RI economy might cool down next year

JAKARTA (JP): Indonesia's overheated economy and high inflation rate this year may force 1996 to become a year of consolidation and cooling down, an economist predicts.

Rizal Ramli, the managing director of the Econit economic research group, said on Saturday that signs of overheating this year can be seen from Indonesia's current account deficit, which may reach US$6.5 billion, more than double last year's US$3.1 billion deficit.

Inflation this year, he said, will also likely reach a high 10 percent.

Rizal said that consolidations, both on the macro and corporate levels, were needed to reduce the negative impacts of overheating and excessive expansions occurring this year.

"Assuming that the overheating will continue into next year, the government must apply conservative macro economic policies to prevent speculative attacks on Indonesia," he told reporters while presenting Econit's 1996 economic outlook.

Rizal said that if Indonesia could reduce the overheating next year, long and medium-term prospects for 1997-1998 could be "very favorable" and lead to an economic boom.

"But such a boom won't happen if our current account deficit continues to be high. This is an important risk factor for 1996," he said.

Econit estimated this year's economic growth rate at 7.5 percent, up from 7.3 percent last year. Next year, however, consolidations are expected to lower the growth to 7.3 percent again.

"Although this may not have a significant impact on Indonesia's economy, several sectors, which can grow faster in such a climate, may feel the effect more than others," he said.

Rizal said several sectors will have to consolidate and review their strategies next year due to changes in government policies and over-expansive actions taken this year.

The impact of rapid investment growth during the 1994-1996 period, especially from foreign investors, will be felt in 1997- 1998, Rizal said.

"Most of the investment during those years have been in areas which are oriented largely to the domestic market, thereby requiring a longer gestation period to bring in revenues," he said.

Increasing investments, he said, would lead to a rise in imports and, consequently, give a boost to the country's current account deficit.

Among the factors which will help to ease the consolidations next year are increasing portfolio and direct foreign investment flows, the depreciation of the yen to the dollar and more government deregulations.

Rizal said the effectiveness in cutting back inflation rates next year would largely depend on the timing of the forthcoming deregulation packages and on how much the measures might raise the prices of goods and services.

"If the government issues deregulatory measures about May, it won't be much use because its implementation can't have a direct effect," he said.

Econit predicted the government would gradually raise the prices of oil and gas and public utilities -- such as water, electricity, public transportation and toll road fares -- next year.

Rizal said the domestic political climate would also determine the country's regulatory and business environment.

"Political anxiety, which started this year, will likely continue next year. Changing tactics and strategies whenever necessary, which is typically Indonesian, will take place to strengthen political leverages for the upcoming general election in 1997," he said. (pwn)