Asean should be mindful of Indonesia's economic woes
Simon Tay says reforms aimed at closer integration can allay fears
Some fear Indonesia is heading for a crisis. Second-quarter growth dropped to below 6 per cent. Trade and current account deficits widened markedly. The rupiah fell some 10 per cent last month to its lowest level against the US dollar in four years.
Investor confidence has been shaken. It is estimated that US$4 billion in capital has recently flowed out. If there is a crisis, the entire region should be concerned. The Association of Southeast Asian Nations is building its Economic Community by 2015 and Indonesia accounts for some 40 per cent of the region's economy.
Investors see the region as an interconnected whole, and past financial crises show how quickly and indiscriminately contagion can spread. Indonesia's Asean neighbours should watch its economic woes carefully, as they have ridden the same growth wave in the past.
Some in Jarkata seem to be in denial, pointing to external factors as the sole cause
The good news is that fears are overstated. Indonesia's corporate balance sheets seem healthy. Flexible exchange rates can absorb shocks. Even as the rupiah drifts downwards, there is no need to try to prop up the currency. However, there are no quick and easy solutions to bring back the boom times.
Normally, a weaker currency would help push up exports - but not in this case. Indonesia's main exports - such as coal and palm oil - face weak demand and low prices as China's growth has slowed and the resource boom has ended. Indonesia's developing industrial sector cannot generate big foreign-exchange receipts.
Even as steps are taken to staunch the financial problems, expect higher inflation, interest rate hikes and slower growth. Looking ahead, it will be tricky to find the right balance in raising interest rates to control inflation while avoiding further slowdowns in growth.
Recent appointments of top policymakers do offer hope. Finance minister Chatib Basri and Bank of Indonesia governor Agus Martowardojo are both highly rated and policymaking has improved since they were appointed. Jakarta has cut fuel subsidies and raised interest rates to tackle inflation. The 2014 budget aims to reduce the deficit.
