Indonesia Finance Chief Cuts View on Growth

Oct. 31, 2013 3:10 a.m. ETJAKARTA—Indonesia’s finance minister Thursday reduced his growth projection for the country, as higher interest rates and a tepid global view continue to cloud the country’s economic outlook.
Chatib Basri, in an interview, also welcomed the U.S. Federal Reserve’s decision Wednesday not to begin winding down its massive monetary stimulus program.
The U.S.’s decision to keep its $85-billion-a-month bond-buying program in place to help the U.S. economy also aids Indonesia by keeping global interest rates low, Mr. Basri said.
Indonesia’s rupiah currency and its stock and bond markets have been under pressure since the summer as foreign capital retrenched from emerging economies in anticipation of higher U.S. rates.
Local markets have stabilized in recent weeks, as the U.S. economic picture has remained uncertain and the Fed has decided not to tinker with its easy monetary policies.
This gives Indonesia more time to push through changes aimed at attracting investment, which will leave the country in better stead when global financing conditions become more difficult, Mr. Basri said.
“To me this is good news. It gives more time for Indonesia to do structural reforms,” he said.
Mr. Basri said Indonesia’s growth outlook has worsened. The ministry now estimates the economy will grow 5.8% in 2013, down 0.2 percentage point from a projection last week and lower than a 6.3% forecast in the nation’s budget.
Indonesia is the latest emerging market to slash its growth forecast as China’s growth slows and demand in industrialized countries remains tepid.
Indonesia’s central bank has been forced to raise rates aggressively to attract foreign capital and damp consumer inflation of more than 8%.
The tighter policy has slowed an economy that regularly grew more than 6% in recent years, fueled in part by easy global credit and large exports of commodities to China.
Both those tailwinds have abated, leaving Indonesia looking at lower growth for the foreseeable future, Mr. Basri said. He added that recent foreign direct investment numbers were disappointing.
Mr. Basri, though, challenged the International Monetary Fund’s somber assessment of the economy. The fund recently downgraded its growth forecast for Indonesia this year to 5.25%, with a current-account deficit of 3.5% of gross domestic product.
He agrees with the current-account deficit projection but said it isn’t consistent with such slow growth.
The current account largely measures flows of exports and imports. Indonesia runs a large deficit as it imports massive amounts of oil and machinery to fuel growth and other consumer goods. Mr. Basri said such large imports point toward greater economic activity than in the IMF’s scenario.
The finance minister has been championing policies aimed at improving the investment environment in Indonesia. The country, he argues, needs to attract more foreign investment to make it less reliant on short-term foreign capital to finance its current-account deficit.
Jakarta will unveil policies soon that allow foreign investors to put money in a wider range of local industries, Mr. Basri said, but declined to give details.
Another government official said the country was looking at allowing foreigners to invest more in horticulture and courier services.
Since coming to office in May, Mr. Basri, a trained economist, has pushed through some changes to policies that foreign investors had criticized.
They include repealing quotas on some agricultural product imports such as beef and vegetables, which were meant to protect local producers. He also has championed Indonesia’s decision in the summer to sharply reduce costly fuel subsidies.
Mr. Basri said he was able to convince his government colleagues to back some of these politically unpopular measures because of the uncertain global environment.
But he acknowledged that with presidential elections next year, some of the economic overhauls may be hard to achieve.
Critics say Indonesia’s government under President Susilo Bambang Yudhoyono, who has been in power for almost 10 years, lurched toward economic nationalism during the years of high growth.
“The good times make bad policies,” Mr. Basri acknowledged.
He defended the government’s goal of forcing mining companies to do more processing of raw materials onshore. The government is planning to ban exports of a range of commodities from January unless producers can show plans to build processing capacity.
But Mr. Basri said the government would perhaps be better not to fully implement the ban now, at a time of great uncertainty in financial markets and a weak outlook for Indonesia’s commodity exports as China’s demand reduces.
“The question is about timing,” he said.
Write to Ben Otto at ben.otto@wsj.com and Tom Wright at tom.wright@wsj.com

Original post: Indonesia Finance Chief Cuts View on Growth