Virtuous or Vicious Cycle Economics Will Drive Politics

1. Virtuous or Vicious CycleEconomics Will Drive Politics Prepared by : S.K Zaenudin

2. Pluses • Macro-economic and political stability. Government projects 6.8% while most economists project between 6.2 to 6.5% GDP growth. • This is the highest growth rate in a decade. • Most foreign banks are very bullish on Indonesia – looking not just for business but to acquire local banks. This bodes well for the banking sector as well as the real economy. • Banks such as ING, Standard Chartered are projecting double digit growth in 2008.

3. Pluses • FDI’s are now at 25% of GDP- still below pre-crisis levels of 30% • but higher than in 2005 and 2006. This will have an impact on the real sector. The government is also planning to spend Rp16 trillion on infrastructure upgrades this year. • Consumption looks likely to remain buoyant both at the high end • (apartments, cars etc) and at the middle-level. SMES are doing reasonably • well, especially in the provinces were there is very strong growth. • Motorcycles sales expected to expand by 20-25%.

4. Threats To Growth In 2008 • Disappearing tempe and tahu: Inflation – almost every economist in town has raised this issue. • Soaring global commodity prices are driving up food prices in Indonesia. Estimates currently • range 10- 15 % rise in food prices in 2008. • Nearly 80 million Indonesians still live on $2 a day or less and spend 85% of their • disposal income on food. Any sharp rise in fuel prices will have severe economic and • political consequences. • Anecdotal evidence suggest that prices generally will continue to rise this year given the • level of global oil and commodity prices. Many producers are talking about passing the • higher cost to consumers while over the past two years, they were willing to absorb • the higher costs. • Masses are now under a lot of cost pressure. Growing concern of possible social disruption. • Many poor families in the rural areas have had to cut back on number of meals a day. • Growing disparity between Java and Other Islands – Consumption stronger outside Java but Java remains the most populous island.

5. Threats To Growth In 2008 • Misguided Government policies. • SBY administration has not had the best of records in terms of introducing sound economic policies. Any major miss-step on the part of the government could be disastrous.

6. Political Themes • Increasing attacks on the government’s economic policies by various segments • of the political elite. • Major political parties will start disbursing funds ahead of the elections – this might mitigate the impact of rising food prices. • Likely to see more potential presidential candidates come out into the open and declare their intentions – Wiranto, Akbar Tandjung, Jusuf Kalla, Megawati Sukarnoputri. Muslim leaders such as Dim Syamsuddin and Mohd Nur Wahid and Hashim Musadi will play important roles but they are not crowd pullers. Hidayat Nur Wahid will likely forge a coalition with one of the larger secular parties.

7. Political Themes • The number of political parties expected to contest the elections will be far lower than in 2004 due to financing issues and the lack of euphoria. • Expect some surprises in the elections. Provincial leaders will make some attempts to enter the national political arena.

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