Indonesia's GDP to grow by 6 percent this year
JAKARTA (JP): Indonesia's Gross Domestic Product (GDP) growth will only rise 6 percent this year and about 5 percent next year due to the impact of the currency turmoil, according to analyst Mari E. Pangestu.
Mari's projection was much lower than the 7 percent growth estimated by other economists for this year and 6 percent for next year.
The government estimated that growth would stay high at 7.4 percent this year despite the growing economic problem.
Mari, the executive director of the Centre for Strategic and International Studies (CSIS) said yesterday that the currency turmoil, which had cut the value of the rupiah against the U.S. dollar by about 35 percent within the last three months, would certainly slow down economic activities.
"I think economic growth will be about 6 percent this year and 5 percent next year," she said on the sideline of a seminar organized by the Institute for the Study and Advancement of Business Ethics.
She suggested that the government review development priorities and place more emphasis on promoting non-oil exports to minimize the impact of the currency crisis.
The government, which is now seeking financial aid from the International Monetary Fund (IMF) to restore confidence in the country's economy and to prevent the worsening of the country's macroeconomic condition, has voluntarily cut back budgetary spending and either postponed or delayed large state-related projects.
Mari hailed the government's retrenchment program, saying that the measures would reduce the impact of the currency turmoil.
But she said that inflation would still be higher than the rate of 6.47 percent last year.
"The government will still be able to keep inflation below 10 percent this year, but next year ... maybe not," she said.
Mari said higher inflation next year would be caused by the rise in fuel prices due to the government's reduction of subsidies for domestic fuel sales and the rise in food prices due to the drought.
A chief economist of Danareksa Sekuritas Rino Agung Effendi told The Jakarta Post that the currency crisis would not only cut GDP growth, but also growth in imports and exports.
The rupiah has lost a third of its value against the U.S. dollar since early July, but has relatively stabilized since the middle of last week on the government's plan to seek financial assistance from the IMF.
Mari said the financial package provided by the IMF, which was widely speculated to be worth around US$12 billion, would be used as a standby loan.
"Indonesia is totally different from Thailand and the financial package would be used as a standby loan to restore market confidence," she said.
Thailand secured a financial aid package worth $17.2 billion from the IMF to bail out the country's ailing economy.
Mari estimated that the IMF would impose "very strict" conditions on Indonesia in return for the proposed aid.
"I think the IMF will, for example, demand the restructuring of the country's banking system, in addition to a change in macroeconomic management and a cut in the state budget," she said.
The rupiah fell against the dollar yesterday, closing at 3,585/96 in afternoon trading compared with the opening of 3,480 in the morning.
Mari predicted that the rupiah would fall again in the next few months as demand by local companies to purchase dollars to refinance their dollar-denominated debt was still high.
"I think it is this high demand that will cause the rupiah to fluctuate," she said. (aly)