Indonesian growth forecast to slide to 2.5 percent

The Jakarta Post, Jakarta | Mon, 11/24/2008 11:36 AM  

Indonesia's economy will still end up this year with a forecast growth in gross domestic product of nearly 6 percent mainly on the back of robust expansion in the first three quarters. 

However, as the global financial crisis has been getting worse since September and economic recession has spread from the United States to Europe and Japan, analysts have been constantly revising downward their forecasts on Indonesia's economic outlook. 

Only about ten days ago, Justin Wood, the Economist Intelligence Unit's director for Southeast Asia, forecast a 3.7 percent economic expansion for Indonesia next year. 

This, he acknowledged, was below the consensus forecast of economists. 

But President of PT UBS Securities Indonesia Sarah-Jane Wagg, in an interview with The Jakarta Post's Vincent Lingga last week, came up with an even lower estimate, forecasting that Southeast Asia's largest economy would expand by a mere 2.5 percent, a nine-year low. 

The following are excerpts from the interview: Question: 

What do you think will be the outlook of Indonesia's economy next year? 

Answer: Given our global recession call, we are expecting Indonesian growth to moderate quite significantly, falling to 2.5 percent in 2009 from an estimated 5.8 percent this year. The prices of almost all primary commodities are falling and investments would be very weak. 

But I think there are virtually no downside risks to this forecast, meaning that would be the bottom. 

What will be the key drivers? 

Private consumption will remain the locomotive. However, the cyclical downturn alongside the tightening liquidity we are already seeing will affect investment growth. It will be difficult for private investment for exogenous and endogenous reasons. 

Globally, there is a flight of capital away from developing economies and Indonesia will not remain unscathed. 

Access to financing is already being made difficult for corporations, as the Bakrie Brothers episode is demonstrating. 

Domestically, a tightening liquidity situation, given the rapid credit expansion in the previous three quarters and keener competition for funding (meaning higher costs) is also putting new lending on hold, thus impacting private investment in a similar fashion 

Growth in Bank lending will slow significantly from the current 35 percent annual rate to 10 percent or even lower in 2009. 

How do you see the rupiah will perform next year? 

I think it may take two quarters before imbalances such as the high lending activity and corrections on imports translate into a small current account surplus, especially because export growth is likely to continue to decline and trade volume growth is expected to fall further, while the prices of most primary commodities will remain low. 

Until then, as the economic numbers turn significantly weaker, the risk of capital withdrawal and currency weakness remains. 

The government should make it compulsory for all on-shore transactions to be in rupiah. I think there would not be much leeway for Bank Indonesia to lower its benchmark interest rate because a significant easing of the monetary stance could affect the rupiah. 

The differentials between the BI Rate and the U.S. Fed funds should be kept relatively high to encourage investors and depositors to hold onto their rupiah assets. 

We expect the current rupiah overshoot to recover to Rp 9,800 per dollar by end 2009.

That about the Indonesian stock exchange? 

Sorry, its almost an impossible call as the current trading level is totally divorced from the fundamentals of the economy. 

What are the prospects for government and corporate bonds? 

New government and corporate bond issuance will remain difficult in our view until global liquidity eases more significantly and global currency fluctuations stabilize (in part reflecting the end of capital repatriation on a large scale back to the American dollar) and risk appetite thus returns. 

However, investors would still be interested in both corporate and government bonds at the right prices, meaning that investors would demand high yields, perhaps as high as 16 percent. 

Bonds from extremely well managed companies operating in sectors with high-growth prospects in the future still have a good chance on the market.