Photo: Ilustration, source: BI.go.id
Stramed, Indonesia’s second-quarter economic growth likely almost matched that of the previous three months, as soft commodity prices and weakening global trade continued to hurt exports, a Reuters poll showed on Friday.
The resource-rich country has been trying to lift GDP growth significantly, but despite heavy infrastructure investment by the government, the pace has remained about 5% for years.
The median forecast from 16 economists in a Reuters poll was for Southeast Asia’s largest economy to have expanded 5.05% in April-June from a year earlier, compared with the 5.07% in the first quarter.
Household consumption, which accounts for more than half of GDP, likely remained stable, helping the headline growth rate stay above 5% while exports were weak, said Andry Asmoro, Bank Mandiri’s chief economist.
“Export growth continued to face some hurdles in Q2, including weakening global demand and lower commodity prices,” said Asmoro, who predicted 5.06% GDP growth. Finance Minister Sri Mulyani Indrawati on July 16 predicted 5.1%, reflecting weaker government spending, but an expected pick-up in investment.
Indrawati has announced tax incentives for some industries and pledged to push ahead lower corporate tax rates to boost investment and accelerate economic growth. “Our domestic factors are contributing something positive for the GDP growth momentum and the global condition can also contribute a positive nuance,” Indrawati said on Thursday.
The central bank has also jacked up efforts to increase economic growth momentum by cutting the benchmark interest rate and bank reserve requirements last month, though Governor Perry Warjiyo has said the impact on growth will be felt more in 2020.
President Joko Widodo, who won re-election in April, has promised to be even more business-friendly in his second five-year term, pledging to cut corporate tax rates, revise rigid labor laws and increase investment in infrastructure and education.
Indonesia could lift its GDP growth to an annual average of 5.4%-6% during Widodo’s 2019-2024 term, according to a proposal from the planning ministry. The International Monetary Fund, which predicts a 5.2% rate for 2019, sees a 5.3% medium-term growth rate in Indonesia.
Indonesia should be aware of the impact of an ongoing trade war between United States (US) and China with the world economy predicted to drop 0.5 percent in 2019, Finance Minister Sri Mulyani said Friday. “We must remain alert to the escalation of the trade war,” Sri Mulyani said in Jakarta.
US President Donald Trump announced a new tariff that goes into effect September 1, 2019, by 10 percent for imported products from China worth the US$300 billion. The policy affected Indonesia with reference to its export performance, she opined. “Thus, all countries will experience adjustments because the challenges for their external trade balance will change, especially from exports and imports,” Sri Mulyani stated.
Indonesia’s financial systems and economic growth in the second quarter of 2019 were stable, she noted earlier. The ongoing tension of trade relations between the US and China would potentially spread to other countries that became the hub of Chinese exports to the US, she said. “This factor has affected international trade and decreased the prospect for global economic growth,” Sri Mulyani remarked.
Indonesian share prices mostly declined on Monday as the escalation of the trade war between the United States and China, and a decline in Indonesia’s GDP growth in the second quarter added to investors’ concerns.
The Jakarta Composite Index (JCI), the main index at the Indonesia Stock Exchange (IDX), fell by 2.59 percent to 6,175.7 points during the day following the downward trend in Asian indices like Japan’s Nikkei, Hong Kong’s Hang Seng and Singapore’s Strait Times Index, which also fell deeper into the red throughout the day.
Foreign investors sold off shares on the day as the IDX recorded a total of Rp 1.1 trillion (US$77.08 million) in net foreign sell during the day, with private lender Bank Central Asia’s stock being the most sold.
Binaartha Parama Sekuritas analyst Nafan Aji told The Jakarta Post that the decline might have been caused by growing concern over the Indonesian economy after GDP growth slowed in the second quarter.
According to Statistics Indonesia (BPS), Indonesia’s economic growth fell to 5.05 percent year-on-year in the second quarter of this year as exports fell and investment growth slowed. That compares to 5.07 percent yoy recorded in the first quarter and 5.27 percent yoy seen in the second quarter of last year.
“However, the slowing economic growth didn’t have much influence on the JCI, as most of the sentiment came from outside of the country,” Nafan said. United States President Donald Trump announced last week that he would impose new tariffs on goods imported from China. Beijing in response vowed to retaliate.
These factors, coupled with geopolitical strain in Iran and Hong Kong, saw Asian indices weaken and impacted the JCI on Monday. The rupiah also weakened by 0.49 percent to Rp 14,255 against the US dollar in the spot market.
Futures firm PT Garuda Berjangka president director Ibrahim said that, other than external factors from the US and the United Kingdom regarding its move to prepare for a no-deal Brexit, massive blackouts in Greater Jakarta, West Java and Central Java harmed investor confidence in the government.
“If the blackouts persist, investors will likely take their money out of the country, as they fear it will cost the country trillions of rupiah from halted activities,” he said.
The trade war between the United States and China has turned into an escalating currency war and emerging countries, including Indonesia, must brace for a currency depreciation and the ensuing capital flights.
The rupiah is now traded at 14,300 against the greenback, having fallen 0.7 percent so far this week as the tit-for-tat between the US and China continued.
China announced it would stop importing US agricultural products until an indeterminate time after President Donald Trump said he would impose additional tariffs on $300 billion worth of imported goods from China.
The yuan traded below 7 per US dollar for the first time since 2008, prompting the US Treasury to call China a “currency manipulator,” a designation it had last used in the 1990s on any country.
“As part of the yuan’s trading block, Asian currencies are squeezed by a stronger dollar and a weakening yuan. Emerging market assets run to safe-haven assets like the yen and the US dollar,” Adrian Panggabean, Bank CIMB Niaga’s chief economist, said on Tuesday.
“Since 2008 the yuan has become an anchor for the currencies of developing countries. The weakening of the yuan must be watched closely because it could drag the rupiah down,” Adrian said. He said market players must stay vigilant for the rest of the week as the volatility is expected to remain. “We have seen an outflow in Indonesia’s equity market and a slowdown in inflow in its bond market,” Adrian said.
“Personally, I hope there is no reversal. From currency and valuation point of views, Indonesian market assets are still very attractive regionally and globally,” he said, adding that the market had already priced in Indonesia’s disappointing second-quarter growth.
“What the market did not expect was the global situation,” he said.
The Jakarta composite index closed 0.9 percent lower on Tuesday, extending a loss since Friday. Foreign investors sold shares worth Rp 2.2 trillion ($154 million) more than they bought.
Coordinating Minister for Economic Affairs Darmin Nasution said the government will wait and see how far the rupiah would fluctuate. “We’re following [the development], we’re doing our calculations but we don’t want to comment about it yet,” Darmin told Antara news agency.
“No need to [exaggerate the issue] now. This is all part of a process that is still going on. Everyone has been making their move. Who knows what action the US would take tomorrow?” he said.
Martin Petch, the sovereign risk group vice president at Moody’s Investors Service, said he saw a hardening of positions between China and the US that is likely to spill over to the rest of the world, particularly Asia.
“At this stage, we do not expect the US Treasury designation to have a material impact on China’s foreign exchange policy. However, market expectations of potential further yuan devaluation may lead to devaluation in other currencies, particularly those with strong trading ties to China,” Petch said.
Indonesia’s trade minister on Friday (Aug 9) threatened to impose higher tariffs on European Union dairy imports in response to the bloc’s proposed move to hit biodiesel made from palm oil with anti-subsidy duties.
The warning could escalate a trade dispute with the EU after Indonesia – the world’s top palm oil producer – hit out at the bloc’s plan to cut its use of palm-based biofuels by 2030.
Palm oil is the world’s most widely used vegetable oil and a key ingredient in a wide range of products from food to cosmetics.
But environmentalists say it drives deforestation, with huge swathes of South-east Asian rainforest logged in recent decades to make way for palm plantations. On Friday, trade minister Enggartiasto Lukita said he had told Indonesia’s dairy importers to look for new suppliers outside Europe, and threatened to hike existing tariffs on EU dairy products, which currently range from 5-10 per cent.
That was in response to an EU proposal for anti-subsidy duties of 8-18 per cent on palm biodiesel from Indonesia, he added. “I’ve spoken with dairy importers here and told them that they’d better look for other suppliers outside Europe,” Mr Lukita told a business forum in Jakarta.
“(The EU) wants to impose an 8-18 per cent tariff (on palm biodiesel) so to make it fair, we will also impose the same tariff when the time is right. “We’re not going to be quiet about this unfair treatment.” (Red/many resources)