Indonesia warned of global slowdown

Urip Hudiono, The Jakarta Post, Jakarta

Indonesia must seek alternative markets for its exports and promote local consumption to secure growth amid a slowdown this year in the world's economy, global financial services firm UBS said.

Current policies to ease inflation and cut interest rates are on the right track for reviving domestic spending, UBS global economist Paul Donovan said, while at the same time not disrupting the appeal of Indonesia's financial markets in the eyes of global investors.

UBS sees world economic growth slowing down to 3.5 percent this year from 4.5 percent last year on a downturn in spending in the U.S.

The economies of Japan and Europe will pick up, but this will be unlikely to be strong enough to offset the effects of the global decline.

For Indonesia, Donovan said this could well translate into lower global demand for the country's main export commodities.

"Indonesia needs to think carefully about how this plays out, and look for alternative markets for its exports," he said during a media briefing Friday on UBS's latest economic outlook.

"Indonesian companies should also think about how to manage this, and, with the right strategies, they will be able to continue growing."

Donovan ruled out a total collapse of Indonesia's exports, as global commodity prices were likely to remain strong. But some sectors were likely to suffer from lower demand, meaning they would grow more slowly. He pointed to Indonesia's furniture sector -- which has quite a significant market in the U.S.-- as possibly being the most likely to be affected.

The U.S. -- the world's biggest importer -- is currently Indonesia's third largest export destination after Japan and Europe, with the value of non-oil-and-gas exports alone amounting to US$10.66 billion last year. Indonesia is also a significant raw materials supplier to China, which is, in turn, a major exporter to the U.S. Indonesia's other major export markets include the rest of Asia and Australia.

Indonesia's exports have started off the year well, amounting to US$8.35 billion in January, up 10 percent from the same month last year, though down 12 percent from December.

Exports grew 17 percent to $100.69 billion last year, with the government expecting that figure to increase by another 20 percent this year. Exports, along with spending, allowed Indonesia's economy to grow by 5.5 percent last year.

Donovan suggested that Indonesia act to encourage domestic spending against a backdrop of easing inflation.

"Bank Indonesia will further accommodate this through more rate cuts, to encourage credit growth," said Donovan, who sees at least three more rate cuts over the course of the year.

The central bank has slashed its key rate to 9.25 percent at present from 12.75 percent last year, as inflation slowed to 6.3 percent from 17 percent.

Regarding world financial markets, UBS says that the latest developments in the global economy will result in the U.S. cutting rates by as much as 1 percent this year, while Japan and Europe may see slight rate increases.

This will lead to the U.S. dollar weakening further against the Japanese yen to 108 yen per dollar, and the euro to 1.4 dollars per euro. UBS sees the rupiah averaging Rp 9,200 per dollar this year.

"Global markets will see a temporary period of risk aversion, with higher market volatility in the next couple of weeks, but markets will fundamentally still be on a fair value," Donovan said.

Markets in Asia were rocked by a slide in the Chinese bourse earlier this week, with many analysts saying this was a market correction in response to China's overheating economy.

Donovan said that BI's rate cuts would be seen as positive by Indonesia's local capital markets, with plans by both the government and local corporate sector to issue more bonds posing no problems given current macroeconomic stability.

"When bonds are issued in a stable financial environment, this it is good," he said. "It will improve the sophistication of the market."