Economy doing well, ready to enter fast lane

Hendarsyah Tarmizi, The Jakarta Post, Jakarta

Despite much criticism over its inability to cope with growing unemployment and poverty, the government has in general managed to get the economic wheels back on the right track this year.

The government's success in achieving the economic targets set out in the 2007 budget can be seen from the improvements in most economic indicators.

Almost all economic indicators, such as inflation, gross domestic product (GDP) growth, the rupiah exchange rate, the central bank's benchmark rate, the balance of payments and foreign exchange reserves all closed the year encouragingly.

According to the Central Statistics Agency (BPS), GDP growth during the first nine months of this year hit the government's target of 6.3 percent, thanks to healthy growth in consumption spending, exports and investment.

As no major changes are expected in the rates of the three main economic drivers during the fourth quarter, GDP should comfortably surpass the government's growth target.

It is also important to note that GDP growth could be sustained at above the 5.48 percent recorded last year despite a slowdown in exports during 2007 thanks to a remarkable increase in actual investments from both domestic and foreign investors.

Indonesia's exports rose by 19.75 percent to US$100.7 billion in 2006, exceeding the US$100 billion mark for the first time in history amid the surge in commodities' prices, which contributed a larger slice of the total exports.

During the January-October period, total exports grew only 13.3 percent, below the government's target of 15 percent, to $93.26 billion from the same period last year, amid a decline in commodity prices.

However, with the expected higher growth in revenues from oil and gas exports during the fourth quarter as the result of a sharp increase in crude oil prices, the 15 percent target will be achieved.

Unlike exports, investment has shown a remarkable recovery since the beginning of the year as investors, who had delayed their investments the year before, have begun to realize their investment plans amid the strong signs of economic recovery.

According to the Investment Coordinating Board (BKPM), actual foreign direct investment (FDI) reached a total of US$10.2 billion as of mid-December, the highest since 2002.

The figure is about 70 percent higher than the US$5.97 billion recorded for the whole of 2006 amid an improving investment climate. About US$3.29 billion of FDI went into the transportation, communications, chemicals, storage and food processing industries.

Singapore was the biggest source of actual FDI at US$3.74 billion, followed by the United Kingdom on US$1.69 billion, South Korea on US$626.8 million, Japan on US$602.7 million and Taiwan on US$469.6 million.

Meanwhile, actual domestic investment reached Rp 34.14 trillion (US$3.6 billion) in the same period, exceeding the Rp 20.78 trillion for all of last year. Nearly half was poured into eight major projects in the paper and plastics industries.

The more stable monetary situation as the result of the easing of inflationary pressures, the cut in the central bank's benchmark rate and the more stable rupiah have all played an important role in the improvement of business confidence.

Inflation -- one of the most important factors affecting the stability of the economy, grew modestly to 5.3 percent in January to November, although the year-on-year rate was still higher at 6.71 percent.

Inflation, which jumped to 17 percent in 2005 as the impact of the rise in fuel prices in October of that year, has dropped significantly during the last two years.

In 2006, the inflation rate was held at below 6.6 percent, and hopefully, it will close this year below the government's target of 6.5 percent.

Low inflation has given the central bank, Bank Indonesia, leeway to maintain the exchange rate of the rupiah against the U.S. dollar at around the government's target of Rp 9,100, and to cut its key interest rate to 8 percent early this December from 9.5 percent in January.

The government had hoped the central bank's key rate could be further lowered to 7.5 percent by the end of this year, but it is unlikely that Bank Indonesia will make another cut, given the higher inflation rate at the end of the year, when inflationary pressures are traditionally much stronger due the higher consumer spending over the year-end holiday.

Economic Indicators

2007* 2008

• GDP Growth 6.3% 6.8%
• In nominal value ( Rp trillion) 3,804.2 4,306.6
• GDP per capita ( US$) 1,858 2,077
• Rupiah against U.S. dollar 9,125 9,100
• Inflation 6.4 6
• Bank Indonesia's benchmark rate 8% 7.5
• Oil prices (US$) 72 60
• Budget Deficit 1.3% 1.7%
• Unemployment rate 10.55% 8%-9%
• Poverty rate 16.6% 15%-16.8%

*Estimate

Source: Finance Ministry

The central bank's success in gradually cutting its benchmark rate to as low as 8 percent has allowed commercial lenders to also reduce their lending rates, which has in turn resulted in a significant increase in borrowing, an important factor contributing to the higher economic growth.

According to Bank Indonesia, the country's banks extended new loans totaling about Rp 183.9 trillion in the January to October period, an increase of 23 percent over the figures recorded in 2006. This lending growth is considerably higher than the 14 percent recorded the previous year.

The country's balance of payments also recorded a surplus of about US$1.1 billion during the third quarter, much higher than the US$0.4 billion booked in the same period last year.

In addition to the increase in the balance of payments surplus, the country's foreign exchange reserves also recorded positive growth, rising from US$50.9 billion at the end of June to US$52.9 billion at the end of September.

Given this figure, the forex reserves are enough to pay for imports and the government's foreign debt repayments for almost six months, much higher than the minimum standard of four months.

The central bank expects that with the increase in foreign direct investment, the surplus in the balance of payments will further swell to US$13.36 billion by the end of the year, exceeding the initial estimate of US$10.9 billion.

The stock market has also marked another boom year, with the Jakarta Composite Index rising by nearly 50 percent to close at 2,657.98 on Dec. 19, up from 1,805.52 at the start of the year, making it as the second-best performing market in Asia after China.

The rise in the benchmark price index is almost the same as the 55 percent recorded last year, which also made the Jakarta stock market among Asia's best performing stock exchanges.

The lower interest rates, more stable rupiah and rising global commodity prices have aroused interest from foreign companies in the Indonesian stock market, especially the resources-based companies, which have become the main drivers of the price-index surge.

If the improvements in the economic fundamentals are used as yardsticks for judging whether or not the government has successfully run the economy, there is no question that it deserves to get high marks for its achievement of getting the economy back on track again.