AWORLD RECESSION CONTINUES TO TAKE TOLL- May 2009

INDONESIAN COMMERCIAL NEWSLETTER

MAY 2009

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WORLD RECESSION CONTINUES TO TAKE TOLL

Optimism amid crisis

Indonesia's economy in the first quarter of 2009 still recorded positive growth of 4.4% y-o-y. The country was one of three countries in this regions beside China and India to chalk up positive growth. This proved that Indonesia is better able to resist the global crisis which has driven many countries including neighboring countries Singapore and Thailand to the depths of recession. Indonesia succeeded in going through he crisis thanks to strong domestic market and fairly good commodity prices until early 2009.

Other economic indicators showed encouraging condition. Inflation was relatively low at around 5% year-on-year, the central bank's benchmark interest rate (BI Rate) has been cut to 7% ; the rupiah was stable at the level of 10,000 - 10,400 per US$. More noteworthy also is the capital market. After sagging deep toward the end of 2008, the composite index (IHSG) of the Indonesian Stock Exchange began to scale up in the past two months.

When the rupiah weakened to the level to 12,000 per dollar in November, 2008, the IHSG dipped to a two year's low. Foreign investors sold their shares and bonds followed by local investors withdrawing their fund from the capital market.

However, the condition began to improve in entering the first quarter of 2009 and continued through the following months until May when the crude oil and commodity prices began to scale up. Meanwhile Bank Indonesia steadily cut the BI Rate, a move followed by the government policy of offering fiscal incentives. The household consumption also grew partly thanks to the brisk political campaigns ahead of the legislative election. No wonder that foreign investors began to return to the country, which is seen as promising good investment return.

The return of foreign investment gave a big boost to the country's capital market and strengthened the rupiah. From March to May trade in the capital market was brisk and the IHSG continued to rise to cross the psychological level of 2,000 in May 2009. The rupiah also strengthened to reach the level of 10,340 per US$

Optimism is growing that the worst part of the malaise has been over. A number of US financial institutions have regained strength and reported profit after being in the doldrums since 2007. The IMF and the World Bank reported that the impact of the global recession is dying away. The World Bank, therefore, revised up its prediction of the Chinese and Indian economies with the manufacturing sector of the two Asian giants reporting growing demand in export market.

OECD (Organization for Economic Cooperation and Development), that groups highly industrialized countries in the world, has also expressed optimism predicting high growth of the world economy. In 2009, OECD projected smaller contraction of the economies of its members from 4.3% to 4.1%, and to only 0.7% from 0.1% in 2010.

OECD said the US economy, which is seen as the source of the crisis, is expected to still suffer a contraction of 2.8% in 2009, better than 4% previously estimated. The US economy in 2020 is expected to start growing only in 2010 with an annual growth of 0.9% as against zero growth earlier predicted.

Crisis not entirely over

In the country, the three presidential hopefuls and their respective vice presidential candidates all expressed optimism that the country's economy could expand strongly. They seem to dismiss the global economic crisis. They pledged high economic growth, even higher than the country had ever recorded in pre crisis period, if the people choose them the next president of the country.

The highest growth recorded by the country after the 1998 crisis was 6.3%-6.5% in 2007 and 2008. If the records in the past two months were to be used as the indicators, the worst part of the global crisis has been over. The bank lending rates have began to scale down and progress have been made in curbing the declining trend of exports . Demand began to rise and the commodity market has improved.

However, the country needs to remain on guard as the improvement in the economic indicators in the past two months was thanks mainly to external factor. The rupiah regained strength on dollar weakening, and exports improved on price hikes of certain commodities like CPO, coal and oil - a condition which is still highly vulnerable that could change any time.

So far the driver of the country's economic growth has been the public consumption. In 2009, the public consumption still continues to increase especially thanks to the pre election political campaigns.

However, the real sector has remained in the doldrums. The textile industry is still facing marketing problem with falling demand in traditional markets including in the United States and Europe. A number of textile factories have cut jobs and some have even stopped operation.

In the first four months of 2009, exports continued to decline compared with the same period in 2008. Exports of non oil/gas commodities in April were valued at US$7.21 billion down 1.74% from March 2009 and by 14.63% from the same month in 2008.

Cumulatively exports in the first four months of this year were valued at US$31.49 billion or down 29.51% from the same period in 2008 and exports of non-oil/gas commodities fell 22.68% to US$26.90 billion year-on-year . Exports of agricultural products alone fell 7.38% and mining products 11.63%. See the following table.

CPO is major export earner for the country. Demand for CPO is declining from major markets - India, China and Pakistan. In Pakistan, Indonesian CPO exporters lose part of market to Malaysian rivals. Malaysian and Pakistan have bilateral agreement with lower import duty making Malaysian CPO is more competitive in price.

Non export oriented commodities like cement also declined in market demand with the slump hitting the construction and property sectors and the still high bank lending rate. Lending rate was still high until May around 15% .

The still high lending rate makes the domestic products less competitive even facing imported products such as steel and textile products. Imported products of steel and textiles still are still flooding the domestic market.

Indonesia has managed to weather the impact of the global financial crisis thanks mainly to growing consumption sector but it does not mean the threat has been over. The country's economic growth could not continue to relay on the consumption sector for growth. The consumption sector could not continue to grow without the support of the production sector. The collapse of the real sector will weaken the consumption sector.

Concern over continuing financial crisis

The World Bank and the OECD have different prediction of the world economic growth. The World Bank has revised down the world economic growth from a contraction of 1.7% to 2.9% for 2009. The World Bank's prediction of the country's economic growth was set at 3.5% for 2009. The government predicted a 4-4.5% growth.

In the coming years, Indonesia should not rely only on the consumption sector. The performance of the real sector has to be improved to create new jobs and to boost exports. If exports continue to decline, the impact will soon be felt by the people.

Capital, therefore, will be needed to support the business sector. The business sector should utilize the capital market. The condition has improved for companies to launch initial public offering (IPO). Meanwhile, banks should cut their lending rate.

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