Lack Of government action to hold back Indonesian economy

By FN Arena

ABN Amro has returned from a fact-finding mission in Indonesia with the conclusion any upside surprise in terms of economic performance is unlikely in the short-term.

Its view is based on a combination of factors, the two most important being a slowdown in government spending thanks to an anti-corruption drive and a slowing economy overall, where a fall in consumer spending is beginning to bite.

The broker suggests this is exactly the opposite outcome to what the country needs, as it suggests government spending should be increasing in an attempt to bring much-needed economic reforms to the country particularly in the areas of investment, labour and tax laws.

The tax changes in particular are important, as if changes were made to eliminate tax liabilities arising from asset revaluations it would have a significant positive benefit in terms of strengthening corporate balance sheets. This in turn would improve the flow of credit and provide greater depth to the bond market.

But having an idea of what is required and actually making the necessary changes are two different things, the broker suggesting the current anti-corruption drive is hampering the ability of the government to make changes. As a result, it suggests investors should prepare for a period of underperformance until such new laws are put into place.

The broker is forecasting GDP growth of 4.5% for 2006.Copyright FN Arena/The ASIA Miner

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