BI cuts growth forecast again on global downturn

Bank Indonesia (BI) lowered its forecast for economic growth in 2012 for a second time on Wednesday on fears that ongoing problems in Europe and the US might weaken the global economy.

The central bank cut its estimate of Indonesia’s gross domestic product (GDP) growth for 2012 to 6.3 percent, down from 6.5 percent , BI director for economic and monetary policy research Perry Warjiyo said on Wednesday.

The government’s initial growth estimate was 6.7 percent.

Economists and international financial institutions, including the World Bank and the International Monetary Fund, have joined BI in lowering economic growth forecasts for Indonesia.

“This is caused by the impact of lower global economic growth on our exports. If exports slide, demand for investment will drop,” Perry told reporters after meeting with House Commission XI overseeing financial affairs.

Export growth might level off at between 12.8 and 13.3 percent, down from an initial estimate of 16.4 percent for 2011, according to BI data.

“Domestic consumption and other investments that are domestic-oriented will remain strong [including] construction, transportation, and additional machinery to meet domestic demand,” Perry said.

Domestic consumption growth is expected to remain steady between 4.6 to 5.1 percent next year versus
the 4.8 percent forecast for this year, while investment growth would accelerate to between 10.2 and 10.6 percent from 7.7 percent, according to the data.

Citi Indonesia analyst Helmi Arman was optimistic that domestic consumption would remain resilient. “Given a young population and a growing middle class, domestic consumption will remain a pillar of growth,” Helmi said in a report published on Tuesday.

“In the face of a changing global landscape, we expect Indonesia to become a growing recipient of FDI [foreign direct investment]. Hence, to the extent that infrastructure bottlenecks can be overcome, the revitalization of manufacturing, especially for domestically oriented industries, has a momentum that can persist in the medium term.”

BI cut its overnight policy rate to 6 percent as of October — a drop of 75 basis points over two months — to lower borrowing costs and stimulate consumer consumption and business expansion in the nation’s domestic-consumption-reliant economy.

While markets have been feeling the heat from the unresolved and potentially contagious eurozone debt crisis and disappointing economic data from the US, analysts said that weak confidence and a negative outlook for the world’s economy might expand to affect the real sector.

Indonesia’s financial markets, as elsewhere in the world, have experienced heavy selling pressures in recent months, with the rupiah suffering its steepest monthly drop since 2009, falling 3.5 percent in November to Rp 9,170 against the US dollar as of Wednesday.

“The trend is weakening. Global uncertainties are very high right now, and investors are recalculating their gains or losses as the year-end approaches. Those who have gained will exit and they will recalculate their investment portfolios at the beginning of next year,” Perry said.

“BI will still be in the market. We will continue stabilizing the rupiah exchange rate through forex intervention and government bond buys. And our forex reserves are enough.”

Perry said Indonesia could limit the impact of the global slowdown and return confidence to financial markets by boosting fiscal stimulus.

“Not only through the amount of the budget readied to support the real sector through fiscal [measures], but also through the increase in disbursements and implementation of infrastructure projects,” Perry said.