Oil threatens healthy global growth

PUBLISHED : Monday, 05 September, 2005, 12:00am
UPDATED : Monday, 05 September, 2005, 12:00am

IMF chief says Indonesian currency woes no risk to region but prescribes bitter pill for country's poor

Global economic growth will stay above 4 per cent this year, the head of the International Monetary Fund said at the weekend, but he warned that the high price of oil posed a growing risk to the outlook.

IMF managing director Rodrigo Rato also said fuel shortages following Hurricane Katrina had shown the United States needed to raise its refining capacity in the long term.

'World growth is clearly above 4 per cent. The tendency will continue this year and next year,' he said at a briefing in Singapore. The IMF, which will release a fresh global growth forecast later this month, said in April world growth would slip to 4.3 per cent from last year's 5.1 per cent.

'The world is more resilient to quite a rapid increase in oil prices,' Mr Rato said, but he added that the high price of oil was a clear and growing threat.

Oil prices soared to a record high of almost US$71 a barrel early last week as Hurricane Katrina slammed into the US Gulf Coast.

Mr Rato said it was too early to assess the impact of the hurricane on the US economy, which grew at a 3.3 per cent annual rate in the second quarter, down from 3.8 per cent in the first quarter.

Mr Rato also said interest rate levels in Europe were providing sufficient scope for growth but warned of 'second-round' effects from oil prices and weakness in some domestic economies.

Second-round effects involve workers demanding higher wages and firms raising prices to compensate for higher energy costs, pushing up the wider inflation rate.

Mr Rato said there was no reason to worry that developments in Indonesia would have a spillover effect on the rest of the region.

The rupiah fell to a four-year low of 11,750 to the US dollar last week as oil prices surged, unsettling local stock and bond markets.

He said that while the country's economy was on a strong footing, its monetary policy should be clear and transparent and more responsive to inflation expectations.

The Indonesian central bank raised its one-month reference rate by 75 basis points last Tuesday to 9.5 per cent.

'What is most important is to make clear a credible inflation policy. The decision taken by Bank Indonesia is going in that direction,' Mr Rato said.

He said the interest rate rise was helping to tackle the biggest weaknesses in the economy, but that the central bank's decisions should be based on rooting out inflation.

He added that Indonesia needed to reduce inefficient expenditures, referring to costly oil subsidies that swallow one-fifth of the country's budget.

Indonesian President Susilo Bambang Yudhoyono said last week that fuel prices would be raised, but only once the poor have been cushioned from the blow.

Mr Rato said a meeting of Asian officials he attended at the weekend identified a consensus for boosting financial integration. This included taking forward steps already in place to cultivate Asia's underdeveloped capital markets.

Eleven Asia-Pacific countries have invested public money to develop Asia's bond market and reduce corporate reliance on bank loans to raise funds.

'The Asian economies are highly open to the rest of the world,' Mr Rato explained. 'There is a lot of catching up to do with financial integration.'

Delegates at the meeting saw the Chiang Mai Initiative - a regionwide scheme designed to prevent any repeat of the 1997-98 financial crisis - as a useful safety net to complement international financial arrangements.

Japan and Indonesia last Wednesday signed a deal to double a US$3 billion bilateral currency swap facility as part of the initiative, a network of bilateral currency swaps set up in 2000 by Asian countries.