The second round of the presidential election is to be held on September 20th. It will be contested by the incumbent, Megawati Soekarnoputri, and her former security minister and leader of the small, reform-minded Democrat Party, Susilo Bambang Yudhoyono. Mr Yudhoyono is currently well ahead in the polls, but although the Economist Intelligence Unit expects him to win, the final result is likely to be close. If successful, he is expected to lead a more proreform, technocratic administration.
The government’s onerous debt-servicing burden suggests that fiscal policy will remain tight, but we expect a greater focus on reducing unemployment and poverty in 2005. Lower inflationary pressures in 2005 should enable interest rates to fall further. GDP growth is expected to remain at around 4.5% in 2004 (unchanged from 2003), supported by robust private consumption, but it will move slightly higher in 2005 as a result of reduced political uncertainty and a recovery in investment. The current-account surplus will be maintained, but it will fall relative to GDP.

EIU have revised up their forecast for the budget deficit in 2004 to 1.5% of GDP, owing to the persistence of high international oil prices and the resultant increased cost to the government of the domestic fuel price subsidy.