Economy Learning

ndonesia’s Economic Outlook 2010 & 2011: Better than initially projected

Domestic economic growth will reach 5.5-6.0% in 2010 and increase to 6.0-6.5% in 2011. Therefore, Indonesia’s economic prospects are better than initially projected. “On the back of strong domestic demand, improvements will principally stem from externalities in line with the global economic recovery, as evidenced by solid export growth since Quarter-IV 2009,” explained the Deputy Governor of Bank Indonesia, Hartadi A. Sarwono.

The global economic recovery is clearly visible from a number of economic indicators in industrialized countries (United States and Japan) as well as in Asia (China and India). In the United States, a recovery is evidenced by stronger private consumption coupled with a rise in production. Meanwhile, Japan began to experience positive economic growth in the final quarter of 2009.  In China and India, indications of an economic recovery were clearly visible from the high rate of economic growth. Such improvements will have a positive impact on trade partner countries, including Indonesia.

The global economic recovery will bolster the external sector of Indonesia’s economy. Non-oil/gas exports from Indonesia in Quarter-IV 2009 recorded expansive growth, reaching 17%. The rise in exports did not only emanate from mining and agricultural commodities, but also from exports of manufacturing commodities. This precipitated stronger-than-expected growth in the industrial and trade sectors.  Meanwhile, import activities increased slightly as a result of the surge in exports, however, at a lower level. The current account is expected to run a larger surplus in Quarter-I 2010 than originally projected.   Furthermore, foreign investor confidence in Indonesia’s economic outlook is improving as reflected by a surplus in capital and financial transactions. With the range of developments mentioned, this year of 2010 as a whole will witness a greater surplus in the BoP than initially projected.  “There remains 1 more notch until Indonesia reaches investment grade, which will bolster foreign investor confidence and boost investment in Indonesia”, explained Hartadi with the Fitch sovereign rating for Indonesia improving to BB+ from BB recently.

In addition to stronger export performance, private consumption has also indicated an improvement. This was confirmed by increases in a number of consumption indicators such as imports of consumption goods, automobile and motorcycle sales, and retail sales. In future, household consumption growth is expected to rise further in accordance with higher income as a result of the income effect from increased exports and consumer confidence.

Regarding prices, inflationary pressures will remain insignificant, at least in Semester-I 2010. Inflation during the first two months of 2010 has remained low.  Relatively controllable inflation is also reflected by the decline in core inflation from 4.43% (y-o-y) in January 2010 to 3.88% (y-o-y) in February 2010. The rise in headline inflation at the beginning of 2010 was proven to be temporary, in particular due to the hike in rice process, and is not expected to rise again for the next few months in line with the upcoming harvests across the country. The possibility of a rise in the basic electricity tariff, if realized, is not expected to trigger any large impact on inflation if applied to the larger customers. Holistically, inflation is projected to remain within its target corridor of 5%+1% in 2010 and 2011. “I am convinced that the rise in domestic economic activity will not exceed the level of potential output and, therefore, not spur excessive inflationary pressures fundamentally”, stressed Hartadi.