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INDONESIAN COMMERCIAL NEWSLETTER
December 2009

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INDONESIA'S ECONOMIC OUTLOOK, 2010


Backgrounds

Unlike in early 2009, optimism was high toward the end of 2009, about global economic recovery and stronger performance of Indonesian economy. A number of macro economic indicators showed improvement in major economies including the United States, Japan and Europe.  Indicators even showed that the manufacturing sector of China and India already fully recovered.

China leads the world toward economic recovery. The United States and a number of European countries have gone through global economic recession and began to post positive growth. The world market is brisker and firmer, opening an opportunity for Indonesia to boost exports.

In 2009, Indonesia managed to grow stronger than expected. Previous prediction put the country's economic growth at 3%-3.5% but in the first 11 months of 2009, the country's economy grew 4.2%. The growth rate was estimated to reach 4.3% in the whole of 2009.

Inflation was only 2.7% in the first 11 months of 2009 or the lowest in the past 10 years. The rupiah has continued to gain to reach an average level of 9,400 per US dollar in November, 2009. The trend continued until early 2010 reaching around 9,200 in January.

However, it is not all smooth in 2010. There are still a host of challenges to be met. The Asean-China Free Trade Agreement (AC-FTA), which came into effect on January 1, has created a big controversy with cons seeing it a threat to the country's manufacturing industry. Various sector of the country's manufacturing industry were already weakened by large imports of manufactured products from the giant partner. 

Inadequate and poor condition of infrastructure remain big hurdles hampering investment, which is expected to be a driving motor for growth of the country's economy in 2010. Political issue over the scandal of Bank Century is also a potential stumbling block causing a drag in economic development.

The manufacturing sector could not be expected to make much headway toward recovery as many of the sectors need revitalization and restructuring.  Many factories still rely on old and outdated machines.

However, almost everybody agrees that Indonesia is in good position to chalk up a fairly strong growth in 2010. The government and Bank Indonesia predicted the country's economy will expand 5%-5.5% in 2010. The World Bank even gave a more optimistic growth estimate of 5.6%. The optimisms are partly based on the rising trend in exports since the last quarter of 2009.

The International Monetary Fund (IMF), however, is always more conservative in its prediction of the country's economic growth. The IMF gave a lower estimate of 4.8% for the country's economic growth in 2010.

General description of Indonesia's economy in 2009

After the turbulence in 2008, the country's economy was relatively stable in 2009. The BI rate was cut to as low as 6.5% much lower than it was in 2008 and 2007. 

Strong stability was recorded in the rupiah exchange rate. Toward the end of 2009, the rupiah gained to reach the level of 9,400 per dollar or the same as in 2007. The price of premium gasoline was also cut to Rp 4,500 per liter. 

The inflation rate tended to decline in 2009 after the prices of primary commodities shrank from peaks in 2008. In 2009, the country's inflation was 2.78% or the lowest in the past decade.

The country's economy grew by around 4.3% in 2009 or   higher   than 3.5% predicted by international agencies. The performance was also better than those of other Asean countries like Singapore, Malaysia, and Thailand.

The economic growth in 2009 was driven mainly by increase in household consumption   and government consumption, which grew by 4.7% and 10.2%. Respectively, Contraction, however, was recorded in exports and imports by 8.2% and 18.3% respectively.

Indonesia managed to post positive GDP growth despite export and import contractions thanks to consumption sector. In 2009, household consumption contributed 58% to the country's GDP and exports contributed only 23.5%. Therefore, the impact of the slump that hit export markets on Indonesian economy was not as serious as on export oriented economies like Singapore. Indonesia could rely on domestic market.

Transport and communications sector continues to post stronger growth

In the third quarter of 2009, positive growth was recorded in almost all sectors led by the transport and communications sector that grew 18.2%. A contraction of 0.6%, however, was recorded for the trade, hotel and restaurant sector.

Exports began to grow in Q-IV of 2009

The country's exports in the first 11 months of 2009 were valued at US$ 103.5 billion, down 19% from the same period in 2008.


Exports of commodities other than oil and gas were valued at US$ 86.4 billion down 13.1%. The sharpest fall was recorded in the exports of mineral fuel down US$ 347.9 million and the highest was recorded in the exports of cacao up by US$ 21 million. 


Exports of non-oil/gas to Japan, the country's largest trading partner, in November 2009 were valued at US$ 935.7 million, to the United States valued at US$ 905 million  and China  US$ 872.2 million; to the European Union  (27 countries) US$ 1.17 billion.


Exports of industrial products in the first 11 months of 2009 shrank 20.97% and exports of agricultural products fell 6.12 % but exports of mining products rose 28.11 % from the same period in 2008.


However, exports in November in 2009 compared with the same month in 2008 rose 2.51%. Similarly in the last quarter of 2009, exports grew compared with the same period in 2008.  In October exports grew 13.5%   ending a period of contraction in nine months. The growing trend is expected to continue UN 2010.

Imports also shrank in 2009. Imports in the first 11 months of 2009 were valued at US$86.58 billion down 28.75 % from the same period in 2008.

Imports of commodities other than oil and gas were valued at US$ 69.69 billion in the January-November, 2009 or down 24.22 %. Imports of oil and gas in the first 11 months of 2009 were valued at US$16.89 billion or down 42.84 % from the same period in the previous year.

Inflation in 2009 less than 3%

In 2009, Indonesia's economy was relatively stable as indicated by the low inflation rate of only 2.78% or the lowest in more than 10 years. The economic slowdown   resulted in weak demand keeping the prices from increasing. The price stability was favorable for Indonesia's economy as it maintained the purchasing power of the people resulting in growing domestic market.

In December 2009, the inflation rose to follow the rising prices of commodities in the world market such as rice and sugar. The revival of the global economy also strengthened demand and pushed up the prices. 

In 2010, the  increase in the prices of commodities especially food commodities  is expected to push up inflation  higher than in 2009  but the increase would not be too high. With moderate economic growth, the inflation is forecast to be around 5%-6% in 2010.

Economic challenges in 2010

The global economic recovery has brought about higher optimism in Indonesia that the country's economy would grow fast in 2010.  However, there would be a lot of challenges to be met in 2010. Good management would be needed to keep the economic development on the right track.

The challenges would be both internal and external factors.

External factors include:
"        World economic recovery will remain vulnerable as there is still  threat of economic instability  when the governments of crisis hit countries stop incentives for the business sector
"        ASEAN-China Free Trade Agreements (AC-FTA) which came into effect on 1 January, 2010 would be a big challenge for less competitive sectors of industry.
"        The oil price instability could affect the price stability of other commodities   on the domestic market.
"        Instability in the financial market could cause a reversal in the flows of capital or change in the orientation of investors.

Internal factors
"        Slow development of infrastructure especially power facilities, road and other transport facilities.
"        High lending rates
"        Bureaucracy and regulations not well or efficiently managed  increasing investment cost
"        Political condition not yet favorable early 2010 discouraging investors forcing them to delay investment in Indonesia.
The condition, however, is more favorable in 2010 for Indonesia to boost its economic growth by utilizing strong fundamentals such as huge domestic market and abundant natural wealth.

World economic outlook, 2010

Almost everybody believes that the world economy would improve in 2010. The global economic recovery has come faster than expected thanks to large economic stimulus provided by the United States, China, Japan and Europe.  The International Monetary Fund has raised its projection for global economic growth by 0.6 percentage point to 2.5 % in 2010. 

The IMF said the global economy has lifted itself from recession but the recovery rate would be moderate. With poor financial system and less support from public policy. The IMF forecast that the world trade would grew only 1% in 2010 or a 0.4 percentage point from its previous prediction.

Among the advanced economies, the United States and Japan are expected to post growth stronger than expected. Improvement is predicted to improve the US labor market, housing, manufacturing sector, consumer confidence and business sector.  The IMF predicted the world's largest economy would suffer a contraction of 2.6% in 2009 or better than previous forecast. In 2010, the US economy is forecast to grow 0.8% or better than previous forecast of zero growth.

The World Bank also agreed that the worst of the crisis has been over, and the world economy is recovering. The conditi0on, however, is still vulnerable. He World Bank predicted the global economic growth would be slow in the second half of 2010 as a result of weak fiscal and monetary measures. It predicted the global economy would expand only by 2.7% in 2010 in 2010 and by 3.2% in 2011.

Indonesia's economic prospects, 2010

With the improvement of the world economic condition starting late 2019, Indonesia, which has succeeded in going through the difficult period with positive growth, should be able to gain from the more favorable condition in the world. 

World Bank chief economist William Wallace predicted Indonesia's economy would expand 5.6% in 2010 if the country could maintain stable consumption growth and boost investment and improve its infrastructure.
Strong domestic demand and world economic recovery would be the main drivers of the Indonesian growth in 2010.

In 2010, Indonesia's exports are forecast to increase to reach the pre crisis level boosted by increase in commodity prices and recovery of the world market. However, imports are predicted to grow faster than exports as the domestic market would grow faster than the world market.

The World Bank's prediction is not far different from the Government's target for economic growth of 5.5% in 2010.

Bank Indonesia, the country's central bank, predicted the country's economic growth would be around 5% - 5.5% in 2010, up from around 4.3% in 2009. Meanwhile, the finance minister predicted the country's inflation would surge to around 5% in 2010.

Most observes agreed that the country's economy would expand in 2010, but the economic growth would be moderate. Weak manufacturing sector would cause drag in the economic growth. The country's manufacturing sector would face greater challenged in market competition under the liberalization of trade.

Data Consult predicted the growing trend of the country's exports since late 2009 would continue in 2010. In 2010, the country's exports are expected to grow 15%-20%. Imports would grow even faster as most of the basic materials for export commodities are imported.  The flow of foreign capital is also expected to be stronger as the country offers better opportunities for foreign investors.

The purchasing power of the people is expected to remain strong. With interest rate relatively low and rupiah stronger, the domestic market would grow faster. Based on the indicators, the country's economy is predicted to expand 6%-7% especially as the government could remove a number of hurdles and improve infrastructure, cope with high interest rate and low competitiveness.


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