RI looking strong with five percent growth

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.