Challenges and opportunities in the second half of the year

Andry Asmoro, Analyst   |  Wed, 07/16/2008 12:29 PM  |  Business

The first half of 2008 just whizzed by with the Indonesian economy adversely impacted by global imbalances. It was not so long ago that we celebrated New Year, which was followed by the sub-prime mortgage crises that hit the U.S.

Worries were exacerbated by relentlessly rising oil prices, which forced the Indonesian government to hike domestic oil prices and lower the amount of oil subsidies in order to ease pressure on the budget.

The resulting inflationary pressure caused the government to lower the country's economic growth forecast from 6.5 percent at the start of the year.

Few could have predicted the kinds of oil price escalations we have seen going into the second half of 2008, and now the million dollar question is: Can the government achieve its revised growth target of 6 percent this year?

Let us review the first half figures first in order to achieve a deeper understanding of what will unfold during the remainder of 2008.

In the first semester, the economy was predominantly driven by private consumption and export growth, which accounted for 57 percent and 23 percent of GDP, respectively.

On the trade front, export growth in the first five months of the year grew 29.5 percent compared to in the same period last year, and higher still compared to in the same periods in 2006 and 2005.

The increase was driven by higher oil and gas exports, as merchandise exports grew by just 21.7 percent, slightly lower than the previous year.

On the other hand, imports grew 53.1 percent on-year, the highest level of growth since 2000. On the fiscal side, the government has decided not to raise oil prices further, but has instead opted to apply budgetary measures to curtail the adverse impact from the volatile oil price.

Moreover, BI has prudently moved to raise the BI rate and dampen expected inflation. In the real sector, cement consumption has grown in excess of 20 percent, supported by resource rich regions outside of Java.

Given these positives, we might say that growth can still be maintained at the 6 percent level. However, there may be pit falls in our way, and several push-and-pull factors effecting the result.

The push factors stem from the tardy disbursements of infrastructure projects in the first semester, which will shove implementation of these projects into the second half of the year. The other push factors are attributed to sectorial economic activities, including agricultural, manufacturing and automotive.

Based on our calculation, the manufacture, trade, hotel and restaurant, and agriculture sectors contribute 27 percent, 17 percent and 13 percent of GDP respectively. Their shares are the biggest relative to other sectors in Indonesia's first-half GDP.

In the second semester, we expect the manufacturing sector to grow from 8.3 percent at first to 9 percent by the end of the year, while agriculture could grow to 6.5 percent from 6.0 percent in the first semester, supported by the government's prudent fiscal and monetary policies.

We will see the combination of fiscal and monetary policies help the government achieve its 6 percent growth target.

Now, the pull factors of the economy. We see continued obstacles arising as a result of the ever-unpredictable oil and commodity prices. Additionally, there are doubts over the government's ability to provide stable electricity supply to industries.

Moreover, land-clearing related problems will remain a huge issue when it comes to the realization of the much-needed infrastructure projects. Finally, in the lead-up to the 2009 general election, we see political risks rising, although this is difficult to quantify.

It remains to be seen whether the government can keep its word on not raising the subsidized oil price again. However, with rising non-subsidized Pertamax fuel hitting Rp 12,000 per liter, the government's challenge will be how to control consumption of the subsidized oil.

In summary, the second half of the year could shape up to be a relatively buoyant economic period, but it will require vigilance and efforts by the government to support growth in major sectors while ensuring political stability in the lead up to the election.

The writer is an economist at PT Bahana Securities

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