MEDIUM TERM OUTLOOK

In 1999, the key macroeconomic indicators of the Indonesian economy provided evidence suggesting that the process of Indonesian economic recovery was gaining greater momentum in line with improvements in various sectors. This is in line with gains on both the domestic political and economic fronts. Inflation has subsided, interest rates have declined, and the rupiah has stabilized.

Toward mid-2000, the economic recovery was well underway. However, a number of strains appear to stand in the way of economic recovery. The rupiah has been continually under pressure, with eventual adverse consequences on inflation. In addition, the bank intermediation function has yet to fully recover as the banking recapitalization process and corporate restructuring are not optimally implemented. The increasing domestic uncertainty, which was reflected in an increase in risk premium and a weakening of the exchange rate, has subsequently resulted in greater inflation pressure and a higher interest rate. These in turn might halt banking and corporate restructuring as well as the recapitalization process, particularly debt restructuring. However, with the peaceful completion of the annual session of the People¡¯s Consultative Assembly and the formation of a new economic team in the cabinet, the trend of economic recovery should turn for the better.

Economic activity for the whole of 2000 should expand more strongly than in 1999, although it remains lower than its historical norm before the crisis. The GDP growth for the year 2000 is projected to surpass the original projection range of 3 to 4 percent. On the demand side, the source of aggregate demand expansion and economic growth is expected to originate from private consumption, investment, as well as exports. Consumption should be moderating while investment and exports should be picking up. Given its share of GDP (the largest at 77 percent), consumption is seen to remain important in driving the recovery. Such an improving outlook is supported by the business survey, which indicated that more respondents expect to see their activities picking up in the next quarter. In parallel, the consumer survey also suggested a more optimistic trend in the next quarter.

At the start of the year, the inflation rate for 2000 is targeted to range between 3 and 5 percent (taking no account of a prices and incomes policy) or 5 and 7 percent (including such a policy). In view of the persistently weakening exchange rate during most of the year, it looks increasingly likely that the inflation outcome will exceed the target. To keep the inflation rate within a reasonable level and to keep the exchange rate movement less volatile, monetary policy is continuously being directed to absorbing excess liquidity in the money market, which at the same time will reduce the use of the rupiah for speculative activities. The tight monetary policy and strategy understandably will push interest rates higher but gradually they will be reduced/eased down in line with the prevailing money market conditions.

INDONESIA: OVERALL ECONOMIC PERFORMANCE