By Anthony Harrington
By the standards of EU markets, the Indonesian economy - despite hitting a few speed bumps lately and thus losing considerable momentum - still has reasonable GDP growth. But Asian economies generally were given a sharp wake-up call by the way their fortunes, and their currencies, nosedived after May 2013 - which is when the U.S. Federal Reserve first started to talk up the possibility of quantitative easing (QE). Part of the problem is the scale of U.S. dollar-denominated debt that Asian economies have racked up during the era of ultra low interest rates in the U.S. Borrowing cheap dollars has been a wonderful stimulus for their economies, but the prospect of repayments climbing sharply in the light of the U.S. dollar strengthening, following a tapering off of QE in the U.S., is a clear negative for those economies. As a result, Asian currencies went on the slide from May and kept going south right up to the U.S. Federal Open Markets Committee press conference on September 18th, when Fed Chairman Ben Bernanke took everyone by surprise by announcing that QE would continue "until the data warranted its withdrawal" - which wasn't yet! Then Asian currencies rallied strongly, getting most, if not all the way back to where they were prior to May 2013.
The scale of the debt problem in Asian economies is not on the level of Japan's debt, or that of Ireland or the U.K., but it is severe. According to the latest report from the Asian Development Bank, Malaysia had $314 billion of debt outstanding as of 30th June, or 53.3% of GDP; Thailand has $268 billion or 44% of GDP, Indonesia has $118 billion or 23% of GDP and the Philippines has $95 billion, or 51.5% of GDP.
Writing for the East Asia Forum, Peter McCawley makes the point that some of the longer-term factors creating headwinds for the Indonesian economy have been the subject of discussion for quite some time. Policy makers have been trying to find ways of strengthening Indonesian industries that will not bring charges of protectionism or unfair government aid, but which will protect the country's key industries from shocks in the global economy, particularly with respect to food and energy security. So far, however, the government has not got much beyond relatively ill-thought through interventionist policies which have had the effect of distorting markets and pricing - always the main risk when government, however well-meaning, seeks to put its thumb on the scales and tilt things in its preferred direction.
The oil sector has seen declining output for the best part of a decade, having been a major revenue generator for government through the 1980s and 1990s. The country is now a net oil importer, putting a strain on Indonesia's balance of payments - and there is not much politicians can do to address falling output. In mining, the government has tried to push the sector towards "added value" exports, instructing mining companies to add smelters to their operation and to process minerals rather than shipping raw ore for export. The result has been a delay in exports, with a negative impact on balance of payments, while firms struggle to comply.
McCawley points out that, in good times:
"... when the international economy is strong and when international financiers are keen to invest in emerging market economies, developing countries such as Indonesia have room to take risks with experimental structural policies."
Bernanke's tapering talk squeezed that room down to zero and matters have been compounded by the slowdown in China, a major buyer of Indonesia's ore exports. Moreover, the global flight of capital from emerging markets prompted by the Fed's talk of tapering raised very real fears of a re-run of the Asian financial crisis of 1997 to 1998. At the very least, it demonstrated yet again just how fast contagion can spread.
The response from the Indonesian government to the threat was to announce a package of fiscal and monetary policy measures to alleviate pressure in the country's financial and trade markets. The central bank, Bank Indonesia, pushed interest rates up to 7% on 29 August and both the Minister of Finance, Dr. Chatib Basri, and the CB Governor, Agus Martowardojo, have a deserved reputation for sound economic policies. In 2012, Indonesia had a small positive balance of payments for the year, of $US 0.2 billion, increasing its reserves to $US 112.8 billion, equivalent to six months worth of imports and government foreign debt repayments. The rupiah depreciated by some 6.3% year on year through 2012 with relatively low volatility. The picture for 2013 is likely to be considerably bleaker when the final figures are in, and things are bound to get worse as and when the U.S. Federal Reserve once again puts tapering back on the agenda.
All in all, 2014 promises to be a difficult year for Indonesia.