RI economy to slow on rising oil, falling rupiah

RI economy to slow on rising oil, falling rupiah

Urip Hudiono and Rendi A. Witular, The Jakarta Post, Jakarta

Indonesia's economy will likely slow down this year, as soaring
oil prices and a weakening rupiah are expected to continue
fueling inflation and key interest rates to the point of
decelerating growth in what has been the economy's backbone,
consumption, economists say.

Nevertheless, Vice President Jusuf Kalla remains upbeat that
the economy would remain strong this year and grow at a level of
6 percent as initially projected.

Bank Mandiri chief economist Martin Panggabean is estimating
that though the country's gross domestic product (GDP) will still
be able to expand higher than last year -- by 5.7 percent until
the end of this year -- it will unlikely grow as fast as the
previous projection of 6 percent.

"We are seeing the downward trend in economic growth, with
consumption slowing down albeit the ability of investments to
keep their momentum," he said during a presentation on Thursday
of the bank's macroeconomic outlook.

The Central Statistics Agency (BPS) reported that Indonesia's
economy grew by 5.13 percent last year, and by 6.35 percent
during this year's first quarter.

Martin explained that the downward trend was the result of two
main factors recently at play: the surge in global oil prices --
which broke the US$65 barrier on Thursday -- and the slide of the
rupiah against the U.S. dollar -- still hovering at the Rp 9,800
level.

Both factors have put pressure on the state budget financing
of the fuel subsidy allocation, pushing the government to cut the
burden of these subsidies by raising domestic fuel prices.

A fuel price hike will put more pressure on the core inflation
rate, which has already reached 7.1 percent, according to
Mandiri. Indonesia's headline inflation, which includes volatile
fuel and food prices, has reached 7.84 percent according to the
BPS.

"This will all result in a higher inflation expectation,"
Martin said. "As a consequence, the central bank will have to
raise its benchmark interest rates higher as well to tame the
inflation."

Rising inflation will affect the public's purchasing power,
thus eating into the country's domestic consumption that has been
the driver of the economy since the economic crisis of the late
1990s. Rising interest rates, meanwhile, could affect business
activities.

Bank Indonesia (BI) on Tuesday raised its benchmark BI rate by
25 basis points to 8.75 percent from a previous 8.5 percent.
Mandiri is predicting it could reach 8.9 percent at year's end.

"Our estimate is that the rupiah will continue to weaken to
between Rp 9,900 and Rp 10,000 to the dollar over the next three
months," he said.

Sharing a similar view, Standard Chartered economist Fauzi
Ichsan is also predicting that Indonesia's economy will only be
able to grow by 5.7 percent this year, on oil price and rupiah
volatility.

Fauzi sees that the country's inflation rate could reach 7.8
percent by the year's end as a result, with the central bank's
one-month SBI reaching 9.25 percent and the rupiah ending up at
Rp 9,500 to the dollar.

Later on Thursday, Kalla said the impact of the soaring global
oil price, however, would be minimal on the country's economy.

"We are optimistic on the existing assumptions (on the growth,
rupiah exchange rate to the U.S. dollar, inflation and BI
interest rate)," he told the press after a meeting with economic
ministers and World Bank officials.

Kalla said the purpose of inviting the World Bank to the
meeting was to ask for their opinion on other countries'
subsidies.

"Most subsidies in Turkey, Brazil and Mexico are for
agriculture sector, while ours are for fuel. Therefore, we had to
decline their advice," he said.

World Bank country director Andrew Steer said he had offered
several systems of social protection to prevent more people from
falling below the poverty line, such as those imposed in Latin
American and European countries.

"There are about 36 million people, or nine million families,
living below the poverty line in Indonesia," he added.

"What is difficult for Indonesia is that the scale of the
country is so large. There is a bigger and complicated problem to
address. But we are sure that the Indonesian government can
address it if it has a strong will to do it."