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Bank Indonesia Grows More Optimistic on the Economy
Dion Bisara | March 12, 2010

The central bank says economic conditions are better than expected. (Bloomberg Photo/Dimas Ardian) The central bank says economic conditions are better than expected. (Bloomberg Photo/Dimas Ardian)
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The central bank on Friday lifted its growth forecasts for this year and next on the back of strong domestic demand and the accelerating global economic recovery.

“Current developments are better than we had expected, as the United States recovers and also the other Asian countries improve. So now we estimate [2010] growth at 5.5 percent to 6 percent,” said Darmin Nasution, acting governor of Bank Indonesia.

The central bank previously estimated the economy would grow by 5 percent to 5.5 percent this year. It also revised upward its 2011 growth projection to as much as 6.5 percent from the earlier upper estimate of 6 percent.

“In addition to strong domestic demand, improvements will principally stem from externalities in line with the global economic recovery, as evidenced by solid export growth since the fourth quarter of 2009,” central bank deputy governor Hartadi A Sarwono said in a statement.

Fauzi Ichsan, an economist at Standard Chartered Bank, said the central bank’s revisions reflected investor optimism toward the economy.

“But there are still minor risks,” he said. “First is the possibility of a second global crisis like in 2008. Second, domestic politics could stall government programs that require the approval of the House of Representatives.”

Foreign investor confidence in Indonesia’s economy is improving, as reflected by a surplus in capital and financial transactions, Bank Indonesia said.

With improving exports and imports, this year will witness a greater surplus in the balance of payments than initially projected, the central bank added.

Bank Indonesia also believes that inflationary pressures will remain insignificant this year.

“I am convinced that the rise in domestic economic activity will not exceed the level of potential output and, therefore, not spur excessive inflationary pressures,” Hartadi said.

“The [planned] increase in electricity prices will not have a significant effect on overall inflation this year. So there’s no problem,” Darmin added, referring to the government’s plan to raise the electricity tariff by an average of 15 percent this year.

The central bank maintained its 2010 inflation projection of 5 percent, plus or minus one percentage point.