Indonesia GDP May Top Target on India, China Demand

By Arijit Ghosh and Aloysius Unditu

Dec. 11 (Bloomberg) -- Indonesia expects economic growth to surpass its target for 2008 as rising demand from India and China shields the Southeast Asian nation and its neighbors from a U.S. slowdown.

``We are aiming for higher than 6.8 percent,'' Finance Minister Sri Mulyani Indrawati said in an interview in Jakarta, referring to the government's forecast for next year's expansion. ``India and China will be quite strong in actually pulling growth in the region.''

Indonesia's economy, Southeast Asia's largest, is expanding at the fastest pace since a regional financial crisis of 1997-98 amid soaring prices for palm oil, coal and other commodities demanded by India and China. Exports to China are growing four times quicker than Indonesian sales in the U.S.

``We have seen that trend,'' said Aldian Taloputra, an economist at PT Mandiri Sekuritas. ``Indonesia's exports to other countries in the region, especially China, are increasing, which will reduce the impact of a recession in the U.S.''

India and China, the world's two largest buyers of palm oil, have helped push up prices and earnings of Indonesian producers of the vegetable oil.

Third-quarter profit at PT Astra Agro Lestari, Indonesia's biggest publicly traded agriculture company, almost tripled to a record 603.34 billion rupiah ($65 million) on higher palm oil prices. The company sold 46 percent of its palm oil to India in the first 10 months of the year.

Power Plants

China, the world's largest user and producer of coal, will be a net importer of 18 million metric tons in 2008, UBS AG said in a report on Dec. 6, pushing up prices of the energy and helping miners in Indonesia, which is the biggest exporter of coal used in power plants.

Still, the U.S. is Indonesia's second-largest export market. Companies in the world's biggest economy have purchased $9.4 billion of Indonesian non-oil products in 2007. China has bought $5.43 billion.

Japan, which purchased $11.3 billion of Indonesian products and is the Southeast Asian nation's No. 1 market, is being affected by slowing U.S. demand.

Japan's third-quarter expansion was slower than the government initially reported, the latest evidence that growth is losing steam because of a slump in domestic housing construction and waning U.S. demand.

U.S. Slowdown

U.S. President George W. Bush's economic advisers on Nov. 29 reduced their outlook for U.S. economic growth in 2008 to 2.7 percent from the 3.1 percent they forecast in June, reflecting turmoil in the credit markets and housing.

``There is definitely going to be some effect,'' said Prakriti Sofat, an economist at HSBC Holdings Plc in Singapore, who expects Indonesia's growth to slow to 5.5 percent next year. ``It depends on the makeup of the country's GDP basket.''

Indonesia's gross domestic product expanded 6.5 percent in the third quarter from a year earlier, the fastest pace since 1997, spurred by bumper harvests and rising sales of cars, motorcycles and homes. Growth in 2006 was 5.5 percent.

Sri Mulyani in the Dec. 7 interview said Indonesia will need to be ``vigilant'' in the second half of 2008 as the effect of a U.S. slowdown may spread. The government will attempt to boost growth by spending on public work projects and easing rules to attract investment.

Roads, Ports

Indonesia's government, which plans to spend 100 trillion rupiah ($10.8 billion) on building roads, ports and other infrastructure projects, expects local consumption to also help boost growth. The government forecasts private consumption to accelerate to about 7 percent next year from 5.3 percent in the third quarter.

Rising oil prices may also affect growth in Indonesia, which caps gasoline prices for consumers. Oil prices are up 45 percent from a year ago. The record was $99.29 on Nov. 21. The government expects to spend more than 100 trillion rupiah in subsidizing fuel in 2008.

Designing an appropriate fuel-subsidy policy ``is a struggle,'' Sri Mulyani said. ``It's prone to the ups and down of the oil price which is not within our control.''

(*) Above Picture: Sri Mulyani Indrawati, Indonesia's minister of finance, speaks during an interview in Jakarta, Dec. 7, 2007. Photographer: Dimas Ardian/Bloomberg News

To contact the reporters on this story: Arijit Ghosh in Jakarta at aghosh@bloomberg.net ; Aloysius Unditu in Jakarta at aunditu@bloomberg.net