Hendarsyah Tarmizi, Jakarta – If the government's macroeconomic targets are used as the yardsticks to assess the country's economic performance this year, the results would be fairly good.
However, if past performance is used as an indicator, the country would score badly because this year's performance is worse than the nation's in 2005.
Most macroeconomic indicators, such as inflation, GDP growth and exports, have met the government's 2006 targets, but they are mostly lower than those recorded in 2005.
The most outstanding achievement in managing the economy was Bank Indonesia in keeping inflation in check.
Bank Indonesia's move to impose a high interest of 12.75 percent on its promissory notes, or SBIs, from November last year until the end of July, has successfully squeezed money circulation and resulted in a sharp decline in inflation.
The central bank has successfully cut down the inflation rate within the level of the goverment's target, albeit at a high cost. The bank is estimated to have spent at least Rp 20 trillion (US$2.2 billion) a year to pay the interest of its SBI notes.
Inflationary pressure first began last November following the hike in fuel prices in October and continued for the year's first semester.
Inflation peaked to as high as 17 percent in January and February before dropping to about 15 percent in March, April and June.
With the tight money policy imposed by the central bank, inflation continued to decline in the second semester. It fell to 15.15 percent in July, 14.9 percent in August, 14.55 percent in September before further diving to 6.29 percent in October and 5.27 percent in November.
The year's annual inflation is estimated to check in at between 5.5 and 6 percent, still within the 5.8 percent target set by the government.
Lower inflation growth has given the central bank much room to reduce the interest rates on its SBIs, which dropped to 11 percent from 11.75 percent in August, to 10.75 percent in October, 10.25 percent in November and 9.75 percent in October, much lower than the government's target of 12 percent.
The lower interest and inflation rates have fueled consumer expenditure during the past three months; the main driving factor in economic growth during the past two years.
Chairman of the Indonesian Retailers Association Handaka Santoso says the cut in the interest rate has resulted in high consumers spending, which in turned boosted retail business.
He estimates that this year, retail business increased by 20 percent to about Rp 50 billion (US$5.5 billion) from about Rp 40 trillion the previous year.
The falls in inflation and interest rates have also renewed business confidence, particularly in the stock market. Trading activities on the Jakarta Stock Exchange have intensified rapidly during the past three months as many investors switch a larger portion of funds from bank deposits to portfolio investments.
Renewed trading on the stock exchange has pushed up the JSX composite index to its highest level in history, breaking the 1,700 barrier.
The index, the main price barometer in the exchange, closed at 1,783.9 on Tuesday, an increase of more than 50 percent from 1,162 at the start of the year.
Easing inflation has also pushed up the rupiah's value against the US dollar to a more realistic level. The rupiah fluctuated between Rp 9,000 and Rp 9,500 during the first 11 months of this year.
In the past two weeks, the currency has strengthened to Rp 9,200 against the greenback, slightly higher than the government's target of Rp 9,300, and far better than last year's average of Rp 9,705.
The impact of the lower SBI rates, however, has not affected the banking industry. Although some banks have lowered their deposit rates to below 9 percent, average lending rates still hover at between 16 and 18 percent. It will therefore take a few more months before businesses are able to get more affordable loans.
According to the chairman of the Indonesian Chamber of Commerce (Kadin), M.S Hidayat, lending rates should drop to about 12 percent to enable industry to generate higher growth.
The country's banking industry is among the business sectors that recorded lower growth this year. New loans extended by local banks rose to about 9 percent as of October to Rp 66 trillion. The central bank has predicted new lending this year would grow by about 13 percent, much lower than the 20 percent booked by the industry in the previous year.
Many banks have put a large amount funds into SBI notes and government bonds instead of extending them as loans to the business sector.
This is one of the reasons for slow growth in the real, or non-financial, sector.
The Industry Ministry has estimated that the country's non-oil and gas sector will grow by 5 percent this year, below its target of 5.25 percent. This would be quite disappointing given the fact that the target had already been cut from the 7.7 percent target set at the start of the year.
Indonesian products, except natural resources-based commodities, such as oil and gas, and mining and agricultural products, have been losing their overseas markets as a result of being unable to compete with cheaper products from China and Vietnam.
Total exports amounted to about $82.21 billion for the January-October period, a 16 percent increase from the same period last year. Meanwhile, oil and gas exports grew by 17.99 percent to $64.67 billion.
Although this year's export growth will likely meet the government's conservative target of 9.4 percent, it will be much lower than the figure recorded in 2005. In 2005, growth in total exports reached 19.53 percent, while that of non-oil and gas exports amounted to 18.55 percent.
The bad news came from the investment front. Despite many efforts to improve the business climate, actual or realized investment continues to fall both in terms of value and in the number of projects involved.
Realized foreign investment for the year up to the end of November plunged by 46 percent to $4.69 billion from $8.67 billion in the same period last year. The same also applied in the case of domestic investment, which fell by 37 percent in value to Rp 16.9 trillion from Rp 26.9 trillion during the first 11 months of 2005. The rate of growth of realized investment was thus far lower than the government's already low target of 7.7 percent.
This put Indonesia's realized investment on a declining curve for the fifth straight month since June.
New investment approvals, however, fared much better amid an improvement in the business confidence indexes produced by independent research agencies.
Foreign investment approvals during the first 11 months of the year rose by 18 percent to $3.88 billion, while domestic investment approvals almost tripled to Rp 157.5 trillion.
With regard to foreign tourist arrivals, the results were also worrying. According to figures issued by the Central Statistics Agency (BPS), the number of foreign tourists totaled only 3.22 million during the first 10 months of this year, representing a 7.91 percent drop from the same period last year.
Foreign tourist arrivals on Bali, the country's most popular tourist destination, plunged even more, amounting to only 1.08 million, or a drop of 17.23 percent compared to the first 10 months of last year.
The unfavorable economic conditions also had an adverse effect on the country's gross domestic product.
According to BPS figures, the GDP grew by only by 5.22 percent during the first nine months of this year, compared to the same period last year.
The growth during January-September was lower than the 5.8 percent projected by the government, and the 5.6 percent growth recorded in 2005.
The slow pace of economic growth had a knock-on effect on state revenues. According to reports from the Finance Ministry, this year's state revenues might come in at between six and eight percent lower than the target
This year's economic performance has been widely affected not only by the sluggish conditions in the domestic market but also the slowdown in the global economy, which has impacted on many of Indonesia's trading partners.
But with more solid economic fundamentals, as reflected by the fall in inflation and interest rates, and an improvement in business confidence over the past several months, the country's economic outlook should be much more promising next year.
If the momentum is properly managed, it is not impossible that 2007 could become the turning point for Indonesia in its quest to regain the high growth rates enjoyed in the early 1990s.