Indonesia’s economy grew a higher-than-expected 6.4% year-on-year in the second quarter of this year, thanks to high commodity prices, strong consumer spending and robust exports. Oddly, Consumer confidence fell to its lowest level in three years, on the back of a 30% fuel price increase in May and rising inflation.
This is good news for the Indonesian Fund (IF)This solid growth will give a boost to President Susilo Bambang Yudhoyono as he released the government’s 2009 budget calling for a 55% increase in funds for poverty fighting and a significant expansion of the education budget.
Economic growth in Indonesia which is south-east Asia’s largest economy and the world’s fourth most populous country, reached 6.3% last year.
Nick Cashmore, of CLSA brokerage in Jakarta, believes that Indonesia had been “exceptionally lucky” because of high prices for coal and other commodities. “If this rising investment cycle picks up, [Indonesia] has the potential for insular growth that will set it apart from its neighbours,” he said. Exports accounted for 30% of growth in the second quarter, far lower than in neighboring countries, while consumer spending represented 60.3%.
Sri Mulyani Indrawati, Indonesia’s chief economics minister, was upbeat. “The growth momentum is very strong and the upward trend on employment and poverty reduction is healthy,” she told the Financial Times. “The main worry is inflation. It will be a couple of months before the central bank and we get it down to single digits again.”
This would be a great story except that market valuations are still high with the stock market trading at 3.5 times book value, 12.2 times cash flow and eighteen times annualized earnings based on S&P data.
Indonesia has been urged by the OECD to overhaul its rigid labor laws, remove foreign investment and ownership restrictions and cut its fuel price subsidies. Despite a 30% increase in fuel prices in May, the Indonesian government is expected to spend one-fifth of its government budget on fuel subsidies this