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INDONESIAN COMMERCIAL NEWSLETTER
September 2009

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INDONESIA'S ECONOMIC CONDITION IMPROVING


The global economic condition has shown sign of recovery. Indonesia will also gain from the revival of the world economy allowing the country to increase exports. Bank Indonesia is optimistic the country's economy will grow higher than previously expected in 2009 and 2010. In 2009, the country's economy is forecast to grow 4%-4.5% or higher than previous estimate of 3.5% - 4%. In 2010, the economy is forecast to expand 5% - 5.5%.

The trend is also indicated by growing domestic consumption and exports in the third quarter of 2009. Increase was recorded in the exports of coal, crude palm oil and copper. Domestic demand rose as indicated by increase in retail sales. 

Domestic demand

Increase in domestic demand is indicated by 4.8% growth of consumption and improvement of GDP in the consumption sector in the second quarter of 2009. The government's spending also rose 17% helping boost domestic demand.

Increase in public consumption is shown in the rise in the sales of motorcycles and cars after shrinking early this year. A sharp increase has also been recorded in the sales of electronic goods. Sales of electronic goods   in May 2009 were valued at Rp1.69 trillion, up from Rp1.56 trillion in the previous month.

Data at the Electronics Marketer Club (EMC) show that sales of electronic goods  in May were dominated by television sets with sales totaling 333,094 units, refrigerators 211,361 units, video/compact disk players (DVD/CD)  totaling 189,477 units,  water pumps 133,406 unit, air conditioners (AC)" totaling 115,495 unit, and washing machines 104,139 unit.

The highest growth  electronic sales  was recorded  for DVD/CD  products  in May, 2009  - growing 131.4%  to 189,477 units  from 81,877 units a year earlier.

Sales of AC rose 11%   to 115,495 units from 104,113, washing machine up 14% to 104,139 units and refrigerators by 8% to 211,361 units.  Sales of TV sets fell during that period. The rupiah fluctuations early 2009 had no much effect on the sales of electronics goods.

Meanwhile, automotive industrialists expressed optimism that car sales will increase this year to exceed target. In the first nine months of this year car sales reach almost 300,000 units. Sales target was set at 450,000 units this year.

Chairman of the association of motor vehicle industries (Gaikindo) Bambang Trisulo car sales are expected to rise again in the coming months after falling in September from a peak in August. Sales fell in September because of many holidays.

Export performance

In the first half of 2009, the country's exports shrank on weak demand as a result of the global financial crisis hitting especially the country's traditional markets - the United States, Japan and Europe.

In 2008, Indonesia's exports were valued at US$ 126 billion or more than US$ 10 billion a month. In January, 2009, exports were valued only at US$ 7.1 billion.  In the second half of the year, however, exports began to scale up and in August exports hit the US$ 10 billion level to follow the revival of the world economy.

Increase in Indonesia's exports was attributable mainly to growing exports of primary commodities such as crude palm oil, coal, copper and other mineral products with growing demand from China, India and South Korea.

The manufacturing sector is still in the doldrums with growth hampered by high interest rate despite steady cut of Bank Indonesia key rate to 6.5% in September 2009.

Trade Minister Mari Elka Pangestu said the government will provide fund for export stimulus expected to bolster exports this year and end the period of contraction.

Rupiah gaining strength

After sharp fall in the first half of 2009, the rupiah began to rise to reach the level of 9,300 per US dollar in October. The rupiah rise followed inflows of foreign funds to the Indonesian market marked with the increase in the Composite share price index (IHSG) of the Indonesian Stock Exchange hitting a new record of more than 2,500 points.

The rupiah appreciation is also thanks to higher than expected surplus in the country's balance of payments. The country's foreign exchange reserve reached US$ 58.8 billion by the end of the third quarter enough to finance imports for 5 - 7 months and repay foreign debts.

Inflation relatively low

The country's inflation in 2009 has remained low. Deflation was even recorded 0.07% in January and 031% in April. The highest monthly inflation was 1.05% in September with the price rises during Ramadan and Idol Fire. Cumulatively inflation was low at 2.04% in the first nine months of this year.

Bank Indonesia said inflation was relatively low in the third quarter of 2009 because of expectation of improved condition with decline in inflation, stronger rupiah, and moderate commodity price hikes in global market.  Sufficient supply of food products kept the prices under control. The increase in toll road fee on 28 September 2009 had little effect on inflation.

Low inflation rate will help provide favorable business climate, and strengthen the purchasing power of the people.

Bank financing

The country's banking sector has been relatively stable and in good condition as indicated by average capital adequacy ratio of 17.3% in May, 2009 with none performing loan of less than 5%.

Bank liquidity including inter bank liquidity is improving. The key rate (BI Rate) of Bank Indonesia was cut by 250 basis points so far in 2009 followed with a cut in deposit and credit rates.

After the relaxation of the monetary policy, the interest rates on deposits has been cut 190 basis points and the lending rate was reduced by 80 basis points. The slower process in cutting lending rate resulted in slower credit expansion. Further cut in lending rate is needed to boost the real sector and the economic growth in general.

Conclusion

In the first nine months of 2009, Indonesia has succeeded in going through the global financial crisis relatively well compared with most other countries.  Large and strong domestic market has kept the country's economy healthy. 

The revival of the global economy gave greater optimism that the country's economy would grow faster than expected. In September, the monthly exports already exceeded the US$10 billion level or the highest in the first three quarters. Inflation is also has been kept low and the rupiah has regained its lost value.

There are, however, a host of problems to be faced and bottlenecks to be removed.  Export increase has been driven by growing prices of primary commodities   with the manufacturing sector remaining in the doldrums. There is still much to do to improve infrastructure; the bank lending rates are still too high, and more incentives are still needed to boost development of the real sector.

Those problems pose challenges that have to be dealt with by the new administration of President Susilo Bambang Yudhoyono in the next five year term.



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