RI economic growth to be robust next year
RI economic growth to be robust next year
What is the economic outlook for the new year? Economist Mari Pangestu ponders with this question.
JAKARTA (JP): Growth for this year is expected to be at 7.5 percent, with the main source of growth on the expenditure side being strong consumer demand and to a lesser extent investment demand. Whereas the main source of growth on the production side has come from a recovery in agriculture and continued strong growth in the manufacturing and service sectors. Despite the slowdown in the property sector, the construction sector continues to grow robustly on the back of massive infrastructure building.
Given the current trend, what is the prospect for next year's growth? Our prediction is that Indonesia is on the upside of a business cycle which should peak in 1997. Therefore, growth should continue to be robust next year and can even be expected to be higher at 7.7 percent. The main sources of growth will be continued consumer demand growth coupled with stronger investment growth. On the production side, manufacturing sector growth is expected to continue; services and especially trade, will also continue to expand along with overall growth. Once again infrastructure related sub-sectors such as construction and the manufacture of cement, cables, pipes and so on will continue to experience strong growth.
While inflationary pressures have abated somewhat with inflation expected to be around 8.5 percent by year end, continued concern about overheating prevails. Continued strong consumer demand growth and the possibility of some increases in prices of basic goods and services, will put continued pressure on prices next year. Thus, even though inflation can be expected to remain at a single-digit level next year it will still persist in the 7-8 percent range.
The other major concern with overheating is the balance of payments. The current account deficit for 1995 is expected to be around US$7-8 billion or more than double the deficit in 1994 of $3.3 billion. The main reason for the jump in the deficit is the decline in the trade surplus due to slower-than-expected growth of non-oil exports and the jump in import growth.
Non oil exports growth has been declining in the 1993-1994 period reaching a 12 percent low in 1994, and in 1995 is expected to reach 16-17 percent. However, at the same time import growth has jumped dramatically from an average of nine percent per year in 1993-1994 to 32 percent in the year ending September 1995. High import growth has been fueled by a sharp increase in the imports of intermediate goods and raw materials which make up the bulk of imports.
However, it should be noted that imports of consumer goods (which account for six percent of total imports) almost doubled. Growth of capital goods imports from new investments is just beginning to pick up, reaching 14 percent by September and expected to increase further in 1996.
The net deficit in the services account also continues to increase due to higher debt servicing caused by larger foreign debts. However, the expected increase from the 20 percent appreciation of the yen earlier in the year, did not come about and the yen is now back to the same level as that at the end of last year.
Despite the dramatic jump in the deficit the situation is considered to be manageable in the short run, since the deficit amounts to only around four percent of the gross domestic product (GDP) and reserves are considered to be adequate at $14 billion or four months of imports. Furthermore, capital flows are also expected to increase dramatically with direct foreign investment inflows expected to double compared with previous years.
Of course, the rising deficit should be of concern. Any decline in the current account deficit in the medium term will depend on whether the high import growth that is generating the deficit will result in productive investment which will reduce imports and increase exports in the future.
Furthermore, the government needs to ensure that the business environment will foster productive investment to enable the investors to repay their debts.
Continued concerns about inflation and overheating will mean that the central bank will continue its policy of managing liquidity with its monetary instruments.
However, given the open capital account, the monetary authorities face the familiar dilemma in liquidity management: tightening liquidity will lead to an increase in the interest rate which in turn leads to rapid capital inflows that need to be neutralized. Interest rates are not expected to rise further, but are expected to stay constant until the middle of next year.
There have been recent recommendations to allow the rupiah to float more in line with capital flows to assist monetary policy in dealing with capital inflows. However, given the level of the deficit, concerns about non-oil exports, and the need to ensure a reasonable flow of capital inflows, it is unlikely that the central bank will deviate from its present predictable continuous exchange rate depreciation policy of around four percent per year.
The limitations of monetary policy will also mean that fiscal policy will have to play a greater role in managing overheating. This essentially means that the government will have to run a budget surplus by ensuring limited expenditure increases and at the same time increase revenue collection.
Despite the rosy macroeconomic picture, problems and issues remain at the micro level. Some of the key issues include the problem of bad debts in the banking sector; the perceived over expansion in the property sector (which is related to the first issue); how to increase Indonesia's competitiveness in the face of liberalization and increased competition for investments and markets: preventing a high cost economy, structural and systemic issues of building up supporting industries, human resources and technological capability and overcoming infrastructure bottlenecks in a timely and efficient way.
The writer is head of the economics department of the Centre for Strategic and International Studies.