Barclays Capital upbeat on Indonesian economy

Vincent Lingga, The Jakarta Post, Jakarta | Fri, 04/30/2010 10:53 AM

Barclays Capital is upbeat on Indonesia’s economy, predicting growth of 6.5 percent this year driven mainly by robust household spending on the back of healthy consumer confidence and an improving employment outlook.

The prognosis by the investment banking arm of Barclays Bank PLC, the second largest bank in Britain, is even more bullish than the government’s estimate of 5.8 percent, the International Monetary Fund’s 6 percent, the Asian Development Bank’s 5.5 percent and the World Bank’s 5.6 percent.

“Domestic consumption will continue to be the main driver of growth, while the purchasing power will get a boost from the 10 percent pay rise for civil servants, bullish sentiment in the stock market, credit growth and rising commodity prices,” Barclays Capital regional economist Prakriti Sofat said.

She told The Jakarta Post on Thursday that she didn’t see any big risk of a sudden reversal in portfolio capital inflows, which had been increasing sharply over the past year because the high interest rate differential was only one of the positive factors wooing fund inflows.

“Many investors also look into the medium- and long-term prospects of the economy, which are positive,” she added.

Sofat also observed positive development in the employment sector as the informal economic sector had been doing well as a shock-absorber of the labor surplus.

She did not see any risks of instability arising from the increasingly antagonistic relations between the government and the parliament.

“The political noise will only be a short-term distraction because the politicians will eventually come to their senses and take into account public interests,” she said.

The UK investment bank observed that with strong growth, benign inflation and supportive balance of payments outlook, Bank Indonesia would most likely maintain the benchmark interest rate at 6.5 percent in the first half but with a slight tightening in the third quarter, ending the year with the rate at 7.25 percent.

With a robust balance of payments ending the year with a surplus of around US$14 billion (2 percent of gross domestic product) and a continued rise in financial flows offsetting the reduction in the current account surplus as well as a strong recovery in both foreign and domestic investments, the rupiah rate is forecast to range between Rp 8,800 and Rp 9,000 for the year.

Barclays Capital’s commodity analyst Yingxi Yu saw a substantial contribution from the commodity sector to invigorating domestic consumption, citing strong income support from the rise in coal, palm oil and tin prices.

Sofat added that fundamentally, Indonesia’s economy was quite different from a decade ago as the national balance sheet becoming increasingly sound.

“Indonesia’s balance of payments condition is strong with large foreign exchange reserves [of $80 billion], the government debt to GDP ratio has declined steadily [to less than 30 percent] and the corporate balance sheet is also strong with low leverage,” she said.