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NEWS UPDATES 10 September 2009

Indonesia: Stimulus no longer necessary to boost investment

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Confident of the success of its fiscal and monetary policies, Indonesia feels it no longer needs an economic stimulus package to boost investment for 2010, the Jakarta Post reported.

The government expects to have a slower budget expansion next year, with a reduced budget deficit of 98 trillion rupiah ($9.8 billion), or 1.6 percent of the gross domestic product (GDP). This year's deficit is estimated to reach 129.8 trillion rupiah, or 2.4 percent of GDP.

"From the total deficit, the ability of budget expansion to boost the economy is lower," said Finance Minister Sri Mulyani shortly after returning from a G20 Finance Ministers summit in London.

She said government spending next year would be relatively modest, while private consumption would remain similar more or less, but investment growth might double.

"Next year's economic growth won't be lower as this year's monetary and fiscal policies, as well as structural policies, have provided stronger grounds for the private sector to invest."

The meeting of finance ministers last week agreed that stimulus measures must be maintained, especially by developed economies, until the global economy fully recovered.

UK Prime Minister Gordon Brown, who hosted the meeting, warned against a premature end of emergency spending and rescue programs, saying it would be a "serious mistake".

"The indicators of economic recovery are considered as too early, uncertain or fragile," Mulyani said.

"Countries with a large budget deficit are given signals to start thinking their medium-term exit policies. Stimulus from budget expansion will be maintained until recovery is considered really strong."

Based on the latest assumption in the 2010 state budget bill, the government and the House agreed to set growth at 5.5 percent, up from this year's estimated 4.3 percent.

"Budget spending does not expand too much next year. But it should not matter as long as the government spends its budget accurately," said Purbaya Yudhi Sadewa, chief researcher of Danareksa Research Institute.

"The government's infrastructure stimulus has not run as expected."

Next year's budget expenditure is set at 1,047.67 trillion rupiah, up from 1,000.8 trillion rupiah this year. Of the government's infrastructure stimulus worth 12.2 trillion rupiah, only 14.2 percent has been disbursed, according to the National Development Planning Agency (Bappenas).

Yudhi said without stimulus the economy could still run well, as long as the government spends its money as early as possible. The government usually spends most of its budget near the year's end, which critics feel undermines economic growth.

He added that lower deposit rates in banks would prompt lower yields, which would encourage spending of people holding money, thus spurring growth.

Fourteen major local banks recently agreed to cap deposit rates 150 basis points above the central bank's benchmark interest rate within three months since August 20. They will reduce the rates further to 50 basis points above the benchmark rate after the three months.


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