Modest growth continues amid signs of investment recovery

Modest 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.