Jakarta – Owing in part to the relative strength of Indonesia's economy, last month's on-average 28.7 percent fuel price increase will have a softer impact compared that caused by the 2005 fuel hike, two bankers predict.
Country business manager of Citibank Shariq Mukhtar said Friday the economy was stronger now compared to in 2005, when the government increased fuel prices by 125.6 percent, a four-times greater raise than last month's.
In the aftermath of 2005's increase, Bank Indonesia (BI) raised its benchmark interest rate to more than 12 percent to balance a skyrocketing 17 percent inflation rate.
The Finance Ministry estimates inflation this year will reach 11 to 12 percent by the end of the fourth quarter, with many analysts expecting the BI rate to climb to between 9.5 and 10 percent within the same period, Mukhtar said.
Tony Prasetiantono, chief economist at Bank Negara Indonesia (BNI), said early expectations of a fuel price rise had minimized the shock and had allowed people time to prepare for its effects.
"Current prices are already the result of creeping inflation as the public anticipated the increase. The public also seems to have adjusted its consumption pattern and saved more, hence reducing the pressure on inflation," Tony said.
However, he said July would reveal the true extent of people's purchasing power, when consumption typically peaks amid school holidays and the start of the new school semester.
A steady increase in the BI rate, which currently stands at 8.5 percent, has in the past lead to a similar trend in bank lending rates, discouraging business and individual borrowing and stunting economic growth.
Mukhtar and Tony shared the opinion of many economists when they said Indonesia's economy would still continue to grow this year at a respectful 6 percent. The government has predicted the economy will expand by 6.2 percent this year.
The economic blow, Mukhtar and Tony said, would be felt more by individual consumers, who were more vulnerable to price changes, than by businesses.
"More than 65 percent of our economy is based on consumer spending. There will be some impact on businesses but it is much more about lower profits. But there is (a higher) risk of consumer loans going bad when prices go up," Mukhtar said.
Citibank, he said, was anticipating a possible raise in non-performing loans (NPLs) by giving facilities to their loyal customers based on their credits and monitoring their cash flow.
Tony said banks should apply more stringent requirements on issuing credit cards and increase the minimum monthly payment.
There is currently a strong possibility the rate of NPLs will rise 1 percent this year, still lower than the above 2 percent rise in 2006 that came as a result of the previous year's fuel price hikes, Tony said.
Speaking of a possible BI rate increase to 9 percent, he added: "The economy and banking sector will still be able to absorb it." (mri)