While much of Asia stands to suffer if festering debt problems in Europe lead to a breakup of the euro zone, some analysts say Indonesia could still cruise through a crisis with an economic expansion of more than 6% this year.
Their argument is that Indonesia, which is less dependent on exports than most of its Asian neighbors, will be relatively sheltered from potential drops in trade if there’s a shakeout in Europe — so long as it doesn’t lead to massive financial-market convulsions that destabilize the economy. Less than 3% of Indonesia’s exports are to Europe and less than 5% of its financing is from European banks.
The strength of Southeast Asia’s largest economy for now is that around 65% of its gross domestic product is from local consumers who are not likely to be as hard hit by any slowdowns in the developed world.
Still, authorities have adjusted down their growth expectations this month, with the Ministry of Finance admitting that Indonesia may not reach its target of 6.5% this year and the central bank saying that slowdowns in India and China could mean weaker growth for Indonesia.
“Exports are really showing weakness while at the same time imports are growing,” Finance Minister Agus Martowardojo said earlier this month. “But I’m certain that domestic consumption, government spending and investment will remain strong.”
A Credit Suisse report on Wednesday agreed with the argument that Indonesia would be among the least affected if the situation in Europe deteriorated. Credit-Suisse predicted that in the unlikely event of the worst-case-scenario breakup of the single currency in Europe, Indonesia’s gross domestic product would only lose about 1.2 percentage points. That’s tiny compared to places such as Singapore, Hong Kong and Taiwan, which could see their growth rates lose more than 9.0 percentage points each.
“Asia may be half a world away from the euro zone, but we can be sure that any sort of breakup of the single currency would have implications for the region,” said Robert Prior-Wandesforde a Credit-Suisse analyst, in the report.
Indonesia does have at least one potential Achilles heel: Its heavy reliance on sales of commodities, including coal, palm oil and rubber, whose prices could fall significantly in a meltdown.
“In our view, Korea and Thailand would benefit the most from policy and commodity price reactions, with Malaysia and Indonesia at the other end of the spectrum,” said Mr. Prior-Wandesforde.
While it is not as dependent on exports as many other Asian countries, Indonesia’s economy is sensitive to global commodity prices because close to 12% of its gross domestic product comes from mining, coal, tin, gold, copper and other minerals. Thermal coal prices have already slipped more than 40% from last year’s peaks so there are billions of dollars less in commodities-related cash sloshing around the archipelago, economists say, which will at least slow consumption some.
“Falling commodity prices will hurt exports,” said Fauzi Ichsan, senior economist at Standard Chartered Bank in Jakarta. “It will effect consumer spending in the commodity (producing) regions but I don’t think it will affect consumption on the (main island of) Java.”