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Jakarta shrugs off growth vs current-account gap concerns

Publication Date : 18-03-2014

 

The Indonesian government says it is optimistic about achieving high economic growth without risking widening its current-account deficit, despite fears that the latter normally improves at the expense of the former.

The government is targeting to push down the deficit in the broadest measurement of trade to at least 2.5 per cent of gross domestic product (GDP) this year, while leveraging the economy to between 5.5 and 5.9 per cent, Finance Minister Chatib Basri said.

“Don’t forget that there are two components of GDP that will see an increase this year: exports and private consumption,” he said recently.

Despite downside risks from China’s economic slowdown, exports would be supported by economic recovery in the United States and Japan, which are Indonesia’s second- and third-largest trading partners, Chatib explained.

He predicted that private consumption would see a boost from the elections, thus compensating for the decline in investments that are under strain from Bank Indonesia’s (BI) monetary tightening policy.

Finance Ministry data predicted that this year’s elections would add 0.2 to 0.3 per cent to Indonesia’s annual GDP expansion.

Last week, the central bank cut Indonesia’s growth outlook for this year to a range of 5.5 to 5.9 per cent, citing the dampening of domestic consumption and investments due to tight monetary conditions. That compares with BI’s initial target range of 5.8 to 6.2 per cent.

BI’s initial economic growth forecast was “not in line with a sufficient reduction in the current-account deficit to reassure markets”, according to a report released by ratings agency Fitch Ratings last week.

The government should allow the economy to cool down more so that it can narrow the current-account deficit further, according to Fitch, which predicted Indonesia’s GDP growth to reach only 5.3 per cent in 2014.

Throughout last year, Indonesia’s current-account deficit stood at 28.5 billion dollars, or 3.3 per cent of GDP. The Finance Ministry has targeted to trim the deficit to 2.5 per cent of GDP this year.

Pushing down the current-account deficit would normally lead to lower economic growth as lower imports would hamper investments, an important growth driver for Indonesia.


The government remains confident, however.

“It depends on how well we fine-tune the situation,” said Deputy Finance Minister Bambang Brodjonegoro, who noted that the government had ways to boost exports and rein in imports without affecting GDP growth.

“For example, we put a mandatory requirement of biodiesel in an effort to rein in [fuel] imports — that will lead to lower current-account deficit, but not lower economic growth,” he explained.

Indonesia’s GDP growth fell to a four-year low of 5.8 per cent throughout 2013, compared to 6.2 per cent a year earlier. Every 1 per cent of economic growth should create at least 220,000 jobs, according to the National Development Planning Board.

The country, however, is seen as biting off more than it can chew. Indonesia’s 6-plus per cent economic expansion was followed by signs of overheating in the economy as the high economic growth had to depend on imports, ultimately swelling the current-account deficit.

Managing the deficit through suppressing investment growth is only a short-term solution, said Citi Research economist Helmi Arman.

“Excess capacity will be used up and a new round of investments may be needed in the next two to three years,” he wrote in a research note.

“Suppressed investment growth but resilient consumption is not a good recipe for long-term current- account sustainability,” he added.

 

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