Update COVID-19 in Indonesia: 130,718 confirmed infections, 5,903 deaths (12 August 2020)
12 August 2020 (closed)
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In a meeting with Commission XI of Indonesia’s House of Representatives (DPR), Indonesian Finance Minister Bambang Brodjonegoro stated that the economy of Indonesia is currently facing four global risks. These four risks are low international commodity prices, China’s slowing economic expansion, the Greek debt crisis in the Eurozone and, lastly, further monetary tightening to be conducted by the US Federal Reserve. These issues are not new and have already contributed to slowing economic growth in Indonesia.
Low Commodity Prices
Being an important commodity producer and exporter (especially palm oil, coal, rubber, cocoa and nickel), Indonesia was blessed by the commodity boom that emerged in the 2000s. However, in the late 2000s concerns about the world recession and credit crunch effectively ended the commodities boom and triggered falling prices. There was a slight recovery visible in 2011 but starting from 2012 most commodity prices started to decline again. Finance Minister Brodjonegoro said that there are no signs of a rebound and therefore Indonesia’s economy will have to live with diminished revenues from the commodity sectors.
Regarding metals, the government has already made efforts to reduce Indonesia’s dependence on volatile raw ore prices through the 2009 Mining Law. One new policy, which was implemented in January 2014, is the ban on exports of mineral ores. Instead Indonesian miners have to process their materials (add value) domestically before export is allowed.
Slowing Economic Growth China
Secondly, Indonesia is impacted by slowing economic growth in China as the world’s second-largest economy is a major trading partner of Indonesia. Hence, slowing demand from China will negatively affect Indonesia’s export performance (as such China’s slowing economic growth is also a key reason for falling commodity prices mentioned above). Official data from China show that the country grew 7 percent (y/y) in Q1-2015, which was in line with expectation but slowing from 7.3 percent in the preceding quarter. In 2014 its economy expanded 7.4 percent (y/y), the lowest economic growth level in 24 years, primarily caused by the cooling property market, collapsing credit, and spiking bad loans. This year the country’s economic growth may touch a low of 6.8 percent (y/y).
Greek Debt Crisis
Although the Greek debt crisis in the Eurozone may not have a direct relationship with the Indonesian economy, it surely impacts on global financial markets and thus affects Indonesia. A Greek exit from the euro (Grexit) is a major concern for market participants as it would jeopardize the stability of the euro and the whole Eurozone’s financial system. In recent weeks concerns have heightened as speculation emerged that Greece may miss a payment to the International Monetary Fund (IMF) on 5 June 2015 if it fails to receive further bailout funds from its creditors (who demand structural reforms to the Greek economy).
Monetary Tightening USA
After having scrapped its bond-buying program (quantitative easing) last year, the Federal Reserve is now focused on determining the timing to raise US interest rates, a decision that is data-dependent (primarily US inflation and employment data). In recent months markets have been speculating about the timing hence triggering severe volatility on global financial markets. Given that US economic data generally show continued economic recovery in the USA, analysts expect to see a US interest rate hike in September 2015. Moreover, Federal Reserve Chairwoman Janet Yellen emphasized that the Federal Reserve is eager to raise rates before the year-end (provided that US economic data continue to improve).
Monetary tightening in the USA causes capital outflows from emerging markets as capital flows back from these economies which were lucrative investment targets - albeit riskier - when the US dollar was cheap and US interest rates low.
Indonesia's Quarterly GDP Growth 2009–2015 (annual % change):
|Year|| Quarter I
||Quarter II||Quarter III||Quarter IV|
Source: Statistics Indonesia (BPS)