While Global Recovery Sputters, Indonesia Strong, IMF Says 

Tuesday, 3 November 2009

The Jakarta Globe

Indonesia’s strong domestic fundamentals should allow its economy to remain strong despite the prospects for a more sluggish global recovery than had recently been predicted, the International Monetary Fund said on Monday.

Milan Zavadjil, the IMF’s chief representative in Jakarta, forecast that the country’s economy would grow by 4.8 percent in 2010, just below the government’s target of at least 5 percent.“We expect the Indonesian economy to grow by 4 percent in 2009 and 4.8 percent in 2010,” Zavadjil said. “We know it is below the consensus, but we still see the potential upside.”

Zavadjil said the relatively conservative expectation was not because the country’s economy was weaker than thought, but because the global economy was.He said most of the positive signs of recovery in the global and Asian economies were fueled by massive stimulus packages and extraordinarily loose monetary policies issued by many countries in reaction to the economic crisis.

However, some indicators had raised doubt over the health of any broader recovery, he said. These included persistently high unemployment rates and weak retail demand.Zavadjil said most Asian countries were in a precarious position because of their reliance on exports to support their economies, meaning stimulus was needed to maintain stable growth.

UBS global economist Paul Donovan had voiced similar estimates on Thursday, saying the shape of the global recovery would likely resemble a “Nike swoosh” rather than a classic “V.”However, both economists agreed that the slower global recovery would have only a minor impact on Indonesia’s economy.

“The recovery in Indonesia is self-sustaining ... due to strong domestic demand,” Zavadjil said, adding that the 4.8 percent growth would be achieved mainly through that domestic demand.

Edward Teather, a senior economist at UBS, said Indonesia had advantages that would allow it to grow faster than its neighbors.“Compared to Malaysia and Thailand, Indonesia has huge room for domestic spending, given the high rate of the savings and investment compared to GDP, the highest in Asia outside China and India,” he said.

UBS sees the country growing by up to 5.3 percent in 2010. It said the government’s target of 7 percent growth by 2014 was reachable if appropriate measures were taken.

“The key to higher growth is increasing productivity per capita, and infrastructure development would do this. With strong domestic demand, I also believe foreign investors will remain confident in putting their investments here,” Teather said.

President Susilo Bambang Yudhoyono has said the country needed Rp 2,100 trillion ($220 billion) of investment per year for the next five years to be able to reach the 7 percent target.

Fauzi Ichsan, a local economist from Standard Chartered Bank, said the IMF’s lower forecast might be caused by expectations of a slower global economic recovery, which “still has an effect on exports and commodity prices.”

“However, we also see that the potential upside is bigger than the downside risk. The potential upside would depend on how fast the government could roll out planned infrastructure projects,” he said