JP/ /Y-macro

Moderate growth continues amid signs of investment recovery

The Jakarta Post/Jakarta

Many people in the automotive industry are really happy these days with the handsome bonuses they have received after achieving or even surpassing sales targets and other performance indicators, thanks to cheaper bank loans that fuel demand and help keep the economy humming.

"It's really been a good year for us. Car sales have even surpassed the peak reached before the (late 1990s) economic crisis," said Yulian Warman, a spokesman for the country's largest automotive group, PT Astra International.

Indeed, the advances made by some economic indicators during 2004 should give reason for some people to celebrate.

Improving macroeconomic stability, as reflected in the relatively mild inflationary environment, has allowed the central bank to continue cutting interest rates, which as of the first week of December stood at a record low of 7.41 percent, a situation that in turn has allowed banks to provide cheaper consumer loans, fueling private consumption as households purchase durable goods such as electronic appliances, cell phones, motorcycles, and cars, and spend more money in the ever- increasing number of shopping malls and hypermarkets in major cities.

Car sales, for instance, are expected to set a new record of over 400,000 units, exceeding the industry association's initial projection of 385,000 units, and marking the sector's recovery from the devastating impact of the late 1990s economic crisis, which saw sales plummet to just 68,000 units in 1998.

Private consumption continues to be the main engine of economic growth, accounting for about 65 percent of gross domestic product (GDP), which in the third quarter expanded by a surprising 5.03 percent over the same period last year, beating the consensus among economists of around 4.7 percent. Almost all sectors in the economy registered higher growth, except for the mining and extractive industries sector, which declined by 5.96 percent year-on-year during the quarter due a lack of investment amid various uncertainties in the sector.

The strong domestic demand is encouraging companies to increase output, and, coupled with a favorable macroeconomic climate and supportive global economic developments, prompting some to start making new investments.

The World Bank has acknowledged these early signs of increasing investment. "There are already signs of an investment recovery and the external economic environment is supportive," it said in a recent Indonesian economic and social update.

These positive developments have prompted the World Bank to revise upward its growth estimate for this year to 4.9 percent from the initial forecast of 4.5 percent. In comparison, the government forecast the economy to grow by 4.8 percent this year.

According to the Central Statistics Agency (BPS), fixed capital formation, or fixed investment, has been growing faster during each of the past three quarters -- from 4.24 percent in the first quarter year-on-year to an annualized rate of 9.25 percent in the second quarter and 13.09 percent in the third quarter. Another indicator of increasing investment is the rise in imports of capital goods, which grew by more than 33 percent in the January-August period.

The encouraging signs in the investment sector seem to be reflected in a better employment picture. According to the World Bank report, unemployment declined from 8.5 percent in August 2003 to 7.4 percent in May 2004 with the labor participation rate increasing from 65.5 percent to 66.2 percent. "This is the first sign of improvement in the labor market, though validation of this trend will require more reliable annual data," the Bank said.

The favorable weather this year has also buoyed up the economy, boosting production in the agriculture sector. It is estimated, for instance, that rice production will reach 34 million tons, compared to domestic consumption of around 31 million tons. This surplus marks a return to self-sufficiency in rice production after more than 20 years. Strong commodity prices, such as for crude palm oil, have also benefited the agribusiness sector, prompting some companies in the industry to revise upward their 2004 earnings estimates.

The improving economic picture, and the relatively smooth and peaceful general and presidential elections, have boosted sentiment on the local stock market, prompting investors to purchase shares in expectation of higher corporate profits. The index during the first week of December surged to a record level of 1,000 points, which translates as a gain of around 44 percent since the beginning of the year. This made the Jakarta stock market the best performer in Asia.

But despite all the progress, there are pressing challenges that must be tackled by the new government of Susilo Bambang Yudhoyono if the country is to enjoy higher economic growth in the years to come and resolve the chronic unemployment problem.

Chief among these is fixing the still weak domestic investment climate. "Indonesia's investment climate remains uncompetitive in international comparisons," the World Bank said, urging the government to push ahead with key economic reform programs to improve the investment climate and reinforce the improving growth picture.

Attracting new investment is crucial for the country if it is to enjoy economic growth of between 6 percent and 7 percent per year, and provide enough jobs for the millions of unemployed.

Pressing ahead with further economic reform in order to create an efficient economy is also crucial to helping the country's exporters compete on the international market. Although exports in the January-September period grew by more than 10 percent compared to the same period last year, analysts said that there were signs that Indonesia was losing share in the export market to competitors from other countries in the region. Indonesia's export performance still lags behind neighboring countries such as Malaysia and Thailand.

The government and the central bank also need to maintain the sound economic policies that have introduced stability to the macroeconomic indicators and fiscal situation. The soaring fuel prices this year have put pressure on the state budget, with the deficit expected to widen to 1.5 percent of GDP from the initial target of 1.3 percent of GDP because of rising spending on the fuel subsidy. Reducing this subsidy will be an important measure to ensure budget efficiency, and a crucial test of the new government's readiness to take unpopular, but necessary, measures to fix the economy.

In conclusion, 2004 has given rise to new optimism for a better economic picture in the mid term. But to take advantage of this positive momentum and strengthen the improving growth picture, democratically elected President Susilo Bambang Yudhoyono will need to send a strong signal to investors and the financial markets that he is determined to implement credible economic policies.