Indonesia needs to rely more on domestic market: Rabobank

Andi Haswidi, The Jakarta Post, Jakarta

As global demand for Indonesian products decreases in 2007 in line with a predicted slowdown in the world's economy, the country's domestic market will become more important, a Rabobank study says.

"So far, the increase of commodity prices has contributed much to the country's exports. This condition will eventually influence the global demand for the country's products," said local head of research Jan Lambregts (pictured left with global research head Bernard Walshots).

Adjustments to commodity prices will take place as global demand weakens following a predicted slowdown in the world's major industrial economies, especially the U.S. and China, Lambregts said.

On Monday, the Central Statistics Agency (BPS) reported the country continued to book record exports, with accumulated value from January to August reaching US$64.63 billion, a 17.13 percent rise compared to the same period in 2005.

"Global demand will decrease but the potential of the domestic market will become more significant in 2007. We will see inflation and interest rates improve," Lambregts said.

Domestic consumption would improve in accordance with the downward trend in these rates, which will in turn help drive the country's economy.

The country already heavily relies on local consumption to drive its economy, with offshore investments yet to flow in as robustly as expected. Net exports are another economic driver, although still relatively small percentage-wise, making up only 8 percent of the country's gross domestic product.

"The financial sector in Indonesia is also a lot better than what it was 10 years ago. Of course there are still risks, but they are much lower," Lambregts said.

The Rabobank outlook predicts Indonesia's GDP growth to accelerate in the second half of 2006, to average 5.3 percent at the end of the year, and rise to 5.8 percent in 2007.

"We are expecting the BI rate to be at 8.25 percent on average for 2007 and that inflation will drop more rapidly, which will improve investment returns. This is very important," he said.

At present, the BI rate stands at 11.25 percent.

The Rabobank group is the only private bank with two triple A predicates from Moody's and Standard and Poors and is the largest financing company in the Netherlands.
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