Indonesian economy continues to lose altitude

The Jakarta Post, Jakarta

If Indonesia's economy was a jumbo jet, it would be flying on the single engine of exports at the moment, with the other engines of private consumption, investment and government spending having stalled out.

And there are rising concerns about the ability of exports to continue providing enough thrust for the economy, with many industries in the country seeing a downturn in their first-half output, sales and profits, on the current slump in demand and rising production costs.

The automotive sector, for example, saw sales of passenger and commercial vehicles fall 49 percent to only 149,634 units during the first six months ending in June, as compared to the same period last year.

Astra International, the country's largest automotive firm, saw car sales drop 30 percent and motorcycle sales 26 percent, president director Michael D. Ruslim reported of the company's first-semester results. This led to a 39 percent fall in net income to Rp 1.86 trillion (US$204 million).

The country's cement industry also had a poor start to the year. According to data from the Indonesian Cement Association, first-half domestic cement consumption dropped 3.3 percent to 14.5 million tons from a year earlier, affecting producers' sales and output.

"The sector may experience flat growth for 2006," said Dwi Sutjipto, president director of PT Semen Gresik, Indonesia's largest cement maker. Though demand is expected to pick up next semester on the back of infrastructure and reconstruction projects, observers do not believe this will compensate for the first-half drop in consumption. Last year's total cement production was around 33 million tons, with some three million tons exported.

Companies involved in the food business also are facing hard times, with monthly sales of processed food until June slowing to Rp 18 trillion from Rp 20 trillion, according to Indonesian Food and Beverages Association chairman Thomas Dharmawan.

The Industry Ministry announced earlier industrial production growth reached only 2.38 percent in the first half. Its target for the whole year is 7 percent. The textile, leather, footwear, and pulp and paper industries have also seen slower demand. However, the agricultural, energy and mining sectors have bucked the trend due to a recent rise in commodity prices.

Local demand for goods and services slumped after last year's fuel price hike bumped inflation up to 17 percent and sapped people's purchasing power. Ensuing high interest rates worsened the situation, curbing demand for both consumer and business loans.

On-year inflation in June eased to 15.53 percent, but the central bank's key interest rate, which lenders refer to for their rates, remains at 12.25 percent.

All of these factors combined to hamper the country's main growth engine of private consumption, as government spending failed to provide the much-needed drive.

The country's economy only expanded by 4.6 percent in the first quarter of this year, the fifth consecutive quarter of slowing expansion, from 6.2 percent the previous year.

Investment has not helped much, with the Investment Coordinating Board reporting only a 4.6 percent increase in foreign direct investment to $3.5 billion during the first semester.

In view of these factors, Bank Indonesia sees growth staying put again in the second quarter, at between 4.6 and 5.1 percent, and wrapping up the year at the lower end of the central bank's projection of 5.0 to 5.7 percent.

The International Monetary Fund, meanwhile, projects Indonesia's economy will grow 5.2 percent this year.

The Central Statistics Agency is scheduled to announce Indonesia's economic growth data in mid-August.

"I think growth in the second quarter will not be far from the first, with consumption and investment still slow. For the whole year, our forecast is only 5.4 percent," said Citigroup's chief of economists for Indonesia, Anton Gunawan, during its recent investor gathering.

"Indonesia needs more spending, especially from the government."
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