RI looking strong with five percent growth

Tata Huberta, Economist, Washington

Through Indonesian newspapers we learned recently the Minister of Finance Boediono believes Indonesia can achieve five percent growth. He stressed that the target of four percent currently envisaged is certainly achievable. In fact, he also said that by working hard, five percent growth is not impossible.

This statement is certainly very refreshing, since most people are skeptical. Therefore, his statement serves as an eye opener for those ignorant on what has gone on in the past few months. But at the same time, this statement may be seen as too bold.

There will certainly be a heated debate as to the justifiability of the minister's forecast. But Indonesia is also building a good momentum for higher growth.

There were at least three pieces of good news that laid a stronger foundation.

The first is the successful sale of BCA. Without ignoring the facts that the sale may not represent the first best solution, at least the sale has sent a stronger sign of the government's commitment to reforms.

The second is the successful completion of the Paris Club negotiation.

In the midst of skeptical receptions on the success of the negotiation, the market has passed its own judgment by the strengthening of the Rupiah and the stock market. And the last is the recent IMF Loans disbursement.

We can certainly extend further on these series of good news. One good candidate for this is the government's decision on the oil price increase. While painful to most of us, the firm decision of the government's resolve on the oil price increase once again broke the infinite cycle of oil subsidies.

We should not back track from the firm resolve that had been shown earlier this year when the decision to allow oil price to follow the market was taken. This is an important building block in which other policies will be also based.

The gains in the stock market reflect the confidence of the investors on the future of the Indonesian economy. This confidence is in fact more clearly seen if we look closer to what has happened in the corporate debt market. Deal by deal has taken place in the past few months as if the market has forgotten what happened before the crisis. A healthy development of the market will help the country pull out from the deep crisis.

With all these developments, the prospect for the Indonesian economy has certainly been brighter. Currently, a number of forecasts have been made.

The IMF referred to the Asia Pacific Consensus Forecast which has seen the Indonesian economic growth to be 3.1 percent. The Asian Development Bank has in its outlook a growth rate of 3 percent. Among many forecasts, ESCAP seems to be the most optimistic by projecting our growth at the level of 3.8 percent. Therefore, the recent statement by the Minister of Finance may be seen as a very optimistic projection.

But is it realistic? The recent records indicate that Indonesia achieved a growth rate of 4.9 percent in 2000 and around 3.3 percent in 2001. These rates were mainly supported by the strength in the consumer spending.

This year, a number of factors have led consumer spending to remain strong. Increases in income and the number of the population will continue to be the strongest factor for strong consumption expenditure.

Also, a better outlook has made the sentiment for consumption to get stronger. In addition, the "wealth effect" from the stock market as well as from the housing market will also provide a good boost for this spending.

The return of the banking system to consumer loans will help support consumption. Therefore, this year will certainly mark the continued awakening of consumers.

The growth this year will also be supported by strength in exports. Recent data of exports have shown some significant rebound. While the figure for this quarter may show some decline from the same quarter last year, what is most important is to see the progress this quarter from the second half of last year.

The indications are encouraging. At the same time, the U.S. economy has also demonstrated its strength in the first quarter. The Washington Post has in fact dubbed the U.S. first quarter growth as "sizzling". With an annual growth rate of 5.7 percent in the first quarter, the U.S. economy has indisputably shown a strong rebound.

This strong growth, as in the past, will be followed closely by similar growth in Europe and elsewhere in the world.

This development will constitute a strong pull factor for the Indonesian export performance.As mentioned earlier, the stock market as well as the corporate debt market have indicated the return of foreign portfolio investors.

In fact, in recent conversation with a number of prominent foreign bankers in Jakarta, there has been a strong credit demand by their multinational clients. This indicates that the foreign multinational companies are in the midst of expanding their productions. This is certainly a first sign of the returning confidence of foreign investors.

From mouth to mouth, the news will spread. Therefore, this development will probably be followed by a fresh interest of the foreign investors to the country.Since the multinational companies that have been operating in Indonesia has indicated their confidence on the country's prospect, therefore prospective foreign investors will discount the bad news that in the past have affected their interest to invest. It is now the right time to invest.

With all these developments, I am very optimistic that we can achieve five percent growth. In the past, we have seen a high volatility on the Indonesian economy. From an average growth of eight percent over the course of almost thirty years, Indonesian economy nosedived to a contraction of 13.1 percent in 1998.

The return of high growth cycle requires high savings and investment rates. The incipient recovery of the Indonesian corporates, banking system and the income of the people will not be adequate in supporting a continuous high growth cycle.

In the past, Indonesian entrepreneurs were able to develop a good network base with various corporations abroad. At the same time, they also developed a strong base of middle management. These things remain in place. In fact, many of them have succeeded in weathering the crisis.

This resilient human resource base and what has been left with the currently developed infrastructure, will continue to form a good foundation for further inflow of foreign investment.