Extreme vigilance required this year

(News Terupdate) - Most analysts and policymakers agree that signals indicating global economic recovery have been stronger since 2H09. Testimony of this is the Chinese government having decided to begin tightening credit recently for fear of over-heating in the world’s third largest economy (3Q09 GDP growth was at a robust 7.7 percent).

Apart from GDP growth, we can also use industrial/manufacturing production growth, the Baltic dry index and consumer confidence index (CCI) to indicate ground level economic activities.

In the US contraction in industrial production improved to -2.0 percent y-y in December 2009 compared to -13.2 percent in June 2009. Additionally, the consumer confidence index (CCI) in December 2009 rose to 52.9, better than 49.3 in June 2009.

Note that CCI represents US consumers’ perceptions and their degree of optimism on the state of the economy, which they express through savings and spending.

In addition to the US, positive trends are also occurring in Japan, Germany and Singapore, advanced countries that have been suffering from economic contraction last year. Japan even posted a positive industrial production growth of 4.2 percent y-y last November, following its worst deceleration of 23.5 percent in June 2009.

We believe that these various economic recovery signals will filter through to the Indonesian economy. At this stage, we expect Indonesia’s economy to grow at a moderately improved pace of 5.2 percent (i.e. up from 4.3-4.4 percent in 2009), in line with the Central Bank’s most recent GDP growth estimate. This is backed by rising exports and investment growth of 4.8 percent and 8.2 percent respectively.

Growing at 5.2 percent, Indonesia is performing comparatively better than the 4 percent growth of the ASEAN-5 average growth figure in 2010. It is worth highlighting that Fitch recently upgraded the country’s sovereign credit rating to one notch below investment grade, the highest in 12 years, suggesting an improved economic outlook.

This should provide the basis for optimism in 2010. However, both global and domestic challenges remain this year, which could derail economic progress unless we remain vigilant. Globally, we believe that we would still face a bumpy road ahead, with threats arising from the China bubble and uncertainties in advanced countries, especially in the US.

In the US, president Obama still struggles on tackling the 10 percent unemployment rate and a federal deficit that rose to US$1.4 trillion last year. At the same time, he also faces rising Chinese exports into the domestic market (as a growing percentage of US total imports).

As reported in The Economist magazine, in the first ten months of 2009, the US imported 15 percent less from China over the same period of 2008, but its imports from the rest of the world fell by 33 percent, lifting China’s market share to a record 19 percent.

Therefore, although the US trade deficit with China narrowed, China now accounts for almost half of the US total deficit, up from less than one-third in 2008.

The China expansion has made Obama’s task in curbing the unemployment rate even harder (a lower unemployment rate would boost retail and housing activities).

We should also remain vigilant on China’s role in supporting global economic recovery due to its large economic size, which should soon overtake the Japanese economy as the world’s second largest economy.

Last week, the world was nervous of the move from China’s government to rein in credit growth to dampen inflationary pressure caused by strong GDP growth that accelerated to the fastest pace since 2007. China’s move could create a slowdown in economic growth and lower commodity prices, which would be negative for Indonesia.

Closer to home, we still face infrastructure problems (hard and soft) and rising tension on the political front. Until major infrastructure-related projects are implemented, it is difficult for Indonesia to raise its competitiveness in the region in our view. This is particularly true given the implementation of the ASEAN-China Free Trade Agreement (ACFTA).

Against this backdrop, it is worth pointing out that Singapore, Thailand, Korea and Malaysia have all posted stunning y-y quarterly economic growth. For example, Thailand’s contraction in 3Q09 had narrowed to 2.8 percent, much better than the negative 7.1 percent in 1Q09. Similar figures also applied for the other three countries.

Thus, while Indonesia has received better a credit rating and has experienced resilient economic growth, 2010 remains full of potential economic pitfalls which require extreme vigilance. We should be mindful of Fitch’s warning that in spite of Indonesia’s past economic achievements, the country remains vulnerable to sudden capital outflows.

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