RI economic to post less robust growth, say analysts

The Jakarta Post, Jakarta

With both inflation and interest rates on the rise, Indonesia's economy is forecast to wrap up the year with lower-than-expected growth, analysts say, as consumption slows amid still-weak exports and investment.

In its latest assessment on the economies of Southeast Asia, global investment bank Morgan Stanley revised downwards its outlook for Indonesia's economy, estimating that the country's gross domestic product (GDP) would likely grow by only 5.3 percent this year.

The New York-based bank even sees Southeast Asia's largest economy growing even slower in 2006 -- at only 5.2 percent, lower than the government's official 6.2 percent forecast and less than analysts' consensus of 5.7 percent.

By comparison, Morgan Stanley revised upwards its forecast for Singapore, to 4.7 percent this year and 4.9 percent next year, and also Thailand, to 4.6 percent and 5.4 percent, on the two's stronger exports.

"The Indonesian economy is clearly decelerating from the hectic 6.7 percent pace of 2004's final quarter, and we suspect it will decelerate to about 4.7 percent in the second half of 2005," said economist Daniel Lian, who co-authored the bank's outlook update with Deyi Tan.

"However, respectable growth of 5.9 percent in the first half of 2005 means only a slight decrease to a full-year's growth forecast to 5.3 percent from 5.4 percent."

Indeed, several economists, as well as the central bank and government officials have already estimated that this year's growth would slow to below the previously expected 6 percent, as Indonesia's main economic engine of domestic consumption gets cut back as a result of fuel price hikes and rising inflation, which in October had reached 17.89 percent year-on-year.

Businesses also face a slowdown as Bank Indonesia was forced to hike its key interest rates to 12.25 percent in order to contain inflation and support the rupiah.

Rival investment bank Standard Chartered sees Indonesia's economy of slowing to 5.5 percent for this year, although they sat it will pick up slightly next year to 5.7 percent.

The Central Statistics Agency (BPS) is expected to announce Indonesia's third quarter growth sometime this week.

Morgan Stanley pointed out that year-on-year retail sales growth had decelerated to 10.9 percent in the third quarter, from 26.9 percent in the second quarter, as consumer confidence slipped on rising inflation.

Indonesia's trade balance also edged down, with third quarter exports growing by only 10 percent from 24.3 percent in the second quarter, while imports continued to surge at 21.9 percent, on pricier oil and inflation.

On Indonesia's investment prospects, Morgan Stanley was particularly concerned about the risks still hampering capital formation in the country.

"We are not a big believer of the structural investment revival story. Indonesia, unlike Thailand, lacks essential fiscal latitude to support proactive financing and lead investment in its infrastructure plans," Lian said.

"We think the largely merger and acquisition-led foreign direct investments, with no real productive capacity expansion, may dwindle in the future."

However, Morgan Stanley said consumption and trade may improve next year, as the current inflationary impacts from the fuel price hikes mellow, supported by increased government expenditure and a more stable rupiah, in addition to a moderate increase in investment.