Magazine article Business Credit

Hot Spots: Indonesia

Magazine article Business Credit

Hot Spots: Indonesia

Article excerpt

The country is doing remarkably well and is attracting growing numbers of investors from abroad, although the local business climate still leaves much to be desired. The expansion of real GDP accelerated in the third quarter of 2009 for the first time in more than a year, as lower interest rates and political calm, following the strife-free reelection of President Susilo Bambang Yudhoyono in July, promoted consumer spending. Indonesia, with its 240 million people and, hence, huge domestic market, has come through the global credit and economic crisis better than most other countries in the region, which are more export-dependent. The economy expanded 4.2% in the third quarter, following an advance of 4.0% in the second, as lower interest rates helped spur spending on big-ticket items such as cars and homes, and consumer confidence reached five-year highs.

The Central Bank forecasts that growth will quicken to 5.5% in 2010 from 4.3% in all of 2009, driven primarily by consumer demand, and President Yudhoyono has said his government aims to achieve economic growth of 7.0% by the end of his second five-year term in 2014, a goal that no longer looks unreachable. Inflation unexpectedly slowed to a nine-year low of 2.57% in October, giving policy makers more time than their confreres in other Asian Central Banks before they feel compelled to raise interest rates. There is a general consensus that monetary erosion will gain momentum and reach 4-6% in 2010, up from 3.5-5.5% in 2009, but this prospect is one that the Central Bank can contemplate without hitting the panic button.

The Central Bank stopped cutting interest rates in August, after slashing borrowing costs for nine consecutive months. There is no urgency to tighten the screws, especially as the fiscal deficit in 2009 is apt to be smaller than anticipated, given that faster economic growth has reduced the need for stimulus measures. President Yudhoyono expects the budget shortfall to narrow to 1.6% of gross domestic product in 2010 from around 2.5% in the current year. Many independent observers believe that he can afford to step up public spending by at least 3% while retaining a public-debt-to-GDP ratio of 35%, which would be well below the globally accepted range.

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Indonesia has made significant progress with structural reforms since the Asian crisis of 1997-1998, repairing balance sheets and encouraging more foreign investment. President Yudhoyono's new government, appointed after his landslide victory in July, is one that seeks to balance technocrats with party representatives, but the economic team is filled with pro-reform technocrats and includes among the reassuring personages Vice President Boediono, a former Central Bank Governor, as well as Finance Minister Sri Mulyani Indrawati, a former senior executive at the International Monetary Fund, who has won praise for reducing the public debt and restoring confidence in Indonesia's macroeconomic policies.

The government has vowed that it will streamline investment procedures. Mr. Yudhoyono has promised to remove "bottlenecks" hindering infrastructure projects, including new roads and ports. He has also pledged to right graft in a nation that Transparency International ranks 126th on its 2008 corruption index. Investors are already flocking to Indonesia, so much so that the benchmark Jakarta Composite Index has been driven up by more than 80% and the rupiah has gained 16% in the foreign exchange markets. Thanks to the authorities' prudent debt management, the country's sovereign debt ratings are presently only a few notches shy of investment grade, and the international rating agencies have been hinting that they expect to announce upgrades sometime in the next six to 12 months. …

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