WATCH ON THE EFFECT OF ECONOMIC SLOWDOWN IN CHINA

Slowdown of economic growth in China in quarter II-2013 from 7.7% against the previous 7.5% would definitely generate impact on Indonesia, as China was the biggest buyer of Indonesian products. So far the impact might not be visible, but soon or late it would, especially in sales off commodities.

               

The Government of RI must keep watch on the economic development in China, as China was one of Indonesia’s main trading counterparts. Data of the Central Board of Statistics [BPS] had it that Indonesia’s export of non oil-gas in May 2013 scored highest record at 1.72 billion, followed by Japan USD 1.44 billion USD and India USD 1.32 billion USD. Contribution of the three countries to Indonesia’s export in May 2013 came to 33.94%.

               

Over the period to January to May 2013 China was Indonesia main export destination country with export amounting to USD 8,556.1 million or 13.63%, followed by Japan 10.90% and the USA 9.97%.non oil-gas products included among others mineral fuel, fat and animal/vegetable oil, machines and electrical equipments, rubber and rubber products, machineries and mechanical instruments, metal ore and dust etc. the highest export increase in May 2013 against April 2013 was in fat and animal/vegetable oil.

               

The Government may be optimistic that Indonesian commodities exported to China were strongly competitiveness so price would remain high: but if demand dropped, price would drop accordingly. It was advisable for the Indonesia Government to constantly monitor and observer global countries like China, Japan, the USA and Uni Europe

               

The Asia Development Bank [ADB] rated that developing countries were stumbling head over heels in their economic growth, so it was necessary to revise their economic growth target to 6.3% for this year and 6.4% for 2014. The trend had happened in China and some countries were posting economic slowdown. By April prediction, growth of developing countries in Asia was 6.6% this year and 7.7% next year.

               

Meanwhile the Asian Development Outlook [ADO] for China this year was 7.7% and next year 7.5%. Southeast Asian countries had their GDP axed to become 5.2% against the previous 5.4% based on the assumption of last April but today again changed to 5.5% and next year 5.7%. Developing countries as Asia were having difficult in Semester 1 this year although the prospect was slightly better than developing nations.

               

In tune with ADB, the in international Monetary Fund [IMF] estimated global economic growth would slowdown to 3.1% by 2013 against the initial projection of around 3.3%. China’s economic growth would be predicted at 7.8%. The figure was average estimate of a number of economists compiled by Bloomberg News, but still below the three monthly percentage figure of 7.7%.

               

IMF noted that China’s economy in quarter two slowed down due to weakened factory output and had the risk of posting further weakening amidst Government’s effort to control credit expansion to avoid threat of financial crisis.

               

The Tax and Customs Dept reported that export dropped by 3.1% to the level of 174.32 billion while import inched down by 0.7% to become USD 147.19 billion USD. Meanwhile 20 economist surveyed by Dow Jones News Wires estimated increase of 3.3% for export and 5.5% for import.

               

One thing was sure that today China’s overseas trading was having serious problem. Low external demand was the main cause, followed by increased export price in foreign currency, labor cost, and trading environment worsened due to heightening trade dispute against Uni Europe.

               

In spite of downgrading of Asia’s economy, China’s economic growth was still the key factor to keep Asia’s economy from collapsing. ADO also described that the key of economic growth in China was domestic consumption, because laborers’ wages kept increasing while consumers’ trust remained high and sales of retail were just as high.

               

Beside China’s slow economic growth, demand also slumped from industrial states; and such burdened East Asian countries like Hong Kong and Taiwan. India’s economy was also troubled by low supply, sluggish investment and weakened economy.

               

Low inflation in India gave more room for monetary easing which could increase consumption and investment, but the paradox of it was slow GDP growth would control inflation on the demand side all over the country.

               

ADB projected inflation in Asia state at 3.3% on the average against the initial assumption of 4%. By next year inflation was projected to descend to 3.7% against the previous estimate of 4.2%. This downturn would have its effect on commodity price and economic slowdown. In general inflation pressures in developing countries in Asia was notably not to serve.

               

Back to China economic growth in this country slowed down in quarter two in line with low production, slow credit expansion and to minimize the risk of crisis in Finance. China’s GDP rose by 7.5% over the period of April-June against previous year especially quarter I around 7.7%.

               

Meanwhile growth of industry slowed down ever since the global financial crisis, while profit from retail sales was more than expected. Now many analysts and economists recommended the Government of China to exercise economic reformation. To exact, the Government of China must focus effort on economic restructurization and maintain sustainable.

               

As reported, production output of industry in China increased by 8.9% in June by early year. Retail sales in June increased by 13.3% initially after increasing by 12.9% in May. Growth of production posted slowest growth since the global financial crisis while retail sales esceeded expectation.

               

So far, China’s Primer Minister Li Keqiang refused to increase stimulus amidst his struggle with the industrial sector which posted over capacity and to control blowing up of credit. On the other hand, China’s Finance Minister Lou Jiwei said 6.5% economic growth would pose as no problem to China.

               

In line with China’s economic slowdown, some of the world’s industry from knife producer in Germany to plam plantation in Sumatra must come to terms with a changing world economic map. Many industries which used to be advantaged by high economic growth in China, now had to face problems. Other producers aiming at 1.3 billion Chinese consumers, were more fortunate. China’s economy was having anti-climax after reaching its peak in 2007 last; however lately the slowdown seemed to worsen.

               

The projected 7.5% growth this year would be recorded as the slowest since 1990. Some economists even suspected China would grow even slower than said level. Indonesia exporters to CPO and coal felt the impact of economic slowdown in China was felt the form decreasing demand and failing price.

               

The economy slowdown in China was felt in Indonesia by producers of commodity products, the sector which was most advantaged by economic booming in China. Study by Standard & Poor’s on more than 90 biggest companies in China showed that those companies would axe their total spending for the first tine in 10 years.

               

Investment in factories, production chain, metal melting facilities and telecommunication network tend to create demand for raw materials imported from China. Looks like this soaring demand for natural resources was coming to an end. The heartening side of it was that China was predicted to contribute 13% to the world’s total economy this year, higher against the 5% in 2006. So, in spite of slowed growth, the China effect on the worlds was still significant. China’s trading surplus which posted downturn of 14% in June 2013 posed as warning on this second economic superpower of the world. The condition was fearful as other economical activities were also dragged down.

               

The economic development in China posed as challenge to Asean states including Indonesia to revitalize economic growth. The direct impact was that demand from China would decline. Meanwhile the direct indirect impact was that demand from China’s trading partner countries as related to Indonesia’s export also affected.

               

The solution was to diversify products and export destination countries to manage trade balance to keep it form deficit while still maintaining greater domestic market potentials. (SS) 

Business News - July 24,2013                   

THE OUTLOOK OF INDONESIA'S BALANCE OF PAYMENT

There was an analyst who concluded that the recent pressure on Rupiah was on account of Indonesia’s bad balance of payment. There were also some who criticized bad balance of payment. Perhaps those analyzes were right, because low payment performance created a negative impression among investors so they tend to avoid using Rupiah as reference urrency.

               

As footnote, balance of payment was a record of all international economic transaction including trading, finance and monetary between one country and other over a certain period usually one year often referred to as inflow and outflow of payment.

               

Balance of payment was essentially a system of accountancy which evaluated financial performance of a nation. Recording was exercised by way of double-entry book keeping system, in which one transaction was recorded as credit and other as debit. The transactions recorded as “credit” would be include into forex reserves. Forex entry came from transactions foreign currency, which reflected national buying power.

               

Meanwhile transactions recorded as debit was outflow of forex. The forex outflow were expenditures paid in foreign currency, which might represent downturn of external purchasing power or power of forex expenditure capacity.

               

Every credit entry [marked “positive”] must be balanced with debt entry [marked “negative]. The two entries were combined to produce data resources and use of national capital [for example how to obtain fund/purchasing power and how to use them]. So total credit and debit of balance of payment of a certain country would be the same by aggregate, but in terms of components of the balance of payment there was there was probably surplus or deficit.

               

Meanwhile Balance of Trade was a terms used to describe the difference of monetary value between import and export. Trade Balance was commonly referred to as netto export. If trade balance were positive it means the country was posting export more than import, normally referred to as trade surplus. On the other hand if the trade balance showed negative condition it means the value of import exceeded import, often referred to as trade deficit. Naturally, a condition of surplus was more expected by any nation.

               

Trade surplus means that export exceeded import. The condition had its positive impact on the surplus country, but a condition of imbalance could trigger trade tension between deficit troubled country and surplus fortunate country, the way it happened with the USA and China.

               

USA-China bilateral trading had created deficit for the USA since 1960. Finally this trading deficit had forced America to stop gold benchmarking in 1971. Since 1997 America’s trade deficit had chalked up exponential increase. The last time the USA posted trade surplus was in 1975.

               

America’s trade deficit was happening against China. In April, trade deficit in the USA against China was posted at USD 19.3 billion or nearly 50% of total US deficit in trading. Therefore China’s bargaining position against the USA was now stronger as they were enjoying surplus. It seemed reasonable if America insisted China to strengthen their currency, Yuan, [Renmimbi] so US deficit could be downpressed.

               

So as far as Indonesia’s trade balance was in deficit, it was for Rupiah to strengthen firmly. This was confirmed by the Government’s statement that export performance which never increased made the Government pessimistic there would be any trade surplus even till end of year.

               

The Board of Fiscal Policy [BKF] of the Ministry of Finance estimated surplus would only be after 2014. Surplus of trade balance was determined by export. If export was hindrance by falling commodity the way it was happening now, deficit of trade balance would continue to happen.

               

To illustrate, Indonesia’s biggest export was commodities like CPO and coal. As global economy changed for the better, normally demand for the two commodities would increase.

               

On the import side, it was expected that increase price of subsidized oil would downsize import of oil; because so far one of the main cause of deficit was oil import, but still it depended on domestic demand. As flashback: demand for oil rose drastically at home with increased number of private vehicles.

               

Economist circles still believed Indonesia’s trade balance would score surplus although still depending on global or domestic economy. In short it was not just the export factor but also import of capital goods lessened to a great extend might cause trade balance to score surplus. As known, it was most unlike that global economy would recover soonest so Indonesia’s economy would recover by 2014.

               

Still there were those who believed that trade balance would book surplus by 2014. The reason was that oil price increase by 33% would reduce fuel consumption by 5%. In that case need for imported oil would be down accordingly.

               

Today there was already signs of global economic recovery next year. For example Japan was predicted to be an Asian state quickly recovering after the Abenomics strategy was put in effect. Economic recovery in Japan would uplift Indonesia’s export volume by next year.

               

The conclusion was that till end of this year Indonesia’s trade performance would still be weak, but there was hope for recovery next year in line with economic recovery in Indonesia’s trading counterparts like the USA, South Korea, China, Thailand and Japan. In case of Europe, it was expected that Indonesia’s export to England, France, Holland and Germany could increase positively whereby to mend Indonesia’s poor trade balance. (SS) 

Business News - July 24,2013   

STRATEGY VS THE FED'S MANEUVERS

This week the market’s attention would be focused on the implication of BI’s move exercise SWAP policy by July 18, 2013 last against confirmation by Chairman of the US Central Bank Ben Bernanke on confirmation of the US stimulus program.

               

It was expected that the two issues would generate positive sentiment to Rupiah. The same was with the stockmarket, since market trust would be strengthened. At least the confusion over Bernanke’s statement on May 22 last which shocked the global moneymarket could be gradually eliminated. One thing was sure the process of Rupiah and IHSG strengthening would run nice and slow.               

The Moneymarket

               

Apparently Rupiah exchange rate value against USD at the interbank spot market in Jakarta of Thursday [18/7] was closed to weaken by 15 points [0.14%] to the point of Rp10,055. The condition still continued during transaction on Friday [19/7] at the level of Rp10,165 per USD which means weakening of 1.04% against closing the day before. Weakening was not only happening to Rupiah but also to most of the currencies in the Asia Pacific region. The USD was seen as constantly strengthening lately. Pursuant to that matter, BI was trying to make intervention through SWAP.

               

Still Rupiah value against USD was predicted to move flat and predictably tend to slump due to lack of positive catalyst, now settled at Rp10,050 – Rp10,100 per USD during closing session last weekend [19/7]. Rupiah was still under pressure by the data released lately was still varied. The market saw positive unemployment data which was predicted to drop from 360 thousand to 344 thousand, but Philadelphia manufacturing index was still weakening from 12.5 to 8.5.

               

Besides, testimony of the Governor of the Fed before the US Banking Committee did not generate to different effect from what he said before the US Congress on May 22 last. So sentiment wise the USD was quite varied. The only thing was that Rupiah tend to be under pressure because it lacked positive sentiment. Apparently investors still feared the stimulus reduction by the US Central Bank. Somehow Rupiah would not nose-dive steeply, since sentiment from the Euro zone was quote comforting as the Greek Parliament approved austerity plan by dismissing 25 thousand Government servants all over the country.

               

On the other hand, the market was still worried about the political condition in Portugal after parliamentary voting for parliamentary trust for the Portuguese Prime Minister was predicted by the market to pass. Now three dominating parties in Parliament were lobbying to find the best solution to overcome political crisis.

               

Only trouble was, there was hardly any positive sentiment at home. The market kept worrying about Indonesia economic slowdown as well as forex reserves which had shrunk to USD 98 billion which means enough for 5 months of import. Therefore if the forex reserves were constantly used for market intervention, it would be drained to a dangerous level. Moreover, demand for USD normally increased toward Lebaran. Besides, the market did not expect too much market intervention by BI since forex reserves was already below the psychological level of USD 100 billion.

               

One thing was sure that BI’ policy to increase BI rate by 75 basic points in the past 2 months did not generate nay positive impact as indicated by national economy which was still in slowdown. Moreover the Government had increased price of oil which led of fiscal tightening so it was feared it would hold back economic growth.

               

At the same time was mounting anxiety of continued economic slowdown in China which was one of the factors of Rupiah weakening. Some analysts suspected that Rupiah slum to below USD 10,000 was deliberately planned by BI because BI ha aggressively increased BI rate. The conclusion was that Rupiah was seeking for new equilibrium against USD in the range of Rp9,900 Rp10,000.- per USD.

               

For the short term it was not easy to expect continued strengthening of Rupiah due to lack of positive sentiment from the internal and external side. Somehow increase of BI rate was expected to generate positive sentiment although not significant enough as there many other economic indicators which showed deficit.

               

Broadly speaking Rupiah, just like other Asian currencies was in the negative zone due to economic slowdown in China. As known, economic slowdown in China could influence Indonesia trade balance and it makes sense because today China was Indonesia’s greatest trading counterpart.

               

It seemed ridiculous how a certain BI official tried to comport the market by saying there was nothing to worry about Rupiah exchange rate value because Rupiah exchange rate value today still represented a healthy economic condition where import and export were well balanced. But bluntly the Central Board of Statistics [BPS] announced that Indonesia’s trade balance last May again sank in deficit of USD 590.4 million.

               

Hence by accumulation, trade balance posted deficit of USD 2.53 billion. Deficit was due to import in May, amounting to USD 16.66 billion, way above export which was posted at USD 16.07 billion.

               

It was possible that the Government’s plan to sell Sukuk State’s Promissory Notes [SBSN] with indicative target of Rp1.5 trillion through auction on July 23, 2013 to cover up some of the financing targets in APBN 2013 could help to prevent further slump of Rupiah. It was reported there were 5 SBSN series in auction, i.e. SPNS2401-24014 [new releases] with return by discount, and assets of state owned goods in the form of land and building. This SBSN would be due by January 24, 2014.

               

Beside the above, Seri PBS001 [relase] with return level of 4.45% and to be due on February 15, 2018. Seri PBS004 [relase] with return level of 6.10% and due on January 15, 2037. Furthermore Seri PBS005 [relase] with return level of 6.75% and to be due on April 15 2043. Series PBS 001Q [new relase] with return level 4.45% would be due on July 15, 2015.

               

The assets used as references for the issuance of SBSN Promissory Notes were projects of the APBN State Budget 2013. Release of the SBSN would be exercised by way of auction run by BI as auction agency. The auction would be open, using the method of diverse prices. In principle all parties, individuals or institutions, could make an offering. However in the execution, offering should be made through auction participant who have had approval from the Ministry of Finance.

               

Besides, the Government also planned to issue a global Sukuk in quarter 3 of this year to cover up deficit in APBN State Budget with benchmark size series of USD 1 billion, but the due date of the bond had not been decided yet. Previously the Government had released bonds in USD denomination worth USD 1 billion in early July. This bond of 10 years tenure brought highest yields since 2010, i.e. 5.45%. In April 2013 the Government had also released Dollar bonds worth USD 3 billion.

               

This year, the Government allocated issuance of forex-based SBN at 18% of the total SBN release plan of gross SBN this year worth Rp332 trillion. Perhaps this news could breeze out hope in the market which would contribute to Rupiah strengthening.

               

Unfortunately in the latest projection the International Monetary Fund predicted current account deficit would continue to prevail in Indonesia for the next 5 years. This made investors slightly doubtful about Rupiah prospect for the mid-term, considering that the position of current account was one of the fundamental criteria which was most important in the valuation of a currency.

               

BI also rated that global economy still tend to slowdown and was full of uncertainty. Economic growth in the USA was predicted not to be as strong as expected, in spite of improvement in production and consumption. Nor was Europe showing any sign of progress.

               

Meanwhile economic growth in China and India was posted as less than early projection, although still notably high. The speculation around the Fed reducing stimulus also affected global economic condition, resulting in capital reversal in the emerging markets.

               

Besides, export performance was still under pressure due to low demand and lowered world’s commodity price with import including oil-gas still going up. Meanwhile forex reserves had always been used up and fell to the level of USD 98.1 or equal to 5.4 months of import payment of Government’s overseas debt.

               

Therefore it was indeed for BI to ease Rupiah restlessness when they, on July 18 last ran the pr imer Fx Swap auction which was responded positively by the market. BI offered targeted SF Swap of USD 500 million auctions of 1, 3, and 6 month tenure. Total offer that entered came to USD 1,240 million USD and way overscribed. Of the total offer the Fx Swap being won was posted at USD 600 million Such indicated how strong the market trust was in liquidity in the domestic market, especially forex liquidity. The Fx Swap auction was one of the policy mix executed by BI with objectives. Firstly it was part of BI’s monetary operations for forex and Rupiah validity in the market.

               

Secondly as hedging instrument for investors or businesspeople against the risk of Rupiah fluctuation in case of liquidity need. Thirdly as an effort of BI to enhance in-depth market intervention through efficient and transparent pricing, and diversification of instrument in managing their liquidity.

               

BI was certain that the policy mix that they adopted would strengthen Rupiah stability, control inflation, and stabilize monetary system as a whole. Increase of BI rate or deposit facility which had been run was believed to mitigate temporary effect of oil price increase on inflation so inflation could be expected subside by September 2013.

               

Rupiah exchange rate value was rated to portray market condition and fundamental economy. Similarly adjustments of SBN yield at the primary and secondary market were rated as high enough. The extremely attractive yield and strengthening of market trust was a momentum for investors to buy monetary asset at the domestic market.

               

To anticipate increasing inflow of portopolio investment to Indonesia, in the future BI planned to run SWAP auction regularly. The objective was that FXSwap could be used as hedging instrument for investors as well as to deepen their actions into the moneymarket in Indonesia.it seemed reasonable if Rupiah value would move in the range of Rp9,950 – Rp10,050 per USD with tendency to strengthen moderately.

               

The Capital Market

               

Just like Rupiah, last week [19/7] IHSG was predicted to strengthen moderately in the range of 4,700 – 4,750. If this range could be arrived at, it would have the chance to continue over the week in the range of 4,725 – 4,775. As with last week’s closing session it was still influenced by lack of sentiment as the market was still watching emitent’s performance.

               

Previously during session on Thursday [18/7] IHSG was closed to strengthen by 41.43 points [0.89%] to the position of 4,720.435. Trade volume dropped but total transaction rose. Foreign investors booked net sell with downturn of buying transaction and upturn in sales transaction. Domestic investors booked net buy. Strengthening of IHSG was driven by the property and financial sectors where index was posted to increase by 1.53% and 0.89% respectively. Increase of IHSG was supported by strengthened regional stockmarket following positive sentiment from the USA.

               

Positive sentiment emerged as the Governor of the Fed, Ben Bernanke, state that stimulus reduction would not be set, timing wise or magnitude wise. The Fed would be flexible so stimulus could be reduced promptly extended according to the data which represented economic condition. On the other hand increase of IHSG was still limited by the Rupiah factor and yield of State Promissory Notes [SUN]. In short, there was still lack of sentiment and the market was still waiting for report of the emitent’s performance of quarter II-2013.

                 

As footnote, the US stockmarket strengthened during session on Thursday [18/7] after weekly jobless claim reported downturn. Weekly jobless claim dropped by 24,000 to the level of 334,000, below the previous revised data of 358,000. In addition to that survey by the Philadephia Central Bank on manufacturing showed increase to 19.87 in July against 12.5 in June, which was the highest reflected level of optimism in the manufacturing sector.

               

Meanwhile financial report of the second quarter was felt as disappointing, after Google Inc and Microsoft Corp reported company’s income and profit below expectation. Moody’s also increased outlook of US economy from negative to stable and rated that although economy was moving at moderate level, the US economy was progressing faster than other countries. Moody’s also again gave AAA rating to US Souverign debt.

               

On the other hand, the Europe stockmarket was closed to strengthen on Thursday session, being uplifted by US economic data. Manufacturing data was also better perceived by the market as the data was positive portrait of US economy. However, the data was not regarded as a signal of monetary stimulus change by the Fed such as non farm payroll of the US Ministry of Labor.

               

Many analysts and economists recommended that the stimulus package be maintained considering that a number of targets were not met, such as unemployment and economic growth. The stimulus could bring psychological impact on the market and bring positive affect on American investors as well as marketplayers in other parts of the world.

               

By statistics, the most influential stockmarket were the stockmarket of the USA and Hong Kong. If the US stockmarket were positive, the impact on Asian stockmarket would also be positive, especially that of Hong Kong, China and Japan. If Asia’s stockmarket was positive, shares market in Indonesia would also be positively influenced in the same way.

               

As footnote, the low global economic growth had its great impact on natural resources [SDA] business. This also resulted in lowered demand fro credit, so banks had to pipeline corporate credit to other sector. Today, to pipeline credit to the SDA sector was rated as inappropriate. This sector held the risk of default as commodity price continued to drop as domestic supply was high but overseas demand was low.

               

To anticipate lessening of credit to SDA, some banks shifted their focus of financing on corporate of the consumer goods sector, and agricultural sector. One thing was sure demand for corporate credit would grow normally although regulators increased BI rate. Understandable because people’s purchasing power was high so companies could rely on a vast market opportunity. Corporate who supply domestic need could still grow normally in the restless economic condition.               

               

The only thing was that the property sector would be under pressure pursuant to BI’s new policy for mortgage [KPR] and credit for apartment [KPA] with LTV ratio gradually bigger. Word was out that the new regulation would be released and to be effective per September 1, 2013 soon, naturally this new regulation would reduce property demand especially KPR and KPA for type 70 and up or type 70 down. (SS)       

Business News - July 24,2013