Indonesia May Expand 5% in `Very Challenging' 2009

By Shamim Adam 

Nov. 10 (Bloomberg) -- Indonesia's economy may expand less than expected next year as the world tilts toward a recession, and the government will study ways to provide fiscal stimulus to sustain growth, Finance Minister Sri Mulyani Indrawati said. 

Signs of a slowdown in Southeast Asia's largest economy may emerge by the year-end after ``very strong'' expansion last quarter, Sri Mulyani said in an interview in Sao Paulo yesterday where finance officials from the Group of 20 nations met. Growth may be as little as 5 percent in 2009, from a previous estimate of between 5.5 percent and 6.5 percent, she said. 

``It will be very, very challenging for us to maintain growth under the current circumstances,'' Sri Mulyani said. ``Just like other developing countries, we have to be prepared for a longer period of weakening in the economy.'' 

The International Monetary Fund last week predicted the first simultaneous recession in the U.S., Japan and euro region in the post-World War II era next year. Central banks in Asia and around the world have slashed interest rates as inflation worries ease, and governments are boosting spending as the world battles the threat of prolonged slowdown. 

``If the U.S. falls into a deep recession then it's possible for Indonesia's growth to slow to as low as 4.5 percent,'' said Purbaya Yudhi Sadewa, chief economist at Danareksa Research Institute in Jakarta. ``I am more optimistic as our economy depends on domestic activity more than before, so even if the U.S. falls into deep recession, we will be the least affected compared with others in the region.'' 

Commodity Prices 

The rupiah has declined 9.7 percent in the past month making it the worst performing among Asia's 10 most traded currencies. It dropped 1.2 percent to 11,025 against the dollar at 10:39 a.m. in Jakarta. 

Indonesia's central bank expects the $433 billion economy to expand as much as 5.9 percent in the fourth quarter, little changed from an estimated 6.3 percent in the third quarter, Deputy Governor Hartadi Sarwono said on Nov. 5. 

Inflationary pressures are easing as commodity prices decline, Sri Mulyani said. Indonesia plans to reduce gasoline prices by 8.3 percent from Dec. 1 on lower crude costs, she said last week. Prices of kerosene and diesel may be cut within two months, according to a newspaper report today citing an Indonesian energy ministry official. 

The decline in fuel costs will probably spur domestic consumption, which the government predicts will support growth next year amid expectations of a weaker agricultural industry hurt by declining commodity prices and as company revenues fall, Sri Mulyani said. 

Fiscal Stimulus 

Indonesia has the resources to provide a fiscal boost to the economy if the government decides to do so, Sri Mulyani said. 

China, the world's largest developing economy, yesterday announced an economic stimulus package worth 4 trillion yuan ($586 billion), or almost a fifth of its output to sustain domestic demand as the global credit shortage drags down growth. 

Still, there is no rush to introduce more of such measures as the government still subsidizes food and fuel costs for many Indonesians and helps the poor among its populace by distributing cash, Sri Mulyani said. 

``In our budget for 2009, we have already provided an allocation that can be used by the government to respond to any worsening situation that may come up from this crisis,'' she said. ``We are still evaluating and looking at the experience of other countries on what is the most effective way to address this situation.'' 

Bond Market 

While emerging economies such as Indonesia can play a part in boosting global growth at a time when advanced countries are slowing or entering a recession, the costs of financing such expansionary policies may be prohibitive, Sri Mulyani said. 

``It used to be very easy for emerging countries with high growth like Indonesia to get capital inflows so they can support economic activity,'' she said. ``Now, capital is quite scarce and it's going to be very costly if we have to issue bonds when the bond market is not functioning normally.'' 

Indonesia will continue to sell debt and ``maintain'' its presence in credit markets as long as rates and the costs of selling such bonds remain ``reasonable,'' Sri Mulyani said. The country has standby loan arrangements with development partners and multilateral organizations that it can tap on if required, she said. 

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net