S N Vasuki – Indonesia reported higher inflation and a sharply lower trade surplus yesterday in line with the expectations of most economists.

But economists cautioned that the continued fall in non-oil exports was a worrying sign of an erosion in the country's competitiveness.

Speaking after a monthly cabinet meeting presided over by President Suharto, Information Minister Harmoko announced that Indonesia's inflation in January rose by 1.03 per cent over December 1996. On an annual basis, inflation is now expanding at 5.45 per cent.

Meanwhile, the country's trade surplus shrank to US$746.6 million (S$1.05 billion) in November from the previous month's US$995.7 million.

Overall, exports in November fell to US$4.4 billion from October's US$4.46 billion while imports during the month rose to US$3.64 billion from US$3.46 billion. Non-oil exports were virtually stagnant in November, rising to US$3.34 billion from US$3.33 billion.

Economists said they were not overly concerned about the rise in inflation. The first two months of the year are the festive period and inflation has traditionally risen sharply during this period. Food prices, a major component of the Consumer Price Index, rose 1.85 per cent while housing expanded moderately by 0.25 per cent.

However, the rise in food prices this year is small compared with the first two months of 1996 when severe flooding on Java island led to a dramatic jump in inflation.

Stockbroking firm SocGen-Crosby, in a report published before the release of yesterday's data, expects Indonesia's overall inflation for 1997 to hit 8.5 per cent.

"Given the sharp pick-up in money supply growth in 1995, we expect continued upward pressure on non-food inflation in 1997 and we anticipate that it will remain above 8 per cent," it said in a recent report. "Given that food inflation is unlikely to fall much further and will probably stabilise, we expect overall average inflation for 1997 to be about 8.5 per cent."Economists expressed concern about the stagnant trend in Indonesia's non-oil exports, particularly for items like textiles and wood-based products. Jardine Fleming does not expect a significant turnaround in growth for these top three non-oil export items.

"Garment exports continued to be affected by lower cost producers in India, China and Vietnam, while volume gain in wood-based exports was eroded by weak prices," the broking firm said in a recent report. "We expect another deregulation package around mid-1997 which should provide a boost to non-oil exports other than the top three."

Last month, Indonesia's Finance Ministry forecast an 8.5 per cent rise in total exports for 1997-98.

Economists said the target was achievable because of higher oil prices but there is scepticism about the government's stated target of non-oil exports growth of between 16 and 18 per cent. Another concern is rapid import growth, which rose by 8.1 per cent in November.