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14 February 2010

Indonesian Finance minister warns of downside risks to economy

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The Indonesian government remains optimistic economic growth will accelerate to 5.5 percent this year but warns of downside risks caused by domestic and external factors, reported the Jakarta Post, quoting the Finance Ministry.

In the last three months of 2009, the economy grew at the fastest pace of 5.4 percent, the Central Statistics Agency (BPS) reported, signaling that a recovery might come sooner than expected.

In 2009, the GDP grew by 4.5 percent to 5,613.4 trillion rupiah ($600.63 billion).
“Growth may surpass 5.5 percent [this year] if banks spur lending,” Finance Minister Sri Mulyani Indrawati told reporters Thursday.

“But I see that banks will likely remain conservative in this quarter and the next. Because of this, growth in the first half may be hampered,” she continued.

The central bank said lending might expand between 18 percent and 20 percent this year, up from 10.7 percent in 2009. But uncertain political conditions may curb demand from businesses, Mulyani said, citing a statement by the Indonesian Banks Association.

The minister said that external factors resulted from the decisions made by some major economies to take an earlier exit policy in their stimulus programs. The early exit policy from the stimulus package could hurt the Indonesian economy, she added.

“We need to be careful because many countries will halt their stimulus programmes in the second half [of 2010],” said Mulyani.

Many countries have considered raising their interest rates as part of their early exit policy. The higher interest rate, which will cause an increase in borrowing costs, may hurt the flow of investment.

Mulyani said the 2010 state budget was aimed at maintaining people’s purchasing power and business confidence as sources of growth. “If external challenges loom larger, sources of growth will be domestic. The source has two factors: consumption and investment,” she said.

The minister said investment might begin to materialise in the second half of this year because of a six-month gap from importing capital goods to starting production.

“We expect investment [growth] to pick up to 7.2 percent [this year] if banks start to consolidate and business confidence is maintained,” she said.

Private consumption is estimated to expand 5.2 percent and government spending 8.2 percent to spur growth.

The government will also create policies to support labour-intensive manufacturing industries to reduce the unemployment rate to between 7.5 percent and 8 percent, and the poverty rate to between 12 percent and 13.5 percent.


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