Indonesia's economy predicted to continue to cool down

Indonesia's economy predicted to continue to cool down

JAKARTA (JP): Indonesia's economy is likely to continue to
cool down this year, with economic growth, the current account
deficit, inflation and interest rates being kept in check.

Hong Kong-based Peregrine Brokerage Ltd. said in its special
report on Indonesia that the country's economy is likely to grow
by 7.5 percent this year, compared with 8.07 percent last year.

"Monetary tightening will down the economy in 1996 but strong
foreign direct investment will prevent a sharp slowdown,"
Peregrine said in the report, released here last week to coincide
with the Indonesia Summit, an international seminar on
Indonesia's economy.

However, the report noted that the recent surge in investment
approvals will not necessarily lead to an investment blow-out
this year because actual foreign direct investment, or the
foreign equity component, usually makes up less than 10 percent
of total investment approvals, which cover the entire costs of
projects.

In addition, over 50 percent of investment approvals in 1993
and 1994 went into large-scale heavy industry projects, the
report said.

"Therefore, we do not anticipate that the rapid rise in
foreign investment approvals will necessarily lead to the
investment blow-out many are forecasting for 1996," the report
said.

Monetary tightening, coupled with the central bank's efforts
to reduce both public and private access to foreign borrowing
this year, will also have an impact on imports growth, which is
projected to fall to 18 percent this year from 27 percent last
year.

Peregrine projected that imports of capital goods and raw
materials will be contained this year -- despite the rapid rise
in foreign investment approvals.

As foreign direct investment still finances less than 10
percent of the value of total imports, by tightening the
availability of both domestic and external sources of financing,
the monetary authority will force foreign joint ventures to slow
down their purchases of foreign goods and also slow down
domestically-generated import demand.

"History repeats itself. This was exactly what happened during
the previous cycle of overheating in 1990-1992," the report said.

In 1990, foreign investment approvals jumped 1.8 times the
record of the previous year. However, a clampdown on credit
growth in 1991 slowed domestic investment and caused import
growth to fall by a moderate rate of 18 percent in 1991 from the
surprising rate of 33 percent in 1990.

Exports

Peregrine is also upbeat about Indonesia's non-oil export
performance this year, which it projected to pick up by 16.5
percent, as compared to last year's 15 percent.

Non-oil exports should fare better this year than last year.
Plywood exports, which experienced continuing drops in recent
years, will pick up slightly this year due to the improving
prices on the international market.

Structural problems and continued weak external demand are
likely to continue to hurt the export performance of textiles and
apparel products. However, electronics and other industrial
exports should continue to take up the slack.

Meanwhile, Indonesia's oil exports are forecasted to fall by
some 2 percent this year due to expectation that Brent oil prices
will average at $17.6 per barrel for the whole year of 1996, down
from the current level of $19.4.

"However, if current high oil prices are maintained, Indonesia
may have a pleasant surprise on this front," Peregrine said.

The slowing down of imports and the improvement of exports are
expected to contain Indonesia's current account deficit from
expanding, which Peregrine projected to reach US$7.5 billion this
year, slightly lower than $7.51 billion in 1994.

As a percentage of the country's gross domestic product (GDP),
the account balance should improve with the current account
deficit declining to 3.5 percent of the GDP this year from 3.8
percent in 1994.

The current account deficit, Peregrine believes, will be
manageable for Indonesia. It will be financed by the inflows of
official capital, which is expected to reach $5.4 billion this
year, as well as foreign direct investment inflows of $4.9
billion and private borrowings.

Peregrine projected that the combination of rising foreign
direct investment, steady official capital inflows and a
stabilizing current account deficit will reduce the country's
basic balance from minus $3.1 billion last year to minus $2.5
billion this year and minus $1.5 billion next year.

"By definition, this means that Indonesia's reliance on other
short-term capital is expected to fall in 1996 and 1997," the
report said.

It forecasted that the country's foreign exchange reserves
will rise to approximately $19.1 billion this year, covering a
comfortable 4.9 months of imports, from $15.8 billion last year.

Such an improving international trade standing will let the
monetary authority maintain its policy of targeting a stable real
exchange rate through crawling nominal depreciation of the rupiah
of approximately 4 percent per annum against the U.S. dollar.

Peregrine also believed Indonesia's real effective exchange
rate has remained remarkably stable since the devaluation in
1986.

It projected that the rupiah will probably depreciate by 3.8
percent against the U.S. greenback this year, ending the year at
Rp 2,396/US$1.

However, the government's monetary tightening will, in all
probability, not significantly affect the growth of the country's
consumer demand, which is still focused on basic items such as
food, clothing and housing.

Spending

Although sales of big-ticket consumer durables such as
automobiles will feel the squeeze, overall consumer spending is
expected to grow at a real rate of 6 percent per annum over the
next two years, slightly above the 5.6 percent average rate over
the past five years.

Such a slight increase in consumption, however, is not
expected to drive up this year's inflation as an improved rice
crop this year will lead to a sharp fall-off in food inflation
this year and core (non-food) inflation has been on a downtrend
since mid-1995.

Peregrine projected that core inflation is likely to fall to
an average of 6 percent in 1996 from 7.2 percent in 1995, and
food inflation to fall to 12 percent from 13.2 percent.

Based on the gradual slowdown of economic growth and the
stabilization of the current account deficit and the containing
of inflation, it is expected that domestic banking lending rates
shall go down this year.

Peregrine forecasted that the 90-day central bank certificate
(SBI) rate will be in a position to fall 50 basis points to 14.24
percent by the end of the third quarter of this year.

The rapid run-up in deposit rates relative to lending rates
since early 1994 and the recent fall in the loan deposit ratio
towards more normal levels indicate that there is scope for
deposit rates to fall ahead of SBI and lending rates.

Despite the expected decrease in interest rates in the second
half of 1996, it is expected that broad money growth and bank
loan growth will continue to tighten through to the end of 1996
due to the lagged impact of higher interest rates, continued
direct and indirect controls on bank loan growth and a clampdown
on the private sector's access to foreign borrowing.

Peregrine forecasted that the growth rate of banking loans
will slow to 18 percent by the year-end from 24 percent at the
end of last year and that broad money growth will fall to 18
percent from 27 percent.

More moderated economic growth and a stabilization of the
current account deficit over the course of 1996 should leave room
for limited monetary easing in the first half of 1997, Peregrine
suggested. (rid)