Sonia Kolesnikov, Singapore – The Indonesian economy has so far proven robust, weathering the Bali storm of last October. During the first quarter, the government posted an unexpected budget surplus, while inflation steadily dropped and growth remained robust.

Though the weakening in domestic consumption is raising some concerns, especially if the severe acute respiratory syndrome spreads to the country, economists are optimistic about the macro-economic outlook for this year. But the real question is whether the government can push forward to achieve a greater rate of growth than the expected 3-4 percent.

"It's like driving a bicycle, there is the stability issue and how fast you can move forward. Stability has been managed, but the issue is now going forward," said Sanjeev Sanyal, economist at Deutsche Bank.

Pieter van der Schaft, an analyst at Barclays Capital, added: "The government released positive first quarter GDP growth and budget data on Tuesday. The data confirm that the impact of the Bali bomb blasts has been relatively short-lived in terms of its impact on economic growth and that fiscal consolidation efforts will likely come out at ahead of target in 2003."

While the government had forecast a budget deficit of $858 million for the first quarter, it posted a surplus of a $338 million, reflecting lower-than-targeted expenditures like a delay in civil servant salaries increases.

If higher oil prices are certainly helping oil-producing Indonesia, the budget surplus was also achieved despite a deferment of planned energy price and electricity tariff hikes and the impact of a one-off fiscal stimulus package in the aftermath of the Bali bombing.

"The achievement is a positive step in [the country's] fiscal consolidation efforts," Finance Minister Boediono said in a statement.

Economists agreed. "Going forward, we believe that Indonesia's progress on fiscal consolidation will be sustained as a result of the positive first quarter budget data, not least because the average annual one-month central bank certificate (SBI) rate will likely significantly undershoot the 13 percent assumed for the 2003 budget," said van der Schaft.

The SBI rate currently stands at 11.4 percent with further Bank Indonesia easing likely in coming months.

On Tuesday, the Indonesian central bank also estimated first-quarter GDP growth at 3.2 percent year-on-year, following a 3.8 percent growth in the fourth-quarter of 2002. The fall was attributed to a drop in consumption and compared with a 4 percent growth target for this year.

"In our opinion such a growth rate is a pretty good outcome, as negative base effects would normally have shaved about 0.9 percentage point off year on year GDP growth. Various economic indicators, moreover, suggest that the slowdown in economic activity is patchy with import growth rates decelerating from very high year on year levels in preceding months, but retail sales and motorcycle sales showing signs of a modest pick-up," noted van der Schaft.

Other data have been pointing to an improvement in the country's fundamentals. The Indonesian Bank Restructuring Agency was able to raise $640 million in the first quarter, mainly through the sale of property assets. This was 67 percent above target.

A steady rupiah has also helped inflation dropped significantly over the quarter. The central bank has said first-quarter inflation was 7.1 percent year-on-year, around half of levels seen a year ago, and compared with 10.03 percent in the fourth-quarter. The government has forecast inflation of nine percent this year from 10 percent last year.

"There is no doubt that from a macro-economic perspective there has been dramatic improvement. But now I think micro-reform are needed if the government wants to jack up growth [from current levels]," Sanyal said. He pointed to judicial reform, cutting down of bureaucracy, and the cleaning up of the banking system to re-orientate it toward lending.

Given that 2004 is a general and presidential election year, there are some concerns amongst investors that the government could throw caution to the wind and shift to more populist policies.

"I personally think this is unlikely," said Sanyal. "So far, the government has managed thing quite well. It is their political interest to stabilize the economy. Think people will be surprise by how conservative this government is." Economists anticipated the government policies over the next year to aim at slowly easing off from the International Monetary Fund program.