Indonesia's promising economic outlook 2009
In the coming weeks, most corporate businesses will start preparing their budgets. Some with more extensive operations and networks have in fact started the drafting process directly after the President's Aug. 16 speech before Parliament.
During this process much time is devoted to predicting the direction of the economy. Will next year be bullish, as we are now experiencing, or will it be affected by the global downturn?
In his presidential address, President has outlined the government's predictions about next year's economic prospects. The most important number is the 2009 economic growth target: 6.2 percent. The nominal gross domestic product (GDP) has also been specified at Rp. 5,000 trillion (US$547 billion).
To compare with 2008 figures, first quarter GDP rate of growth was 6.3 percent, second quarter, 6.4 percent. The nominal GDP was Rp. 1,126.8 trillion in the first quarter and Rp. 1,230.9 trillion in the second. Will the uptrend continue until next year, or are there specific reasons to predict otherwise?
Many people are skeptical about our economy. Some of their convictions are justified, especially if we look at the pockets of poverty, especially in urban areas. However, to harp on that issue is unfair to others who are looking for a better estimation of opportunities for their business activities. Aside from being sympathetic to the poor, we have to be more balanced by assessing the situation objectively.
Predicting an economic prospect means judging the movement of the economy, a dynamic process. Successful predictions also account for which economic sectors may have better prospects than others.
Judging from previous performance, the Indonesian economy so far seems to be decoupled from world trends. Despite the economic slowdown in the US and Europe, our economy continues to show resilience.
Indonesia's previous economic performance reflects the strength of the two drivers of our growth: the population-based economy and the resource-based economy. In the population-based economy, we noted strong growth in manufacturing, such as in automotive and consumer products; property development and construction; and many others.
Apparently the rising domestic fuel prices in May did not significantly erode the increasing income of the population as a whole. Our business entrepreneurs note their expansion plans continue to yield a comfortable return. On a radio talk show I tuned in yesterday, a new and growing company, Bengawan Solo Cafe, has been able to set up 27 outlets in just four years.
Similarly Solaria, a fast-growing local restaurant chain, has expanded to more than one hundred outlets in just a few years. These are just anecdotal examples of such dynamism. The population-based economy is largely a domestic economy.
This palpable growth is not just taking place in urban areas. Many rural areas are enjoy faster development than urban centers.
Meliau, for instance, a village in Sanggau regency, West Kalimantan, used to be a backwater. With the rapid rise in the price of palm oil and increased production, the village now boasts nine motorcycle dealers.
I also believe, once the Pontianak-Tayan highway is completed, the West Kalimantan hinterland will see much faster growth and better living standards for its people. This last example reflects the strength of the second driver of the economic growth: the resource-based economy.
Taking the motorcycle dealers as an example, they will eventually drive demand at the factories in Java, thus promoting manufacturing sector growth. This shows how a sector which has received a strong pull from the population-based economy at the same time enjoyed another pull from the multiplier effects of the resource-based economy. I am sure this trend will continue.
In forecasting the 2009 outlook, I am fully aware many institutions will make conservative predictions. Unsurprisingly, the President himself predicted a growth rate of just 6.2 percent. Since the growth rate will most probably reach 6.4 or 6.5 percent for all of 2008, can we infer the President is predicting a downturn in our economy?
It's always good to hear we can boast about our performance if we attain a growth rate higher than the target. However, setting the bar too low can also be self-fulfilling. Businesspeople will use the government's figure as their reference, which means they may set their companies' targets too low.
Based on my observations visiting companies in Java and elsewhere, I can infer optimism in the field still abounds. In fact, many business owners were puzzled this year when their companies' performance far exceeded their targets. Therefore, it will be interesting to see whether these same people will repeat that mistake another year running.
From these observations, and also my own rough sectoral calculations, I am optimistic the outlook for 2009 may be slightly better than predicted by the government. Though the government-predicted growth rate for 2009 is 6.2 percent, there is a strong possibility the growth rate will attain between 6.4 and 6.7 percent.
Moreover, the nominal GDP will deviate significantly. The first and second quarters of 2008 already produced a nominal GDP of Rp. 2,357.7 trillion. Based on previous experience, the nominal GDP will continue to grow in the third and fourth quarters.
Thus, a nominal GDP of Rp. 4,800 trillion is within reach for the economy this year. This figure is 21 percent higher than in 2007. Still, judging from the rate of nominal growth in first and second quarters at 22.5 percent and 27.9 percent respectively, a rate of growth for the whole year of 21 percent remains a conservative prediction.
Therefore, the government's forecast of a nominal GDP of Rp. 5,000 trillion in 2009 will be far too low compared to what can be achieved for 2008. My own prediction for 2009 is the Indonesian nominal GDP may reach Rp. 5,500-5,700 trillion.
Thatnumber will ensure a much lower debt-to-GDP ratio, an important number for the government.
I am optimistic about the Indonesian economy going forward. Such a sizable nominal GDP would translate into about US$610 billion, far higher than the $419 billion which Goldman Sachs predicted Indonesia ought to have by 2010, to be well on its way to ranking seventh among world economic powers by 2050.