Wednesday, 16 February 2011


Indonesia is among the most fortunate countries in the world. At a time when superpower states are collapsed by the virus of debt, Indonesia remains to stand tall with relatively healthy figures.

In fact there are two dangerous types of virus in the world’s economy. One is the virus of the state budget and the other is the virus of debt of the private sector. Fortunately Indonesia had taken antibody drugs to anticipate the two viruses. Ever since the crisis of 1998 this body had been very effective, so effective it even had its side effect of killing other cells in Indonesia’s body in the past few years.

So strong were these antibodies, the Government had been unable to liquidate fund for projects on time. Just look at the figures on December 23, 2010 word was out the Government only managed to liquidate 83.4% of fund, against 2009 which was 86.5%. Far from being ideal. This degradation process must be stopped in 2011, because by expenditure of economic growth, people and Government’s consumption were still the primadona of Indonesia’s economic growth. Although the other two sectors the investment sector and export had been greatly contributive in 2010, most likely they would turn to become a risk factor in 2011.

The main internal risk is inflation, particularly that of food and energy. Food (rice), a strong component of inflation, is most likely to have price increase. This is caused by weather factor which threaten Asia, particularly a rice producing countries like Indonesia, Thailand, and Vietnam. Two neighboring countries are having sharp drop of harvest, and most likely unable to export rice to a rice consumer country like Indonesia.

On the contrary if pressures of inflation strengthened, the Government must put brakes on the projects so as to prevent excess liquidity to minimize the pressures of inflation.

Inflation might also occur in a condition of over heating, where demand explodes faster than production. At this point the expenditure sector (consumer demand) becomes the determinant factor (more than 50% of GDP). By the time Bank Indonesia controlled interest rate with the intention to jack up investments, the people are having extra cash, which motivate people to shop. This drive could be excessive because the balance sheet structure of the banking system remain unchanged, so even at low level of interest the banks are still reluctant to extend credit and prefer to enter the bond market of corporations and the state. Back to the above scenario, the Government must put brakes on liquidation of project funds to that excess liquidity of the financial system will not have excess baggage and boost inflation faster.

Fine tuning of Government’s shopping greatly affects Indonesia’s economic growth so by the time the Government stop projects, the economic development would slowdown and vice versa. Under such circumstance, the Government’s action in project coordination, particularly in liquidating fund of the State Budget, must be improved as soon as possible. Government’s shopping becomes a counter cyclical act to fight inflation, in addition to the instrument used by Bank Indonesia such as selling of bonds to absorp excess of liquidity.

The external factor is the weary economic recovery of the world, particularly the USA and Europe. Some of the world’s economic surveyors predict that the real economic growth of the world would slump from 4.1% in 2010 to become 3.7%. America would grow by 2.7% in 2011 (against 2.8% in 2010) while Europe would grow by 1.7% in 2011 (against 1.8% in 2010). Even China would slump from 10% growth in 2010 to the level of 9% growth in 2011.

In short, the world’s economic growth would slowdown because the global economic recovery of 2011 was not caused by improvement of the bottom line (increasing demand and production of goods) but rather by betterment of balance sheet (minimizing debt and efficiency measures) of 2010. It comes as no surprise that the world’s economy is not sustainable and highly sensitive to minor turbulences.

If this scenario materialized, Indonesia’s prospect of investments and export are most unlikely to be as bright as in 2010, especially when things are made worse by reversal capital outflow which caused sudden weakening of the Rupiah that drives imported inflation and reduced the potentials of foreign investment. Slowdown of economic growth in China may reduce Indonesia’ export opportunities to China especially of mineral products an other natural resource materials.

Business News predict that Indonesia’s real economic growth could reach 6.5% with inflation potentials of 6.3%, and most likely Bank Indonesia would maintain 50 basic points above inflation, at least by end of second quarter.

Share index is predicted to increase by at least 12.8% (as much as nominal growth of GDP) with the potential of 20% by year end, or maximum index reaching 4,440 by end of period. Meanwhile emitence of corporate bonds could rise steeply due to increased investment grade from both sovereign and corporates so with spread yields Government Bonds of 100 to 150 basic points (1% - 1.5%) against inflation, Government Bonds could range around 7.5% (one year) while Corporate Bonds could reach 8.5% (for one year). The dynamics of yield would depend on change of demand magnitude due to liquidity excess which would eventually downpress yields the way it happened in 2010.

Again the important issue of 2011 is to maintain momentum, so by the time infra-structure projects run and electicity powerhouses completed by end of 2011, Indonesia’s economic growth could happen faster through elimination of bottlenecks on the supply side.

No comments: