Indonesian central bank has concerns

Indonesia’s central bank has taken a more pessimistic view on the economic prospects for 2013 amid the country’s widening current account deficit and uncertainties in the global economy.

Bank Indonesia Governor Darmin Nasution said in Jakarta that with such unfavourable economic conditions, the average exchange rate of the rupiah against the US dollar could further weaken in 2013, surpassing the government’s target of 9,300 rupiah. 

“With such economic scenarios, the rupiah exchange rate might stand at 9,500 per US dollar next year,” Darmin said during a hearing with the House of Representatives Commission XI on finance and banking. As for economic growth assumptions, Darmin forecast the economy would grow by between 6.3 per cent and 6.7 per cent in 2013, lower than the government’s target of 6.8 per cent.

The government estimates in its 2013 state budget draft that the rupiah exchange rate might stand at 9,300 per US dollar, while growth is estimated to be 6.8 per cent. The ministry believes that a massive market with significant growth in the middle-class segment will enable Indonesia to spur growth via consumption and investment.

 

Dealing with deficit

Darmin said that pessimistic views on the economy were based on the fact that the government had been taking a different approach in handling the current account deficit compared to the ones that it had taken in the past.

For three consecutive quarters in 2012, Indonesia suffered widening current account deficits due to high import rates of capital goods. 

“In 2005, we suffered a current account deficit in the second quarter due to high imports and a mini-crisis. What the government did was to raise subsidised fuel prices. Bank Indonesia then increased its benchmark interest rate and reduced its forex [foreign exhange] reserve. Within two quarters, everything went back to normal and optimum growth was achieved,” Darmin said.

“The policy was the same when another deficit occurred in 2008. We raised subsidised fuel prices, increased our policy rate and our forex reserve was reduced,” he added. Currently, Darmin said that the policy was different because even though forex reserves had dropped to $106.5 billion from $114 billion, the government was not able to convince the House to raise the price of subsidised fuel during deliberations over the revised 2012 state budget.

“If we are still unable to raise subsidised fuel prices, then we can try to increase foreign direct investment. As of now, our foreign direct investment reached $15 billion. If we can increase it to $20 billion, then the deficit could be lowered,” Darmin said.

“Other than increasing foreign direct investment, we should also try to increase our export rates by at least 7 per cent to cover potential deficits,” he added.

The Finance Ministry’s interim fiscal agency director Bambang Brodjonegoro said that the government was confident it could drive more investment into the country due to the country’s large potential market.

However, Bambang also said that increasing exports would be a challenge because most of the 

manufacturers that planned to invest in Indonesia were domestically oriented rather than export oriented.