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News Analysis: Domestic consumption to spur faster economic growth in Indonesia next year

English.news.cn   2012-12-04 13:34:34            

by Zheng Shibo

JAKARTA, Dec. 4 (Xinhua) -- Despite the continued gloomy global economic outlook in the coming year, Indonesia's buoyant domestic consumption could push the country's further growth in 2013.

Indonesia's economy would grow 6.5 percent in 2013, slightly higher than this year's growth which is expected to be 6.3 percent, said Eric Sugandi, an economist for Standard Chartered Bank Indonesia, in an interview with Xinhua.

Indonesia, a member of G-20, has been experiencing strong economic growth with 5 percent to 6.5 percent since the 1990's Asian crisis, compared with other major developed and emerging countries.

The country posted strong economic growth in the third quarter this year, expanding by an annual rate of 6.2 percent, slightly weaker than the first quarter's 6.3 percent and the second quarter 's 6.4 percent.

Indonesia's economic growth is mostly driven by household consumption which helps insulate the country from the impact of global downturn, according to Eric.

Indonesian President Susilo Bambang Yudhoyono emphasized last month that Indonesia's economic growth should be anchored on domestic consumption as an export-oriented economic style is not suitable for the country.

Indonesia's Central Statistics Agency announced Monday that the country's trade deficit hit record high at 1.54 billion U.S. dollars in October as exports continued to decline amid weakening global demand.

According to Eric, household consumption contributes 55 percent of Indonesia's gross domestic product, supported by expanding size of the middle class and record low interest rates.

Strong domestic demand helps provide Indonesia with some protection against international fluctuations in commodity prices and demand and offset weak exports, according to analysts.

Indonesia's rapid economic growth over the past few years had turned middle-class households richer. With a population of about 240 million, the middle class comprises 60.9 percent of Indonesians in 2011, according to a survey by the Indonesian central bank.

Consumer confidence rose in October following optimism on jobs and wage. Last month, the Jakarta government approved a massive 44 percent increase in next year's minimum wage and other regions in the country are also expected to increase their minimum wage.

"The increase of minimal wage is positive for the household consumption since workers can now buy more basic necessities," Eric said.

Eric has forecast that the central bank would keep the benchmark interest rate at 5.75 percent until the end of the first half of 2013 and hike the rate by 50 points in the second half of next year as political parties will spend more on campaign for the 2014 presidential election.

Looking at the household consumption, Eric said there are three factors to be considered, namely the fuel prices, the exchange rate of Indonesia's currency rupiah, and the political stability.

"So long as the three factors are under control, Indonesia will have strong household consumption, and I am optimistic that the three factors can be put under control," the economist added.

According to Eric, the Indonesian government will not hike the price of the subsidized fuel next year because of the 2014 presidential election. No political party would be brave enough to run the risk of losing popular vote by supporting a fuel price hike.

Fuel prices have always been a highly contentious political issue in Indonesia. In 1998, former President Suharto's decision to raise fuel prices helped topple him after three decades in power.

Eric predicted that the exchange rate of Indonesia's rupiah would be 9,650 per U.S. dollar but he firmly believed that the devaluation of the currency would be better for the current account.

"By letting the currency weaken slightly, it will discourage imports and encourage exports and thus help narrow the current deficit," Eric said.

A report by the Standard Charted global research shows that Indonesia has achieved political stability in recent years and the 2014 presidential election is likely to be peaceful.

The report said the threat of Islamist terrorism has diminished as the security forces take a legalistic approach to the issue by resorting to legal means in prosecuting terrorists rather than treating them as political enemies.

Eric, however, stressed that Indonesia is still facing multiple challenges ahead despite rapid economic growth, citing poor infrastructure as the main obstacle to further economic growth.

According to Eric, Indonesia can learn lessons from India whose economic growth slows as its infrastructure support failed to sustain development efforts.

"Indonesia will enjoy higher than 7 percent economic growth if the infrastructure support is improved," he said.

Editor: Yang Lina
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