Boom Time for the Economy but Concerns Remain

By webadmin on 08:11 am Sep 03, 2012
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Dominic G. Diongson, Tito Summa Siahaan & Pitan Daslani

Few countries with economies comparable to Indonesia’s $850 billion size come close to matching or exceeding the Southeast Asian nation’s 6.4 percent growth rate during the second quarter.

China is the only other member among the Group of 20 nations with a faster-growing economy, expanding at a 7.6 percent pace in the April-June quarter. But its pace is down from last year’s 8.9 percent rate.

India, which used to boast growth rates of more than 7 percent, is also facing a cooling economy as high inflation curbs expansion. Its economy in the second quarter expanded 5.5 percent.

Neighboring countries Malaysia, the Philippines, Singapore and Vietnam are growing at rates less than 6 percent.

“Compared to our peers, Indonesia’s growth is still above average,” said Destry Damayanti, chief economist at Bank Mandiri. “Our regional peers such as Malaysia and Thailand are both export-based countries and this year they might grow by only 3 to 5 percent. India is expected to grow around 5 percent and Vietnam below 5 percent. These countries don’t have the strong domestic economy as Indonesia.”

The International Monetary Fund and the Asian Development Bank forecast economic growth to accelerate in 2013.

The IMF forecasts the economy expanding 6.1 percent this year, before growing 6.6 percent in 2013. The ADB is targeting growth to pick up to 6.7 percent in 2013 from 6.4 percent this year.

About eight months ago, Fitch Ratings and Moody’s Investors Service raised their debt rating on Indonesia to investment grade for the first time since 1997, highlighting the country’s resilience to the global economic downturn.

Growth is being boosted by consumer spending, which accounts for about 60 percent of the nation’s economic activity. Low borrowing costs have helped to encourage consumers to take out loans for purchases on homes, cars, motorcycles, mobile phones, computers and other goods.

That has also helped boost profit at consumer-related companies such as Astra International and Unilever Indonesia, and lenders including Bank Mandiri and Bank Central Asia.

The Indonesian government last year launched a master plan for economic development (MP3EI), a Rp 4,000 trillion ($420 billion) project that focuses on infrastructure development such as the construction of roads, airports and seaports. The plan is aimed at making Indonesia’s economy among the 10 largest in the world by 2025.

Royal Bank of Scotland’s senior regional economist, Erik Lueth, said in a statement on Thursday that Indonesia’s economy remains on track to meet RBS’s growth forecast of 6.2 percent for 2012.

“The second quarter data demonstrated that domestic demand, and in particular, investment, remain key growth drivers,” he said. “Owing to its strong domestic demand and high import-content of its exports, Indonesia is much less sensitive to the global growth slowdown than many of its Asian peers.”

Even though investment from abroad is helping to boost economic growth, imports of machinery and equipment might put a strain on trade balance. Exports — which account for about 25 percent of the economy — have also been slipping, as demand for coal, nickel and palm oil weaken in Europe. A drop in demand and lower coal prices — down about a third from a year ago — have threatened to curb jobs at small-mining companies in Kalimantan, and Adaro Energy has said that it will curb its output in a bid to prevent prices from slipping further. Shares in Vale Indonesia, the country’s biggest listed nickel producer, have fallen 28 percent this year, as its first-half net income plunged 99 percent.

Those trade deficits are already having an impact on the rupiah, down 5.5 percent against the dollar this year and the second worst-performing currency in Asia after India, according go Bloomberg data.

Bank Indonesia governor Darmin Nasution conceded on Friday that the central bank was willing to allow the rupiah to weaken further in order to make the nation’s exports more competitive. Still, he said the country’s low inflation rate, strong domestic growth and low fiscal deficit were the main indicators of “a good economic balance.”

But he didn’t dismiss intervening in the market by selling dollars, which have been costly. Foreign-currency reserves hit a record $124.6 billion in August last year, when the dollar fetched around 8,500 rupiah. It closed on Friday at 9,560.

Reserves totaled $106.6 billion at the end of July. As a form of currency control, the central bank last month forbade foreign banks such as Citibank from dispensing dollars at ATMs so that it can monitor dollar flows.

Darmin said that Indonesia’s industrial capability is the weakest link in the country’s strong economic performance. “Our industries imported many capital goods amidst weakening exports,” he added.

Indonesian industries cannot keep up with the economic growth, which could backfire, because strong economic growth will always be followed by an increase in imports, Darmin said.

Indonesia’s trade deficit in June widened to $1.3 billion, which was a record amount, and brought the deficit for the second quarter to $2.29 billion, according to central bank data.

For the current account — the broadest measure of trade — the deficit widened to a record $6.9 billion in the April-June quarter, or equivalent to 3.1 percent of Indonesia’s gross domestic product.

Chatib Basri, chairman of the Investment Coordinating Board (BKPM), said he was not worried about Indonesia’s triple deficits — budget, trade, and current account — because “even in the past when we had very high growth rates, we always experienced budget deficits, which were balanced by foreign aid.”

Borrowing can become very expensive, even as the central bank maintains its key interest rate at a record low 5.75 percent.

In last week’s government bond auction, the Finance Ministry sold Rp 3.84 trillion in securities, less than the Rp 6 trillion that was targeted, Reuters reported. Yields have also started to rise, highlighting the elevated risk in holding Indonesian debt. The 10-year note yielded 6.3 percent as of Friday, up from 5.5 percent six months ago, according to Bloomberg data.

The central bank has also been trying to curb lending from its projected 24 percent growth rate, amid concern that excessive lending practices might cause some loans to turn bad.

Among the 42 of 45 companies in the LQ-45 Indonesian stock market index that have reported their latest income statements, combined profit for the second quarter dropped 1.1 percent to Rp 38.26 trillion from the same period last year, according to Bloomberg data.

Slowing profit growth may also be a drag on the stock market, a leading indicator for the economy. The benchmark stock measure, the Jakarta Composite Index, is up 5.2 percent this year, closing on Friday at 4,060.33. It closed at a record high of 4,224.00 on May 3.

“The global economic situation remains a drag,” Anton Gunawan and Dian Ayu Yustina, economists at Bank Danamon Indonesia, wrote in a note to clients on Wednesday. “There is no significant improvement on the economies of the main trading partners.”

Bank Danamon is forecasting Indonesia’s full year economy to grow 6.1 percent, less than last year’s rate of 6.5 percent, which was the fastest since 1996.

Additional reporting by Muhamad Al Azhari, Investor Daily