'RI economy to grow at 7.6% in 1997'

JAKARTA (JP): Indonesia's economy is expected to improve next year, growing at 7.6 percent, despite the forthcoming general election, Mari E. Pangestu, an economist at the Center of Strategic and International Studies, said yesterday.

Mari projected that next year's growth will be between this year's, which is estimated at 7.5 percent, and last year's growth, which was 8.1 percent.

Speaking at a seminar organized by the Prasetiya Mulya Graduate School of Management, Mari predicted that next year's general election would not have significant impact on economic growth.

"The growth will remain high next year because the country's external environment is improving and the investment boom starts to bear fruit," Mari said.

She projected that most of the growth would come from the construction sector, and the financial services, trade, hotel and restaurant industries.

The construction sector is expected to grow by 11.5 percent next year, up from 11 percent this year; the financial services by 10.5 percent, up from 10 percent; and trade, hotels and restaurants by 7.5 percent, up from 7.3 percent.

Meanwhile, agricultural growth is expected to slow to 2.9 percent next year, down from 3.0 percent this year; the manufacturing sector is expected to decline to 10.8 percent from 11 percent; electricity, gas and clean water should drop to 13.5 percent from 14.5 percent; the mining sector is predicted to remain flat at 5 percent.

"All my projections are based on the assumption that the government will continue to make the correct policies. And I do believe that the government will do it," Mari said.

The government's policy consistency was tainted this year when it introduced a controversial national car policy and imposed of tariff protection on the upstream petrochemical products, polyethylene and polypropylene.

"However, I believe that such policy inconsistency will be temporary and will not affect the fundamentals of the economy and I believe that such short-term policy inconsistency will not affect long-term investment in the country," Mari said.

Mari forecast that next year's growth would be very much propelled by investment, both domestic and foreign, rather than by consumption.

She noted that the growth of consumption goods imports, which raised great concern last year, has been decreasing. Meanwhile, imports of capital goods remained high, in keeping with the increasing realization rate of investment commitments.

Foreign investment commitments have increased dramatically during the last four years, from merely $8 billion in 1992, to $23.7 billion in 1994 and $39.9 billion in 1995. As for this year, the government has targeted the approval of $27 billion worth foreign investment projects.

Mari noted that the increasing foreign direct investment would also help the government finance its current account deficit, which is projected to remain high next year.

Next year's current account deficit, Mari said, would come merely from the deficit in the services sector, as Indonesia is expected to enjoy a surplus in its merchandise trade.

Non-oil exports are expected to increase slightly next year because of the improving economic growth in developed countries, Indonesia's traditional export markets.

Meanwhile, Indonesia would also bring in more money from oil exports because of the increasing oil prices in the world market, Mari said.

She expected the monetary authority to remain conservative next year. This means that current interest rate levels will likely be maintained and that the rupiah depreciation rate against major currencies, notably the U.S. dollar, will be kept below 5 percent.

She noted that the difference between the rupiah deposit rate and the U.S. dollar deposit rate was currently too wide, standing at some 9 percent. The 9 percent difference constitutes 5 percent in rupiah depreciation and 4 percent in risk premium.

"As the country has attracted much capital inflows, I suspect that the central bank will not depreciate rupiah any faster. My prediction is that next year's depreciation will be in the range of 3 to 3.5 percent," Mari said.

Mari was confident that if the country successfully arranged a "soft landing for the economy," with consistent and prudent macroeconomic management, the business cycle will rebound in 1998 and will continue pick up until the year 2001. (pwn/rid)

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