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)