Jonathan Thatcher, Jakarta – It could be the pre-crisis boom days. Jakarta's marbled shopping malls are packed and the road to weekend villas in the mountains south of the capital is thick with the fumes of new cars.
But economists say the consumer-backed recovery of Indonesia's broken economy is more wobbly than some of the bouncier government forecasts suggest and promises no quick lift to the tens of millions living near the poverty line.
And while some see a few buds of recovery elsewhere, bringing them to bloom will take a combination of luck and good policy, neither abundantly evident in Indonesia's recent history.
The latest government forecast for gross domestic product next year is for up to five percent growth. That compares to just under 4% this year, almost nothing last year and a contraction in 1998 of some 14%.
It is axiomatic among economists that Indonesia cannot return to the high growth years before the economic crisis erupted in 1997 until it has restructured an almost destroyed banking sector and billions in corporate debts. Nor will investors dip their toes back into Indonesia's waters until the political scene looks less stormy.
None of these factors look like being resolved for some time and a recent Reuters poll showed Asian fund managers rated the Jakarta stock market among their least favorite destinations in the region for the next 12 months.
Consumption leads the way In the meantime, Indonesia's modest growth has been based more on consumption, which may be quickly undermined by inflation. "Incomes are not really on the rise. This [spending] is a realization of postponed expenditure and a shifting of deposits into fixed assets. It will come to an end because of inflation," said Vickers Ballast research head in Jakarta, Ferry Yosia Hartoyo.
The purchasing, he said, is driven more by easier credit from banks and relatively low interest rates than any new-found real wealth, he added. "They'll get 4% [GDP growth] next year if they are lucky ... that's not a lot. I doubt they could get a lot more out of this economy without a major breakthrough in the corporate and banking sectors," one international economist said.
The government is in no position to give the economy any boost. About two-thirds of its budgeted revenues next year will evaporate in domestic and foreign debt payments.
No respite for the poor
The international economist said the real impact for most of Indonesia's 200 million people – at least half of whom live not far from the poverty line – is that their per capita GDP has slumped 20% since the country's worst economic crisis in over a generation erupted in 1997. The economist estimated at the current growth rate it would take Indonesians eight to nine years to get back to where they were before the crisis.
Inflation is already beginning to perk up. Imminent increases in fuel prices and public transport fares and the end year Moslem fasting month – which despite its name is usually a time of large household purchases – are certain to push prices higher.
The government says inflation could hit 8% next year – modest compared to its peak of almost 80% in 1998 – but enough, say analysts, to discourage spending when the recovery remains so fragile. Hartoyo of Vickers Ballast predicted the consumption cycle would peak in the middle of next year.
Recovery signs?
But others see green shoots of recovery coming from elsewhere. The government pins some of its hopes on exports, booming at record levels of more than US$5 billion a month since the middle of the year. Economists say that a key to sustaining that will be whether Indonesia can successfully lure in the additional investment to boost export capacity to meet the expected surge in demand. Leading economist Sri Mulyani Indrawati said consumption growth had created a sense of optimism and money was being invested, albeit not yet in large amounts.
She saw what she called impressive growth in some manufacturing areas such as food and vehicles which could feed into other areas such as construction and services. But the supply side is proving to be a bottleneck because of the banking and debt problems.
Banks are under pressure to get their capital adequacy ratios higher next year to reassure foreign investors and international aid agencies of their soundness. However, that risks making them too prudent as lenders in a country where most economic activity depends on direct bank loans, she said.
The government too has to move quickly to make policy changes and maintain confidence by ensuring that efforts to restructure the banking sector really do take root otherwise the money to finance a deeper recovery will not be there.
"If not the recovery won't be maintained ... this is a crucial few months, The ingredients for recovery are there," she said. "Many business people are at the stage now of deciding whether this recovery is solid or not."