RI economy projected to decelerate next year
RI economy projected to decelerate next year
JAKARTA (JP): Merrill Lynch has predicted a deceleration of
the Indonesian economic growth rate to a range of 6.5 to 7
percent in the coming 12 or 18 months, quite different from the
rate of more than 7 percent projected by most domestic analysts.
In its latest monthly review, made available to The Jakarta
Post yesterday, the world's largest brokerage company noted that
Indonesia's strong economic expansion during the last two years
has pushed up inflation and could also lead to a record external
current-account deficit in the current year.
As a result, the brokerage firm said, it is possible that
Indonesian economic policy will be tightened in the coming months
in order to address the imbalances.
"However, given the present momentum in the economy, a sharp
and sudden slowdown seems unlikely in 1996. The more likely
scenario is of a gradual slowdown spreading out over the next two
to three years," it added.
Almost all domestic analysts -- both government and private-
sector economists -- have forecasted robust economic growth of
between 7.3 and 7.5 percent during the next two years.
During next year, Merrill Lynch said, the domestic demand is
likely to remain the major engine of expansion with strong
contributions from both consumption demand and fixed investment.
Based on recent trends, Indonesia's current-account gap could
swell to over three percent of the gross domestic product (GDP)
this year before easing to about 2.5 percent of GDP next year, it
said.
The American securities firm estimates the inflation rate this
year at 9.3 percent, compared to 9.24 percent in 1994. The
current account deficit is predicted to reach US$6.4 billion, an
increase of 106 percent from last year.
The company noted a growing concern over the slowing pace of
non-oil exports combined with already weak oil exports. During
the first eight months of this year, exports increased by about
13 percent while imports rose by 32 percent. In August, exports
were up 9.7 percent while imports increased by 38 percent.
Special note
The report took special note of weak export growth at a time
when import growth is running high. That produced a trade deficit
in June for the first time in over five years. But next year, the
growth of the exports and imports will likely move closer to each
other, the report concluded.
The company foresees weaker domestic demand next year, which
should slow imports while fixed investments being made now will
help boost exports.
Capital inflows, including direct foreign investment, should
be adequate to finance the current-account gap and help further
build foreign exchange reserves, Merrill Lynch added.
According to the brokerage firm, during next year, slower
economic growth, a likely drop in the inflation rate, and a
smaller external deficit all point towards a fall in interest
rates, which are predicted to peak this year.
It is possible that interest rates will stay firm through the
end of 1995 as the money supply growth is still running strong.
This year's growth of the broadly-defined money supply as of
September stood at 26.5 percent, compared with 20.2 percent in
1994.
Most domestic analysts, however, expect the domestic interest
rates to remain high as a result of the tighter monetary policy
pursued to cool off the overheating economy.
The American securities company also expects the rupiah to
ease by about five percent against the U.S. dollar next year.
During the last ten months of this year, the local unit slipped
by slightly over three percent against the greenback.
The company foresees a higher pace of depreciation in the
coming 6 to 12 months given the need to bolster the non-oil
export growth and narrow the external current account deficit.
The government recently tightened the monetary policy to
address looming economic overheating.
Bank Indonesia, the central bank, raised the bank reserve
requirement last week from 2 percent of assets to 3 percent in
February to slow down excessive growth in credits.
According to Bank Indonesia, credit expansion during the
January to November period reached Rp 217 trillion (US$95.01
billion) or 23 percent. The growth rate was far higher than the
credit expansion of 18 percent set for the fiscal year of
1995/1996.
Last Friday, the central bank decided to stop issuing new
licenses to non-bank finance companies except those engaged in
venture capital. The bank also announced new measures to control
their lending expansion.
Most government economic ministers share the view that the
economy is overheating and therefore requires a slight cooling
down.
But State Minister for Development Planning Ginandjar
Kartasasmita urged the public not to worry too much about the
economic overheating.
"Worrying too much and overreacting to a gloomy prediction
will only harm the public, particularly the small-scale
businessmen," he insisted.
Noted economist Sumitro Djojohadikusumo has warned that high
inflation and the widening current account deficit may endanger
the economy if the government does not take immediate corrective
measures and address inefficiencies within the economy.(13)