Better Investment Climate Lifts Indonesia's Growth Outlook
9/8/2005JAKARTA, INDONESIA (8 September 2005) - A revival in investment is bolstering Indonesia's economy this year, prompting ADB to raise its full-year growth outlook slightly to 5.7%, from an earlier forecast of 5.5%.
"The investment pickup, from a low base, follows the relatively seamless transition to a new government after elections in 2004, and expectations of greater regulatory certainty and a recovery in infrastructure spending," says ADB's Asian Development Outlook 2005 Update (Update) released today. But the report also warns that a burgeoning oil subsidy bill could yet jeopardize prospects.
Indonesia's gross domestic product rose 5.9% in the first half of the year, fuelled by a 13.6% expansion in fixed capital investment. The higher investment was a major reason for a 35.4% jump in imports, as businesses bought more capital equipment and production materials overseas. Exports grew by 27.5%, partly as a result of higher prices for shipments of oil and natural gas. The trade surplus rose to $12.2 billion in the first half.
The Government's policy to subsidize domestic fuel prices has put the fiscal position under pressure as global oil prices soar. Despite major resources of oil, natural gas, and coal, Indonesia is still vulnerable to rising oil prices due to underinvestment in oil production and rapid demand growth.
"Budgetary prospects in 2006 depend on the Government's willingness to address the current gap between the prices of domestic subsidized oil products and world oil. Although domestic prices have already been raised, they are still well below world levels," the Update says.
"In the event of still higher oil prices, budget deficits may be larger than expected, risking an end to several years of determined fiscal consolidation." In late August, the Government stated that it plans to raise fuel prices again sometime after October. Financial markets reacted negatively to the rising oil prices and lack of clear policy measures.
Inflation averaged 7.7% in the first seven months of the year, well above expectations, due to higher food prices, an increase in fuel prices, and a weakening of the rupiah. Full-year inflation is now estimated at 7.5%, up from the 5.9% forecast in April by the Asian Development Outlook 2005. The inflation projection for 2006 also is raised, to 7.5% from 5.4%.
While the upturn in investment could lead to increased economic growth, more jobs, and higher wages, the Government needs to follow through on its agenda to reduce corruption, improve the legal and regulatory environment for investment, and support infrastructure development, says the Update. Concerted action on oil subsidies is also needed.
"On the expectation that more resolute action will be taken on these fronts, GDP growth is forecast to edge higher next year," the Update adds. The economy is expected to rise by 5.9% in 2006.
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