Indonesia Economic Growth to Quicken, Citigroup Says

Indonesia’s economic growth will accelerate this year amid a pick-up in domestic demand and investment even as faster inflation may prompt the central bank to start raising interest rates in March, Citigroup Inc. said. 

The nation’s gross domestic product will grow between 6.3 percent and 6.5 percent in 2011 and 2012, Johanna Chua, the Hong Kong-based head of Asian economic research at Citigroup, wrote in a report to clients today. Chua also raised her inflation forecast for the Southeast Asian nation to 6.5 percent for this year from the previous estimate of 6 percent. 

“We expect continued resilience of private consumption,” Chua said. Furthermore, “unlike in the past where credit expansion was led by consumption, we are now seeing a much more pronounced rebound in working capital loans, which is a positive sign for investment.” 

Indonesia’s economy may have expanded 6 percent last year compared with 4.5 percent in 2009, Bank Indonesia said Jan. 5. The Jakarta Composite index gained 46 percent last year, the best performer among Asia’s 15 biggest stock markets, as low borrowing costs supported domestic consumption. 

Indonesian stocks jumped today, recovering from the biggest four-day drop in two years, after gains in oil and metal prices boosted commodity shares and amid speculation the recent plunge was excessive relative to the outlook for earnings growth. 

The Jakarta Composite advanced 2.7 percent to 3,546.67 as of 3:25 p.m. local-time, the biggest gainer among Asia markets. The measure plunged 8.7 percent in the past four days, the sharpest drop since November 2008, on concern faster inflation will spur interest-rate increases. 

Inflation Outlook

“We are forecasting headline inflation will remain in the 6.5 percent to 7.5 percent range throughout the first half of 2011, exacerbated by the low-base effect, which could lead to core inflation rising to over 4.7 percent by March, April,” Chua wrote. “While still below the 5 percent threshold, the rising trend could be enough to sway Bank Indonesia to move.” 

December inflation accelerated to 6.96 percent from a year earlier, exceeding the 6.71 percent median forecast in a Bloomberg survey and adding pressure on the central bank to raise its reference rate. Bank Indonesia “won’t hesitate” to increase the rate if core inflation, which exclude food and energy prices, exceeds 5 percent, Deputy Governor Hartadi Sarwono said Dec. 22. 

Demand for loans may rise after the central bank kept its benchmark interest rate at a record low of 6.5 percent for 17 months to boost Southeast Asia’s biggest economy. PT Bank Rakyat Indonesia, the nation’s second-largest bank by assets, said Jan. 10 lending growth may accelerate to as much as 22 percent this year from an estimated 18 percent to 20 percent last year. 

The central bank may raise rates by 75 basis points starting in March with a possible delay to April, Chua said. Source: Bloomberg