UBS lowers growth forecasts for RI

UBS lowers growth forecasts for RI

Kabir Chibber, Bloomberg, London

UBS AG, Europe's biggest bank, cut its growth forecasts for Indonesia for this year and next, following a slide in the rupiah.

Indonesia's central bank increased its benchmark rate by half a point to 10 percent on Sept. 6 for the third time in the past four weeks to halt a plunge in the rupiah and stem inflation. The rupiah has fallen almost 11 percent this year, triggered by a surge in energy prices which has increased demand for dollars in the only member of the Organization of Petroleum Exporting Countries (OPEC) that is a net oil importer.

"We expect the policy response to the crisis to have growth costs, but to be adequate to restore confidence in the exchange rate," Christa Janjic, senior economist at UBS in Singapore wrote in a research report. "We do not believe that further monetary policy tightening and a gradual cut in fuel subsidies would cost the economy excessively."

The Zurich-based bank lowered its forecast for Gross Domestic Product growth in Indonesia, Southeast Asia's largest economy, to 4.7 percent from its earlier forecast of 5.2 percent for the second half of 2005, and cut its estimate for growth in 2006 to 4.3 percent from 5.5 percent.

Inflation in Indonesia should rise to 12 percent by the year end, wrote Janjic who wasn't immediately available for comment. Interest rates will probably increase to 12 percent by year end and 14 percent by the end of June 2006, wrote Janjic.

Consumer prices gained 8.3 percent from a year earlier in August, its fastest pace in five months, on higher food costs after rising 7.8 percent in July, the Central Statistics Bureau said in Jakarta on Sept. 1. Indonesia's inflation rate reached a 26-month high of 8.8 percent in March after the government boosted fuel prices by an average of 29 percent to cut subsidies.

Investor confidence in the country can be restored and the rupiah will probably return to around 10,100 to the dollar by the end of the year, Janjic wrote.

The rupiah fell for the third day in four on Friday, to 10,365 against the dollar at 1 p.m. in New York, taking losses in the past month to 5.7 percent, according to data compiled by Bloomberg.

Indonesian State Minister of State Enterprises Sugiharto said on Friday the country's central bank should be prepared to add to this week's interest-rate increase to help support the value of the rupiah.

"The Indonesian rupiah's weakening has caused concern about the sustainability of economic growth," Sugiharto said at a conference in London sponsored by Euromoney Institutional Investor Plc. "The central bank has to keep its tightening bias to prevent a further fall."