Indonesian Growth Can’t Match China, India, Credit Suisse Says
Indonesia can’t replicate the “high single digit” economic growth of China and India because of impediments to investment and high credit costs, according to Credit Suisse Group AG.
“We don’t expect investment to take off,” Cem Karacadag, an economist at Credit Suisse in Singapore, said in a report received yesterday. “It will take the government many years to fix the structural obstacles to investment, including corruption, regulatory risks, and a weak legal framework.”
President Susilo Bambang Yudhoyono’s re-elected government has “neither the mandate nor the capacity” to implement quickly the reforms needed to overcome these obstacles to investment, according to Credit Suisse. Borrowing costs are also too high as the central bank isn’t committed to keeping monetary policy “stable and tight,” Karacadag said in the report.
Indonesia wants to be included among the so-called BRIC nations of Brazil, Russia, India and China, according to Emil Salim, an adviser to President Yudhoyono and a former Cabinet member. The nation’s accelerating growth provides a case for its inclusion among BRIC economies, Morgan Stanley said in June.
Credit Suisse said it was likely that gross domestic product growth in Southeast Asia’s largest economy would remain below that of China and India.
“The key question for Indonesia is will investment accelerate quickly and be efficient enough to lift GDP growth to high single digits?” Karacadag said. “Our answer is no.”
‘Bright’ Outlook
Still, Indonesia’s long-term economic outlook is “bright” and annual GDP growth may average 5.6 percent from 2010 to 2014 and 6.5 percent from 2015 to 2019, according to Credit Suisse. That will see per capita income almost triple to $6,800 by 2019 from $2,300 in 2009, it said.
Indonesia’s economic growth accelerated in the three months to Sept. 30 for the first time in five quarters, with GDP expanding 4.2 percent from a year earlier. The $514 billion economy may expand 4.3 percent this year and between 5 percent and 5.5 percent in 2010, the central bank said yesterday.
“The country has a sound fiscal policy, good balance of payments, declining government and external debt ratios, and an improving political situation,” Karacadag said. “However, we don’t expect investment and real GDP growth in Indonesia to take off in a hurry.”
China and India will continue to achieve faster rates of GDP growth until Indonesia fixes structural impediments to investment and shows a “credible commitment to low inflation,” according to Credit Suisse.
Inflation Target
Bank Indonesia kept its benchmark interest rate unchanged at 6 payday loan.5 percent for a fourth straight month yesterday, after nine consecutive cuts that ended in August.
The central bank said monetary policy would be directed toward “keeping inflation low while taking into account the recovery of the economy.” Inflation this year may be “lower than” the target of 3.5 percent to 5.5 percent, the bank said.
“Unfortunately, we don’t perceive the government and Bank Indonesia to be committed to keep monetary policy stable and tight enough to rein in inflation and persistently high inflation expectations,” Karacadag said. “Even if the central bank was committed to bringing inflation under control once and for all, it first would probably have to keep real interest rates high for many years.”
Indonesia’s inflation rate has hovered around 4 percent to 17 percent over the past decade, according to Credit Suisse.
Weak Credibility
“Being able to deliver on their inflation targets in the coming two years would be a significant breakthrough for Indonesia,” said Enoch Fung, an economist at Goldman Sachs Group Inc. in Hong Kong. “Weak inflation credibility is the biggest issue overhanging the Indonesian risk premium.”
Indonesia’s inflation unexpectedly slowed in November, suggesting that the central bank may take more time before it follows other Asia Pacific nations including Australia, India and Vietnam in withdrawing monetary stimulus.
Consumer prices rose 2.41 percent last month from a year earlier after gaining 2.57 percent in October.
“There is less pressure for Bank Indonesia to increase rates earlier in 2010 following Vietnam and Australia,” said Destry Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta. “The central bank may maintain the benchmark rate at the current rate of 6.5 percent at least until the second quarter of 2010 before gradually increasing it to 7.25 percent.”
Bank Indonesia needs to show a stronger commitment in its fight against inflation in order to bring down borrowing costs to companies and consumers, according to Credit Suisse.
“The higher the rate of inflation, the higher are real lending rates because of the inflation risk premium that is built into nominal interest rates,” Karacadag said. “It would only be much later, once tight and consistent policy has raised the credibility of the central bank, that the payoff would come in the form of lower real interest rates.”