Steady Growth Ahead

Indonesia

Economic News

22 Jul 2010
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Indonesia's economy grew at the highest rate in a decade in 2007, despite slower growth in the third quarter, due to rising investments and commodity exports. However, targets for 2008 could be revised slightly downward in the face of increased global instability, showing more modest figures than had been anticipated.



Indonesia's gross domestic product (GDP) grew by 6.32% over 2007, rising from 5.5% in 2006, the Central Statistics Agency reported last week. Growth between October and December was 6.25%, a decrease from 6.51% for the same period in 2006. A combination of floods and global financial instability caused growth to slow towards the end of the year, the government said.



"The 6.3% annual growth in 2007 continued the steady expansion of recent years, supported by a combination of exports and domestic demand," said David Cohen, director of Asian Economic Forecasting at Action Economics.



Economists predict that the momentum will be maintained this year, but have said a growth rate of 8% would be necessary to improve unemployment rates, which at around 9% as of August, are among the worst in the region.



"Quality wise, the GDP growth is not that good, as it can't really [address] the problem of unemployment and poverty," said Anton Gunawan, chief economist at Citigroup Indonesia.



A large increase is not likely to be attained this year, and officials have said the economic growth forecast for 2008 could be revised slightly downward from the original 6.8% expected. President Susilo Bambang Yudhoyono has warned that the country will have to contend with higher inflation and greater instability over the coming year as a result of the global economic slowdown and uncertainty in the US economy and other key export markets such as Japan. The budget deficit for this year is higher than official targets, at 2% of GDP rather that the anticipated 1.7%; while inflation could reach 6.5%, overshooting the original 6% goal set by the government. The revised budget for 2008 is expected to be presented to parliament this month.



Inflation has emerged as a key concern for 2008, with prices of certain basic goods such as soybeans and flour rising, and local press reporting that inflation had reached a 16-month high in January. Finance Minister Sri Mulyani Indrawati said the purchasing power of Indonesians would be hurt as a result of global price increases.



The World Bank has said the effects of the US subprime crisis and the rise in oil prices would have an impact on the Indonesian economy, though it said it expected growth to remain solid at about 6.4%.



"On the one hand Indonesia is endowed with high priced commodities that have been translating into trade and growth advantages. On the other, these same high prices, compounded by a slowdown in the US economy, risk feeding into slower world growth and higher inflation," said William Wallace, the World Bank's lead economist for Indonesia.



Analysts have however predicted that increased foreign direct investment (FDI) and continued growth in the commodities sector should avert a major downturn in 2008. The government is working to improve the country's potential as a destination for FDI, proposing a revision of the corporate income tax law that will impose a set rate of 25% for all companies (previously 15% to 30%, depending on a series of income benchmarks). A streamlined tax and regulatory environment should give a boost to private sector involvement.



Despite concerns for 2008, President Yudhoyono recently said Indonesia should achieve a full recovery from the effects of the 1998 Asian financial crisis within the next few years.

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