Indonesia remains cautious over Chinese economy

(THE JAKARTA POST)Despite improvement in the domestic economy, Indonesia must remain aware of the "China effect" as that country’s volatile stock market and depreciating currency will affect Indonesia’s stock market and the rupiah due to capital outflows.

Chinese economic turbulence has caused the renminbi, traded in the Shanghai-based China Foreign Exchange Trade System, to fall by more than 1.5 percent against the dollar in the past week, the largest decline since Aug. 11, 2015, when its central bank announced a foreign exchange rate reform.

Bank Indonesia Governor Agus Martowardojo said Bank Indonesia had been watching developments in the Chinese economy and its impacts on Indonesia, given China’s position as one of Indonesia’s main trading partners.

According to him, further depreciation of renminbi amid a downward trend in commodity prices, and global politics would have an impact on other economies, including Indonesia.

“Developments in China and the commodities prices as well as geopolitics can prompt [rupiah] depreciation due to capital outflows. We need to manage [the situation] well,” Agus told journalists in Jakarta on Monday night.

In general, he continued, Indonesia’s economy had improved due to a narrower current account deficit (CAD) and benign inflation. The market, Agus claimed, was responding positively to the government’s measures and optimism.

Indonesia’s CAD narrowed to US$17.5 billion (Rp 243.25 trillion) in 2015, a 35 percent improvement compared to the 2014 deficit of $27 billion. One of the drivers was the narrower deficit in the services transaction account, from $34 billion in 2014 to $31 billion in 2015.

Annual inflation has fallen to the lowest level in six years, with consumer prices last year increasing by just 3.35 percent.

“We also saw the government’s commitment to speed up infrastructure projects. Many government institutions are conducting tenders earlier. We expect later in the first quarter there will be progress on economic growth,” he said.

All these improvements, he continued, had saved Indonesia from global economic pressure that befell many countries, including China.

However, Agus stressed that Indonesia should not be complacent, as the global economy would affect the country’s economy to some extent.