RI economy improves but oil prices risky: ADB

Urip Hudiono, The Jakarta Post, Jakarta

Observing the recent improvement of investment to Indonesia, the Asian Development Bank (ADB) has maintained its optimism about the country's economy, revising its full-year growth outlook slightly up to 5.7 percent, from an earlier estimate of 5.5 percent.

The Manila-based bank, however, warns that a recent surge in global oil prices, which will translate into a ballooning of fuel subsidy costs and further strain the state budget, may jeopardize growth prospects, it said in a report released on Thursday.

As such, the bank is projecting South East Asia's largest economy to only be able to grow by 5.9 percent next year, down slightly from its previous 6 percent forecast, though still maintaining its upward trend from 2005.

ADB said in an update of its 2005 Asian Development Outlook released a revival in investments following the smooth transition to a new administration in late 2004 has improved the economy.

"Indonesia's gross domestic product rose 5.9 percent in the first half of the year, fueled by a 13.6 percent expansion in fixed capital investments," the bank said. "The higher investment was a major reason for a 35.4 percent jump in imports, while exports grew by 27.5 percent."

The government's policy to continue subsidizing domestic fuel prices, ADB said, had put Indonesia's fiscal position under pressure, with both oil prices and fuel consumption rising, at a time when the country's oil production was stagnating due to underinvestment.

"Budgetary prospects in 2006 depend on the government's willingness to address the current gap between the prices of domestic subsidized oil products and world oil," the bank said.

"Although domestic prices have already been raised, they are still well below world levels."

ADB is estimating that Indonesia's economic growth could be affected by 1.1 percent downwards if global oil prices reach US$70 a barrel.

The budget's deficit, meanwhile, could increase by 0.2 percent under the same scenario.

On inflation rate, the ADB revised its price indicator forecast for 2005 and 2006 sharply to 7.5 percent, from 5.9 percent and 5.4 percent, respectively.