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Indonesia's growth slows, yet remains strong

Publication Date : 11-05-2012

 

The central bank of Indonesia kept its policy rate unchanged at 5.75 per cent at its monthly open market-operations meeting on Thursday as Indonesia’s first quarter economic growth slowed to 6.3 per cent from 6.5 per cent in the previous quarter, as most analysts had predicted.

But the expansion remained among the fastest in Asia even though the country has begun to bear the brunt from the weakening economies in Europe and the United States.

In the near term, consumption — the main driver of growth — will soften further, given weaker consumer confidence. However, private consumption will surge again to reach its annual peak during the upcoming Islamic fasting month in July and post-fasting Idul Fitri festivities in August.

Despite the rise of 100 basis points in headline inflation in the last two months due to the uncertainty about fuel prices, we think Bank Indonesia will remain focused on managing liquidity through higher reserve requirements to contain inflation and inflation expectations.

Investment, which accounted for almost one-third of gross domestic product, grew by almost 10 per cent, though slightly lower than the 11.5 per cent increase in the previous quarter. New investment will likely remain robust, given the favourable financing conditions and robust investment-related credit growth.

Investors, facing few promising investment opportunities in Europe and the United States, seemed to simply overlook the risks inherent in Indonesia’s crumbling infrastructure, policy consistency and increasing incidence of legal uncertainty as regards the sanctity of business contracts.

But businesses still seemed concerned about the impact of the fuel-price hike uncertainty may have on consumption demand and the worsening condition of basic infrastructure, notably at seaports and main highways.

The DBS Bank Economic and Currency Research Group even cited the fuel uncertainty, lower commodity prices, tighter loan conditions and policy noises about the export policy on mineral ores as speed bumps for growth in Indonesia for the rest of the year.

Businesses also have begun to raise alarms over what they considered as an increasing trade protectionist sentiment, and the rising tendency for resource nationalism that could escalate in the run-up to the 2014 legislative and presidential elections.

The eroded credibility of the government’s policy-making capability could increase institutional and structural impediments to sustainably high levels of growth.

But even well-designed policies could be counter-productive if the sequencing of their implementation is confusing and irrational. Investors expect policy changes in such an emerging economy such as Indonesia as long as the future policy direction is clear and policy execution is consistent.

Indonesia has now become one of the most favourite places for investment, given its rich natural resources and huge market potential, but we may simply waste this golden opportunity if we become complacent, neglecting our homework to implement long-delayed economic reforms, notably those in facilitating smoother infrastructure development.

The government is well advised to realise that no country in the world can sustain high levels of growth without maintaining a high rate of public investment in infrastructure to pave the way for new industries to emerge.

 

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