Indonesia’s inflation may show an upward trend this year along with surging commodity prices globally, which could discourage capital inflows into the country, the Finance Ministry says.
An upward trend in inflation was “possible”, Finance Minister Sri Mulyani Indrawati said Friday after a meeting at the Coordinating Economic Ministry, citing increasing commodity prices as the catalyst.
The Finance Ministry has revised its inflation forecast to 5.7 percent in the proposed 2010 state budget revision, from 5 percent set in the initial 2010 budget. Before being enacted, the revision must be approved by the House of Representatives.
Anggito Abimanyu, the head of the Fiscal Policy Office at the ministry, said inflation could discourage capital inflows.
“If inflation starts picking up, the spread [between inflation and expected yield] becomes narrower. So it will be less attractive [to investors],” he said.
The government has postponed a hike in electricity rates until the second half of this year. The increase was initially planned for January to help curb inflation. Last week Mulyani also said there would be no increase to prices of subsidized fuels this year.
March may see deflation if commodity prices including rice continue to decline, she said Friday.
“If some commodity prices show a decline, we expect month-to-month inflation in March could be very low, or we may even see deflation,” Mulyani said.
According to data from the Central Statistics Agency (BPS), inflation in February slowed to 0.3 percent from January, which saw 0.84 percent month-to-month inflation. Year-on-year inflation in February was 3.81 percent.
Standard Chartered economist Eric A. Sugandi said March may see a deflation of 0.1 percent, helped by cheaper rice prices brought about by the harvest season and stronger rupiah against the US dollar, reducing imported inflation. “Year-on-year inflation in March may even be lower than February,” he said.
The central bank estimates there will be no inflationary pressures in the first half this year, which will provide more room to maintain interest rates.
Bank Indonesia’s (BI) benchmark interest rate has been kept at 6.5 percent for the seventh straight month, aiming to spur economic growth.
BI estimates the economy to expand between 5.5 percent and 6 percent this year, and further accelerate to between 6 and 6.5 percent in 2011.
National Development Planning Minister Armida Alisjahbana said the economy could expand between 6 and 6.3 percent next year with a recovery in investment.
“We expect investment to increase 10 percent from 2010,” she said. The government estimates investment to increase 7.8 percent in the proposed 2010 budget revision, but some analysts say the figure could be higher as Indonesia became an attractive investment destination in it’s rapid recovery from the global economic crisis.
Last year the economy grew by 4.5 percent amid the global crisis, the BPS said. Indonesia needs more infrastructure to attract investment, analysts said.
President Susilo Bambang Yudhoyono expects the economy to expand 7 percent in 2014, when he will end his second and final term.
Yudhoyono hopes Indonesia’s gross domestic product will double, to surpass US$1,000 billion from
Rp 5,613.4 trillion in 2009 (according to BPS data).
