Country Report Indonesia

Outlook for 2008-09

• The coalition government will come under strain as the 2009 parliamentary and presidential elections approach and parties begin to distance themselves from the current administration's policies.
• The president, Susilo Bambang Yudhoyono, is likely to be re-elected in 2009. The weakness of rival candidates should outweigh the negative impact on Mr Yudhoyono's popularity of rapid food and fuel price inflation.
• The Economist Intelligence Unit expects GDP growth to slow to 5.9% in 2008, down from 6.3% in 2007, in response to a spike in domestic inflation and a more uncertain global economic outlook.
• Despite a recent decision to raise fuel prices, in 2008 high global oil prices may put further upward pressure on the fuel subsidy bill, thus straining government finances.
• Bank Indonesia (BI, the central bank) will probably raise interest rates by around 50-75 basis points over the next few months.
• Strong import growth (largely driven by the ongoing investment boom) and the rising deficit on the income account will cause the current-account surplus to contract from an estimated 2.5% of GDP in 2007 to 1.9% in 2009.

Monthly review

• A decision by Mr Yudhoyono to raise fuel prices by nearly 30% from late May 2008 to avert a budgetary crisis has put Indonesia’s coalition government under strain.
• Indonesia, along with China, faced severe criticism from international human rights organisations in May after blocking a UN Security Council resolution on aid to Myanmar in the aftermath of a devastating cyclone in that country.
• BI raised its benchmark interest rate by 25 basis points, to 8.25%, at its monthly policy meeting in early June, after year-on-year inflation reached a 20-month high of 10.4%.
• GDP expanded by 6.3% year on year in the first quarter of 2008, demonstrating resilience in the face of weakening external conditions.
• Consumer confidence, as measured by BI’s monthly survey, fell sharply in the first quarter of 2008, suggesting that households may be about to cut back on spending.
• The unemployment rate fell to 8.5% in February 2008, compared with 9.1% six months earlier, but much of the latest fall in unemployment was attributed to an increase in the number of workers employed in the informal sector.