Tuesday, July 18, 2006

Mid 2006 Look

The first semester has just passed. Here's a summary:

Growth. Government’s target of 5.9 percent growth (revised down from 6.2 percent) this year is unlikely. We maintain our forecast of 5.4-5.7 percent. As for point estimate, it is close to 5.5 percent.

Inflation. Bank Indonesia is on the right track (i.e. tight monetary policy). So is the Ministry of Finance (fiscal expansion). As a result, inflation is relatively tamed. BI loosened up a bit by decreasing its policy rate to 12.5 percent. The percentage differential to US Fed is still 625 basis point. If The Fed keeps its rate at 5.25 percent, there is still room for BI to lower its own to 12 percent. The fiscal expansion, on the other hand, has not promoted growth as expected – most of it goes to government’s capital expenditure, local governments, social aids, and cash transfer program. The main driver of inflation so far is food prices increase. We maintain our forecast of 8-9 percent of inflation this year.

Employment. Unemployment increases. In February 2006 the rate of open unemployment is 10.4 percent, as opposed to 10.3 percent in February 2005. Labor force is close to 160 million. Fiscal expansion has not been helpful for job creation, as promised. SBY has been promoting his “New Deal” program, yet it is unclear.

Exchange rate and stock index. Indonesia’s Rupiah and stock price index are consistent with the regional pattern. However, it shows the highest volatility. The composite index hit an all time high in May 2006, i.e. 1,553.062.

Export. Export value increases. But the figure is illusive. That is, the main drivers of the “increase” are mining and agriculture which in turn benefit from higher international prices.

Expected policies. We still expect fiscal stimulus and stabilizing monetary policy. However, the government’s inability to spend is quite worrying.

Fingers crossed.

4 comments:

treespotter said...

okay, do enlighten me, what is so difficult in spending? i'm assuming that you mean that they have the money and have problem in actually spending it, right? where's the problem? (they should elect me to gov't if you ask).

also, where can i learn (or perhaps you care to educate me a little), if oil price increases significantly - say to 80$ - how would impact the budget? i don't understand this things enough really.

thanks a bunch.

Aco said...

"They can't handle the money!" (to borrow Jack Nicholson's tune). So this is what happens: The Govt pledged to spend to boost job creation (infrastructure and all that). The money was sent by MoF to technical departments/ministeries and to local governments. Alas the recipients are very slow in disbursing the money into useful projects. Why? Because they are afraid that they might be scrutinized by KPK or other any kind of auditors. Strange? Yes. Ask project leaders around. They're not happy with all this "fighting against corruption" thingy. As for me, that's the price of reform. I don't buy the "zero-tolerance(to corruption)-zero-growth" concern. But many do. In addition, there are new systems everywhere that are supposed to minimize abuse. Govt apparatus are yet to get used to them. All these explain the slow progress on spending. Last year, the government failed to spend what it promised. The amount got carried over to this year. Alas, until May, the budget is still surplus.

If oil price increases significantly, then it burdens the state budget, esp. via subsidy (BBM, etc). We're now a net importer. So higher oil price means higher spending. (Well even if we're net exporter, we're still paying that damn subsidy).

treespotter said...

thanks. so far really, i've heard of no really plausible excuse for this inability to spend from gov't officials, i heard ppl mention the scrutiny is an issue, but still, as you said, i don't really buy that.

as for the oil price, i understand the subsidy bit, only my understanding is that the subsidy is currently lower than it was, higher oil price also means higher income, right? how much is the ratio between the subsidy/expected profit from the oil increase? JK said something about how oil increase wouldn't really affect the budget, while i won't rush to nominate him for Math nobel prize, i'm still curious how he gets his number.

thanks again.

Aco said...

The thing is, we also have to import both crude oil and oil-based fuels. Worse yet, our consumption is increasing while production is decreasing. I don't have numbers now, sorry.