Indo economic forecasts too bullish

While the government expects the economy to grow 6.6 percent next year, worries about rising oil and food prices absorbing consumers’ purchasing power have analysts less bullish.

Consumer spending is the main driver of Indonesia’s economic growth, accounting for two-thirds of the country’s gross domestic product.

Finance Minister Agus Martowardojo revealed the government’s 2012 economic targets during a cabinet meeting at the State Palace in Bogor on Tuesday. It expects the economy to grow 6.6 percent next year after projecting 6.4 percent growth in 2011. It assumed the rupiah would trade at 9,150 against the US dollar and put headline inflation at 5.5 percent.

The government uses seven assumptions to calculate the state budget, including economic growth, the rupiah’s exchange rate against the dollar, the inflation rate, three-month Bank Indonesia certificates, oil prices and oil production.

Hatta Rajasa, the coordinating minister for the economy, said the government would protect the people from the impact of volatile global oil prices. He said the government acknowledged the Indonesian Crude Price, the international price index for crude oil from Indonesia, had reached $113.03 per barrel, but he said the government would “escort the economy and guard consumer purchasing power.”

Analysts said they were not so sure.

“It will be hard for the economy to grow beyond 6.5 percent,” said David Sumual, an economist from Bank Central Asia. “It will be overheating because our economy still relies on non-tradeable sectors, which is bad as it does not absorb much labor.”

He said the complicated bureaucracy and poor infrastructure hurt potential growth.

“Poor infrastructure conditions are hampering the competitiveness of our labor-intensive manufacturing sector,” he said. “Our cost of production remains higher compared to rivals such as China even though we offer cheaper labor costs. It’s because of our poor infrastructure.”

Infrastructure spending in the state budget increased significantly to Rp 126 trillion ($14.5 billion) this year, the largest allocation in six years, from Rp 108 trillion in 2010. The country needs an estimated Rp 1,400 trillion until 2014 to build much-needed infrastructure projects such as seaports, airports and roads to ease the distribution of goods.

Purbaya Yudhi Sadewa, an economist at the Danareksa Research Institute, said the government’s target was attainable if consumption remained strong and foreign investment continued to flow into the country.

“We can grow even more if government comes through with its infrastructure projects,” he said. “The increase may seem slow because they have not implemented all their programs.”