Year-ender -- Indonesia hopes better economic improvement in 2008

By Andi Abdussalam

Jakarta (ANTARA News) - The government believes that Indonesia is moving towards total recovery from the economic crisis that has hit the country since 1998.

Inspired by better economic performance in 2007 which is likely to achieve its growth target of 6.3 percent, the government set an economic growth based on optimistic assumption at 6.8 percent in 2008.

Observers, however, predicted that Indonesia`s economy would grow at a range between six to 6.5 percent only due to various factors such as increase in crude oil price in the world market, sluggishness of the world economies and effect of the subprime mortgage crisis in the United States.

Due to the external factors, the Indonesian Institute of Sciences (LIPI) predicted that Indonesia`s economy would grow within the 6-to-6.5-percent range, while the World Bank (WB) put an estimate of 6.4 percent. The estimates are lower than the government`s projection of 6.8 percent as set in the 2008 State Budget.

"Indonesia`s economic growth rate next year is estimated to settle at between six and 6.5 percent only. The higher figure can be reached only if the economic performance level in 2007 can be maintained next year," Latif Adam, an economic researcher at the LIPI said.

The weak economic agenda of the Indonesian cabinet, the sluggishness of world economic growth and the increase in oil prices in the world market would have a significant effect on Indonesia`s economic growth rate next year.

According to Finance Minister Sri Mulyani, the surge in the world oil price to US$80 per barrel will affect Indonesia`s economic growth although it showed a positive trend in the past year.

"Though the economic growth rates in the third and fourth quarters were relatively high at over six percent, the increase in the people`s purchasing power to above five percent and the higher exports, we must stay alert about a possible rise in inflation and a decline in people`s purchasing power next year," she said.

According to a study, an increase by 10 dollars a barrel would cause a cut of 0.44 percent in the gross domestic product (GDP) of high-income countries, a decline by 1.47 percent in the DDP of poor countries, or even a reduction by 4.0 percent in the GDP of the least developed nations. After all, the oil prices in the world market last month almost reached US$100 per barrel.

William Wallace, the World Bank Indonesia`s lead economist, meanwhile warned of downside risks as the external environment remained unsettled.

"On the one hand Indonesia is endowed with high priced commodities that have been translating into trade and growth advantages. On the other, these high prices, compounded by a slowdown in the US economy, risk feeding into slower world growth and higher inflation," he said.

The International Monetary Fund (IMF) has also predicted that the world`s economic growth would slow down from 5.2 percent to 4.8 percent in 2008.

"Only Africa will experience an increase in economic growth from 5.7 percent to 6.7 percent in 2008," Adam of the LIPI said.

The United State would see economic growth stagnation at 1.9 percent while the growth of the European Union`s economy would drop from 2.5 percent to 2.1 percent and Japan`s from two percent to 1.7 percent.

About 45 percent of Indonesia`s direct exports would be shipped to the three destinations. There were also indications that Indonesia`s exports to Singapore, Hong Kong and China would be re-exported to the United States, Europe and Japan.

"Economic sluggishness in the three destinations of Indonesia`s exports will automatically disturb Indonesia`s economic performance. And the world`s hope for economic drive is likely to turn to China, India and Russia," Adam said.

Despite this however, the World Bank, which predicted a growth rate of 6.4 percent for Indonesia next year, still sees some good momentum.

"We expect economic momentum and high regional growth, combined with higher government investments, to sustain Indonesia`s good economic prospects in the year ahead even though there will be some global slowdown," World Bank Country Director for Indonesia Joachim von Amsberg said. The positive macroeconomic environment will create a unique window of opportunity for microeconomic reforms in Indonesia.

"Reforms to improve the investment climate will quickly attract additional investments that will lead to more vibrant competition and higher incomes that reduce poverty."

In the meantime, Bank Indonesia (BI) also expressed its optimism that next year`s economic growth would be better than this year`s.

Senior Deputy Governor of BI Miranda Swaray Goeltom said the central bank was optimistic the economic growth in 2008 would remain above six percent.

She said the economic growth in 2008 could be better than that in 2007 so that the growth in the third quarter would reach 6,3 percent.

In order to meet Indonesia`s economic target, the central bank hoped investment in 2008 would reach Rp1,165 trillion. With the need of investment amounting to Rp1,165 trillion, banks will have bigger opportunities to finance investment, she said.

"In a few years ahead, Indonesia will really recover from the economic crisis," President Susilo Bambang Yudhoyono said recently.

The president was not alone in voicing such an optimism. World Bank President Paul Wolfowitz, who is also a former US ambassador to Indonesia, shared Yudhoyono`s projection.

Indonesia`s economy will slowly, though not yet fully, recover from the economic crisis that had taken place since 1989, he said.