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Economics – Markets – Strategy
Economics: Indonesia
Chart 8: Investment credit to slow on rate hikes
% YoY %
30
25
20
15
10
5
0
Latest: BI rate
Jun08; credit
1mth SBI (RHS)
DBSf
Investment
credit
Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08
6
7
8
9
10
11
12
13
14
Chart 9: Export prices up, but so are import prices
% YoY
35
30
25
20
15
10
5
0
-5
-10
-15
Wholesale
expt px
Wholesale
impt px
Latest:Mar08
Jan-01 Jan-03 Jan-05 Jan-07
Looking at the medium to long-term, once the economic – and even fiscal uncertainty
clears – rapid investment growth should return. Amid improvements to the
investment climate, there has already been a significant build-up of investment
interest in the country both domestically and overseas since 2005, as evidenced
by the continuing surge in investment applications. Last year, foreign applications
totalled USD 40.1bn (excluding the oil & gas and banking & insurance sectors),
three times the amount in 2005. Domestic applications totalled USD 20.6bn,
four times the amount in 2005. These are investments that will get realized in
the next 1-3 years.
Investment interest
the country could
rise even further,
if national budget
priorities are set
straight. Prior to
the May subsidy cut,
budget figures
showed that a
whopping 24% of
budget spending
was slated for
subsidies this year,
in contrast to just
2% on health, 3%
on public works and
5% on education
(Chart 10). Naturally,
reductions in the
Chart 10: Budget expenditure breakdown, 2008 (pre-subsidy cut)
% of total budget spending
Other govt
agencies
24%
Subsidies
24%
Public works
3%
Int payments
10%
Health
2% Defense
3%
Education
5%
Regional
transfers
29%
country’s subsidy burden via fuel price adjustments will free up a significant
amount of funds for other areas of expenditure that can help improve the investment
climate, such as infrastructure spending.
Net exports will not contribute much
Meanwhile, net exports will add a negligible 0.1%-pts to overall GDP growth.
Export growth has admittedly been stronger than we initially anticipated, up
15% YoY in 1Q08 on robust demand for commodities. However, we are still
looking for global growth to slow this year; in Asia, risks to the growth outlook
are also emerging from rising energy and food inflation. The likelihood is therefore
for export growth to lose some steam in the quarters ahead on a YoY basis,
though shipments should still outpace last year’s, at almost 12% versus 8%.
Subsidies eat up an
huge proportion of
government
expenditure that
could be better
spent on improving
infrastructure
Net exports will
contribute just
0.1%-pts to overall
growth
105