Indonesia’s Economy to Ease in 2008, Edge up in 2009, Says ADB

Asian Development Bank

Jakarta, INDONESIA (2 April 2008) - The Indonesian economy will expand at a slower pace over the next two years, following its best growth rate since the Asian financial crisis in 2007, the Asian Development Bank (ADB) says in a key report.

ADB’s flagship annual economic publication, the Asian Development Outlook 2008 (ADO), released today, says Indonesia will grow at 6.0% this year, and then edge up to 6.2% in 2009, from 6.3% growth in 2007.

Growth will be driven mainly by private consumption, helped by the lagged effect of lower interest rates. Private investment is also likely to expand in response to the lower interest rates and an improving investment climate. This will by offset to some extent by a contraction in net exports. At the same time public sector investment growth and much needed development expenditures are also likely to remain constrained by increased outlays on subsidies.

Inflation is likely to pick up to 6.8% in 2008, from 6.4% in 2007, due to increased domestic demand and high global food prices before moderating to 6.5% in 2009 due to an easing of world food prices.

Export growth is expected to be more moderate in 2008 - 2009 due to weaker global demand and some easing of international commodity prices. Although around 50% of Indonesia’s non-oil and gas exports are destined for markets in Asia other than Japan, the slowdown in industrial countries will also indirectly hurt these exports since most are intermediate products that feed into final products that are then shipped to industrial markets. Import growth is, however, expected to remain robust owing to stronger domestic demand. These developments on the trade front are likely to be accompanied by larger deficits in the services and income accounts. As a result, the current account surplus will decline to 1.9% of GDP in 2008 and to 1.6% in 2009.

The ADO notes the Government has remained committed to its reform agenda aimed at improving the investment climate and public service delivery. While businesses still face a difficult legal and regulatory environment, in 2007 parliament passed the long awaited investment law and a tax administration law, and Government adopted a raft of measures to reduce the cost of doing business. The Government also launched a National Community Empowerment Program in 2007 to improve local governance and service delivery at the subdistrict and village level. A longer term challenge is to improve the environment for employment generation to reduce the vulnerability of the many Indonesians who live near the poverty line.

ADB, based in Manila, is dedicated to reducing poverty in the Asia and Pacific region through pro-poor sustainable economic growth, social development, and good governance. Established in 1966, it is owned by 67 members - 48 form the region. In 2007, it approved $10.1 billion of loans, $673 million of grant projects, and technical assistance amounting to $243 million.