Indonesia’s resilience
During a recent visit to Indonesia, we were struck by the economy’s resilience in
the face of the global economic downturn. That resilience seems due to good
luck, good policies, and good politics. These factors appear likely to continue in
the months ahead.
Good luck
Indonesia has characteristics that help insulate it from the global downturn: (1) it
is one of the region’s larger economies, and therefore less exposed to the plunge
in external demand; (2) its exports are diversified, both by market destination and
by product mix; and (3) the large share of primary commodities in exports
(approximately two-thirds) has benefited from China’s robust demand, and
revenues have been lifted by a recent upturn in prices.
Good policies
Sound fiscal management over the past several years has left Indonesia room to
expand its deficit to support domestic demand, with the government now aiming
for a deficit target of 2.5% of GDP in 2009. Meanwhile, Bank Indonesia (BI) has
lowered its policy rate by 225bp since December 2008, and falling inflation
provides further room for rate cuts, in our view. We’re lowering our interest rate
forecast from 7.0% to 6.5% by Q3. Rate cuts should help underpin a pickup of
credit growth in the second half of the year. Indonesia has also lined up US$5.5bn
in official contingency financing from the World Bank, ADB, Australia, and Japan.
Good politics
Following his Democrat Party’s strong showing in the National Assembly elections
on April 9, President Susilo Bambang Yudhoyono (SBY) appears set to coast to
victory for another (and final) 5-year term. An SBY victory would auger well for
policy continuity. The choice of Boediono, the highly respected academic and
non-partisan technocrat, as his running mate signals SBY’s political strength, and
in our view underscores his administration’s focus on policy over ideology.
Implication for financial markets
A further buildup in reserves, continued growth prospects, and improved global
risk appetite bode well for the outlook, and make a repeat of recent market
pressures unlikely.
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