CNBC by Ansuya Harjani
October 14, 2014
China’s ‘new normal’ of moderate growth is a top concern for Indonesia as it implies downward pressure on commodity prices, the country’s finance minister said.
Southeast Asia’s largest economy has been hit amid falling commodity prices and slowing consumer spending. Commodities – including nickel ore, tin and thermal coal – account for around 60 percent of Indonesia’s exports.
“We can’t continue to rely only on natural resources or cheap labor. It’s time to focus on quality of human capital, improve infrastructure, governance – with this we’ll promote growth,” Chatib Basri told CNBC on the sidelines of 2014 IMF/World Bank annual meetings in Washington DC.
The economy grew 5.8 percent in 2013, its slowest pace in four years andthe first sub-6-percent expansion since 2009. It’s forecast to grow around 5.2 percent this year.
Can Indonesia grow at 6.5% again?
Asked when Indonesia will return to 6.5 percent growth, Basri says not before 2017.
“I think 2014-2015 we need to choose strategy stabilization over growth – if you’re talking about 2017 – I’m quite optimistic the economy will grow higher than 6 percent,” he said. The economy last grew at 6.5 percent in 2011, before moderating to 6.2 percent in 2012.
Infrastructure spending could propel growth, he said.
“If the government can relocate money from fuel subsidies to infrastructure, within three years we’ll have infrastructure projects that will promote growth,” he said.
Fuel subsidies have long dogged Indonesia, contributing to its current account deficit and crowding out other government spending.
In 2014, total energy subsidies are expected to rise to a record of more than 350 trillion rupiah ($29.75 billion), coming in at around 21 percent of the government’s budget and around 3.4 percent of gross domestic product, according to data from CIMB.
Rupiah: shaky or stable?
Tighter U.S. monetary policy is another risk for Indonesia.
Last year, the Indonesian rupiah lost 26 percent of its value against the U.S. dollar amid concerns about the Federal Reserve scaling back monetary stimulus. The rupiah has undergone large swings this year, but is flat year-to-date; dollar-rupiah was recently at the 12,215 level.
However, Basri believes the rupiah “will be safe” when the Fed begins its tightening cycle, as current levels reflect economic fundamentals.
Steps that the government and central bank took to get Indonesia’s economic house in order should also soothe investor concerns, he said.
“What we did last year was a combination of three things – fiscal tightening, tightening on monetary side, and we let the exchange rate depreciate,” he said. “I’m not too worried.”