Indonesian economy in for robust growth
Indonesia's economy is ending 1994 with a respectable growth rate and is in for another robust expansion, according to the views of noted economists, which are rounded up below by Vincent Lingga. In the second article, the Research Department of PT Sigma Batara, a major securities company, analyzes the performance of the Jakarta stock market and charts out its likely development in 1995.
JAKARTA (JP): Domestic and foreign economists are unanimous in their verdict on Indonesia's economy, expecting economic growth of at least 6.7 percent this year and another robust expansion of more than seven percent next year.
At the same time, they signal extra caution about inflationary pressures and a larger possible deficit in the current account of the balance of payments.
Douglas H. Short III, the Senior Director and Country Head of American Express Bank here, sees 1994 and 1995 as very good years of respectable economic growth rates at around seven percent.
"But you will not see a large increase in growth next year, compared to this year. Inflationary pressures may require the government to slow down the growth a little bit to cool off the overheating. That, I think, will be a good policy to do," Short says.
Merrill Lynch & Co., a major securities company of the United States that set up a joint venture here a few weeks ago, is even more bullish and has predicted seven percent growth this year and 7.5 - 8.0 percent next year.
Noted Indonesian economists Sumitro Djojohadikusumo, Sjahrir, Mari Pangestu and Hadi Soesastro are equally optimistic and foresee growth of 6.5-6.7 percent this year and 7-7.2 percent in 1995.
The analysts attribute their bullish projection partly to the strong economic recovery expected in the world's economic powerhouses of Japan, the United States and Germany.
The Organization for Economic Cooperation and Development (OECD) predicted last week that the economies of its 25 member countries (all developed) would likely grow by an average of three percent in 1995, up slightly from an estimated 2.8 percent this year.
More encouraging is the OECD's prediction of a non- inflationary period of growth over the next two years.
Indonesian economists take special note of the agricultural sector, which they expect to recover strongly next year with a growth of at least 2.5 percent.
"If our economy could still grow by 6.5 percent last year when the agricultural sector expanded by a mere 1.5 percent, I don't see why our gross domestic product growth could not exceed seven percent next year," Sjahrir says.
Agriculture contributes around 18 percent to Indonesia's GDP.
"I also expect significant improvements in the banking industry and in basic infrastructures such as electricity and telecommunications," adds Sjahrir, the Managing Director of the Institute for Economic and Financial Research.
The analysts take the explosion early this year of US$450 million loan scandal at the state-owned Bank Bapindo a momentum for an accelerated consolidation process of the banking industry.
The business sector will reap more benefits from the consolidation of the banking industry that has taken place over the past two years, according to Sjahrir.
The economists don't expect any drastic fiscal measures. In addition, the average price of crude oil exports, that will generate about 25 percent of the government's revenues, will most likely reach the government estimate of $16 per barrel for the current fiscal year ending next March.
International oil prices are projected to fluctuate within the range of $16-$18 next year, which is seen as relatively comfortable.
Hadi and Mari, both senior economists of the Centre for Strategic and International Studies (CSIS), cite seven sectors, notably agriculture, manufacture, mining, electricity, gas and water, transportation and communications, trade and restaurants as the main propellers of growth next year.
Merrill's economist Sanjoy Chowdhury expects strong growth in fixed investment and buoyant consumption spending next year.
"Private consumption growth is likely to accelerate from 5.8 percent in 1993 to 7.5 percent this year and 8.5-9.0 percent next year," Chowdhury says.
He cites the increase in labor wages and the compulsory extra month's wages, and the 5-15 percentage point cut in income tax rates as of January (based on new tax laws), as the main factors that will spur consumption growth.
"The more immediate effect of the changes (lower tax rates) should be a boost in disposable incomes," Chowdhury says.
"But my concern is whether the collection effort will be stepped up to offset the decline in tax receipts caused by the lower tax rates," Short says.
Short calculates that the tax base will be broadened significantly to take most benefits from the lower tax rates.
The new tax laws, which go into effect next month, will reduce the lowest income tax rate from 15 to 10 percent and the highest one from 35 to 30 percent and will increase the number of tax brackets from three now to four.
Chowdhury notes, however, that while 1995 may mark a peak in the current growth cycle, longer-term prospects will depend on further deregulation measures and additional efforts to reduce the high-cost structure of the economy.
Chowdhury suggests that the government lower import tariffs further and reduce non-tariff barriers that protect uncompetitive domestic industries.
The economists also share the same view about potential problems that may upset their rosy projections, more specifically -- inflationary pressures and the current account deficit.
They welcome the almost 200 percent increase in licensed foreign investment commitments of around US$23.7 billion and the 35 percent rise in domestic investment approvals to Rp 53 trillion ($24.3 billion) in the first eleven months of this year. But at the same time, they are concerned about their expansionary impact on imports.
"About 50 percent of capital outlays for large projects is usually spent on imports and this may worsen the current account deficit," Hadi says.
He foresees stronger pressures on the balance of payments, especially because exports may grow only by 11-13 percent, lower than the 16.8 percent target, while imports will expand at least by 15 percent.
Finance Minister Mar'ie Muhammad also acknowledged at a hearing with the House Budgetary Commission early this month that extra caution was needed to keep the current account deficit in check.
Hadi says if import growth is not controlled, the current account deficit may rise to $4-$5 billion, which is 4-5 percent of GDP and twice as high as the government target.
"Therefore, I will not be surprised if the government takes measures to restrain import growth next year," he adds.
Chowdhury also projects a larger current-account gap to result from the combination of higher imports and a larger deficit in invisible (service) trade.
"Indonesia's invisible trade deficit, which stood at $11 billion in 1993, may grow to about $12.5 billion by 1995 due to larger interest payments on external debts," he says.
Minister Mar'ie admitted that the service account deficit increased by 5.3 percent during the April-October, 1994 (first half of fiscal 1994-1995) period.
He blamed the increase on the higher spending on import freight and foreign debt servicing.
Chowdury sees that trend as discouraging, especially since Indonesia's foreign debts are approaching the $100 billion mark.
Official figures showed that as of September, Indonesia's foreign debts totaled $93 billion, of which $56.6 billion were owed by the government and $36.3 billion by the private sector.
The Merrill Lynch economist therefore sees a larger capital inflow as crucial for financing the deficit. This would also allow the central bank to maintain the rupiah rate on a stable path with an annual depreciation of 3-4 percent, as it has over the past two years.
Douglas Short, however, is not too worried about the rupiah rate, which he expects to remain stable within the central bank- set depreciation band of 4-5 percent.
"I am glad that Bank Indonesia is closely monitoring the situation and always sees to it that monetary growth is sound and sustainable," the Amex Bank executive says.
Short also has observed a healthy trend in the business sector, evidenced by the many companies that have restructured their capital either through the domestic and foreign debt markets or through stock exchanges.
The sources of funds for the corporate sector are much more varied now, especially because more foreign banks have come to Indonesia, he says.
"The Japanese banks have become more active. You also see a lot more European banks and major international securities companies coming here. I think this trend will continue next year," Short points out.
All this, according to him, reflects the international community's confidence in Indonesia's economic prospects.
He does not see the heavy indebtedness as something to be inordinately worried about.
"Indonesia has a very good track record. The international community is very impressed by the way Indonesia has handled its foreign debts," Short notes.
Analysts also expect higher lending rates next year to be part of the central bank's measures to sustain sound monetary growth.
"But I don't think the upward trend in the interest rates will last for the whole of next year. They will decline again if the inflationary pressures decrease," Short says.
But many analysts expect the prime lending rates, which have risen to a range of 17-18 percent, to hover at about 20 percent next year.
" I am greatly concerned about the steep increase in lending to the property sector. This means that many banks have converted quite a sum of their short-term deposits into long-term credits," bank analyst Laksamana Sukardi observes.
Such gapping practices, according to Laksamana, increase the liquidity risks of banks and make them highly vulnerable to monetary fluctuations.
"Hence, I expect many banks to raise deposit rates and, consequently, lending rates to cope with the liquidity risks," says Laksamana, chief executive officer of ReFORM Consulting and a director of ECONIT Advisory Group.
Amex's Director Short expects very tough competition in the banking industry as the number of banks has now almost reached 240.
"I think the consumers could better be served by a smaller number of banks," he says.
Laksamana concurs that the development of the banking industry should emphasize quality rather than quantity, suggesting that it is better to have a smaller number of solid banks.
The economists want to see more concerted anti-inflation measures to check the rise in the consumer price index, which is estimated at 9.2 percent this year.
That is a major challenge because in so far as Indonesia is concerned, curbing inflation is not mainly a matter of monetary management and supply-demand equation but has deeper roots in the cost structure of the economy as a whole.
"It is the inefficient economy that puts the natural rate of our inflation at a high range of 7-10 percent a year, while our neighboring countries can check their inflation at 3-5 percent," Sjahrir contends.
Indonesia's most senior economist Sumitro Djojohadikusumo is pessimistic and feels that the government will not be able to curb inflation at its annual target of five percent.
"I think inflation will range from 8.5 to 9 percent a year during the 1994-1998 period," Sumitro says.
Theoretically, inflation will remain low as long as there is spare capacity and inflation will start to rise once the slack is absorbed.
In Indonesia's case, inflation is also imbedded in the high cost structure of the economy. That is why the country's economy seems unable to sustain high rates of growth for a long period of time before hitting inflationary buffers.
According to Sumitro, Indonesia can actually sustain an annual economic growth of up to 10 percent without high inflation -- if the market distortions, distribution bottlenecks and bureaucratic hurdles are removed.
Anti-inflation measures therefore should include the continuation of overall economic reform (deregulation). In turn, this will enhance fair market competition, efficiency and smoother distribution of goods as well as bureaucratic reform.