Indonesia’s economy grew at the fastest annual pace in six years last quarter, adding to the case for the central bank to raise interest rates further as inflation accelerates. Gross domestic product increased 6.9 percent in the three months through December from a year earlier, the Central Bureau of Statistics said in Jakarta today. That was higher than the 6.3 percent median estimate of 13 economists surveyed by Bloomberg News. GDP increased 6.1 percent in 2010. Rising consumer spending is driving the expansion in the world’s fourth-most populous nation, increasing pressure on the central bank to restrain price gains and protect purchasing power. Indonesia joins counterparts from China to Singapore in reporting accelerating growth in the fourth quarter as Asia weathers risks including elevated U.S. unemployment. “The central bank clearly needs to stay hawkish with the economy growing at this pace and they have to be vigilant on inflation,” said Lim Su Sian, a Singapore-based economist at Royal Bank of Scotland Group Plc. Bank Indonesia will raise borrowing costs by a further 0.75 percentage point this year from the current level of 6.75 percent, she said. The Jakarta Composite Index fell 0.2 percent today. The index had tumbled approximately 8 percent from its Dec. 9 record high on concern the central bank has fallen behind regional peers in boosting rates to cool inflation. The rupiah strengthened for a fifth day to 8,953 per dollar. Inflation Risk Private consumption contributed 2.7 percentage points to GDP growth last year, while investment accounted for about 2 percentage points, the government said. The absence of a harvest led to a 1.4 percent economic contraction in the final three months of 2010 from the previous quarter, Central Statistics Office Chairman Rusman Heriawan said today. “Inflation clearly outweighs growth risks,” Chua Hak Bin, a Singapore-based economist at Bank of America Merrill Lynch, said before the report. “Indonesia’s strong export growth is being supported by surging commodity prices, including on oil and coal prices. We expect growth to remain resilient.” Economists from UBS AG and Royal Bank of Canada are among those predicting the nation’s borrowing costs will rise to 8 percent this year, after the central bank increased its benchmarkreference rate by a quarter of a percentage point on Feb. 4 from a record low. Consumer ConfidenceBank Indonesia had previously resisted higher rates to avoid attracting more foreign capital inflows, while opting to increase lenders’ reserve requirements and tighten rules on banks’ foreign-exchange holdings to help curb price advances. Consumer confidence rose in January from December, with a central bank index climbing 4.6 points to 113.9, the highest level since August 2009. Indonesians were more optimistic on the outlook for income, the economy and employment than any time since September 2009, a separate index measuring expectations showed. The nation’s growth has made companies more confident about raising prices as commodity costs increase, with PT Indofood CBP Sukses Makmur boosting the price of its instant noodles by 100 rupiah a pack last month. Consumer-price growth accelerated to a 21-month high of 7.02 percent in January, from 6.96 percent in December. Higher borrowing costs may help anchor inflation expectations and support the rupiah and longer-term bonds, according to Citigroup Inc. Growth Objective President Susilo Bambang Yudhoyono seeks to expand the economy at an annual average rate of 6.6 percent and create 10.7 million jobs by the end of his second term in 2014, including through attempts to boost investment in the country’s infrastructure. Foreign and domestic investment in Indonesia totaled 208.5 trillion rupiah ($23 billion) in 2010, Investment Coordinating Board Chairman Gita Wirjawan said Jan. 23. Indian and Indonesian companies last month signed accords worth about $15 billion to build airports, steel plants, a railway line and ports in the Southeast Asian nation. Indonesia will seek bids for 50 new oil and gas blocks in 2011 through tenders and direct offers to help boost output, the Energy and Minerals Resources Ministry said last year. Moody’s Investors Service upgraded the credit rating of Southeast Asia’s largest economy on Jan. 17 to the highest level since the 1997 Asian financial crisis, citing the nation’s “economic resilience” and improving public debt position. Food Costs Indonesia, the third-biggest rice importer in Asia, is seeking to “strengthen” its stockpiles to protect the poor against rising costs, Bayu Krisnamurthi, Deputy Minister of Agriculture, told Bloomberg News on Feb. 4. The government has removed import duties on 57 food items including wheat, soybeans, rice and animal feed for as long as one year to help cool prices. Rice imports are tax-free until March and tariffs on other commodities are lifted until December, Bambang Permadi Brodjonegoro, head of fiscal policy at the Finance Ministry, said Jan. 27. Indonesia is less dependent on exports compared with its neighbors, suggesting it may be more resilient to fluctuations in global business cycles. The International Monetary Fund predicts the economy will expand more than 6 percent this year. The government’s target to lift more people out of poverty in a country where the World Bankestimates 29 percent of the population earn less than $2 a day has boosted consumer spendingand imports. The central bank had refrained from raising rates since 2008 to support the growth push. In a statement announcing its rate decision this month, Bank Indonesia said it will keep a “close watch on future inflation developments and strengthen the rupiah exchange-rate policy in line with measures to curb future inflationary pressures.” The central bank expects inflation to be in the range of 4 percent to 6 percent this year and forecasts the economy will probably expand by 6 percent to 6.5 percent in 2011. Indonesia’s exports may rise 12 percent to $168 billion this year, Coordinating Minister for the Economy Hatta Rajasa said Jan. 3. News Source : Bloomberg
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