A Glance on 2006

The following is the list of key macroeconomic assumptions for the budget year 2006, as agreed by the government and the parliament, last Friday. In parentheses are the government’s initial assumptions, before the discussion with the House.

• Economic growth 6.2% (6.2%)
• Inflation 8.0% (7.0%)
• IDR/USD 9,900 (9,400)
• 3-month SBI 9.5% (8.0%)
• World oil price USD 57/barrel (40)
• Domestic oil lifting 1.050 mbpd (1.075)
• GDP IDR 3,041 trillion (2,996)

Some notes are in order. If this year’s growth is 5.6% and the projected 2006’s is correct, then there is no reason to worry about stagnation. Furthermore, this year’s inflation will likely to be 13-14% (I initially thought it would be 12% -- due to BBM price hike; but then BI printed money). In other words, next year’s inflation rate will be lower. These two indicators are sufficient not to expect a stagflation (yes, unemployment might increase a little above 10% -- but it alone is not enough to qualify for a stagflation).

However, it is fair to say, that the lower inflation rate assumption would be easier to settle if the government refrains a little on spending. It has proposed a 1.1% deficit. The House, on the other hand, is more prudent with 0.6%. They agreed on 0.7%. If this is credible, I wouldn’t be surprised if the next year’s growth is 6.0%, not 6.2%. But that’s good, since it will hold down inflation rate a little below 8.0%. This year’s inflation is too high already that BI should probably set its BI rate at 13-14% (currently it’s 11%). Meaning, commercial banks’ borrowing rate might end up at 20-21%. That’s too much for the real sector. Some degree of prudence next year might then be a good idea. And by “prudence”, I also mean not talking too much.

Addendum: This is shocking. Just an hour ago a collegue told me that October's inflation is ... 8.7% m-o-m! I couldn't believe it. But his source is an official from the Statistics Office (BPS). How can this happen? Moreover, the y-o-y inflation rate is 17.89% and y-t-d is 15.65%. Well, if all this is true, the arguments above break down... But I'm still having hardtime to understand the official figures. I hate to suspect (or blame it on) the politics.

Addendum's addendum: It is confirmed. The October's inflation is 8.7%. The biggest contributors are BBM (3.47%) and transportation (2.08%). BI has raised its BI rate to 12.5%. This means, the prime rate will be around 19.5%! (higher yet for concumption credit). This is saddening. BPS also informs that the open unemployment increases to 11.6 million (10.8% of the labor force), 0.4 million of which is "due to BBM price hike". I hope November and December inflation rates are well below that of October -- and there are reasons for that hope.