Danareksa: CEOs feeling the heat from a change in economic climate

Martin Jenkins ,  Analyst   |  Thu, 06/19/2008 9:58 AM  |  Business

Given the vast amount of information on the economy coupled with the tendency of some sections of the media to blow up certain issues, it can be quite difficult to gauge how the economy is doing at the present time.

And although GDP data is released by the authorities, it takes some time to compile, meaning there is a modest time lag before the current health of the economy can be ascertained.

Fortunately, economists have some other tools at their disposal to gauge how well the economy is performing. One of the most useful is the Business Sentiment Index (BSI). To construct this index, Danareksa Research Institute (DRI) surveys more than 700 chief executives or directors from leading firms across the full spectrum of industrial sectors.

After all, the overall economy is merely the aggregate output of all individual firms. And who knows how well these firms are performing?

DRI's most recent survey covers April and May 2008. So what does the survey tell us?

The latest survey shows business sentiment is significantly weakening. In the latest survey, the BSI slumped 12.8 percent to a level of 106.0 after having fallen a hefty 11.5 percent in the previous survey (February-March 2008).

This is not surprising. The sharp deterioration in business sentiment comes at a time of significant change in the economic climate. First of all, the globally surging prices of food have had a spillover effect on Indonesia with domestic foodstuffs, such as rice and vegetables, seeing major price increases.

At the same time, imported food commodities -- such as soybeans and wheat -- are now much more expensive as well. As a result, inflation has picked up its pace. Crude oil prices are continuing to soar as well.

And this of course prompted the government to raise subsidized fuel prices by nearly 30 percent toward the end of May, giving a further jolt to inflation and ultimately putting intense pressure on the Indonesian central bank to lift rates.

It is no wonder CEOs are now more concerned over the health of the economy. This is reflected in the index measuring assessments toward current economic conditions, which has dropped 14.6 percent to just 50.98 after slumping by an astonishing 33.9 percent in the previous survey.

Only 5.9 percent of CEOs think the economy is doing well while 54.9 percent believe it is performing poorly.

In the months under survey, month-on-month inflation reached 0.57 percent and 1.41 percent in April and May respectively. The year-on-year inflation rate rose to 10.38 percent in May.

Interest rate increases now seem inevitable since it will be difficult for the government to get year-on-year inflation back to single digits before the end of the year.

These concerns were also expressed by CEOs; 63.2 percent of them now foresee higher loan rates in the six months ahead compared to just 23.2 percent in the previous survey.

And higher rates would not be good news for the economy of course. They mean higher borrowing costs and also discourage consumers from taking out loans.

In regard to corporate performance, the survey findings are also downbeat: for the first time CEOs reported a contraction in sales with the relevant index slumping 17.6 percent to 92.6, which is below the neutral level of 100. At the same time, profit growth also slowed, with the index down 4.6 percent to 93.6.

Nonetheless, it is not clear how long the impact will last. It may be the case, for example, that firms simply need some time to adjust to May's fuel price hikes before demand improves and sales pick up again.

It appears too early as well to say firms are in for tough times ahead. Ironically, for example, in the face of surging crude oil prices, car sales are booming and reportedly jumped 46 percent in April to 51,500 units from a year ago.

Interestingly, CEOs attach much of the blame of the tougher economic conditions to the government. The index measuring business confidence toward the government has now fallen to a level of just 76.40, well below the 100 neutral level.

In conclusion, it is clear the nation's top executives are very concerned about the much more challenging business environment. And individual companies do seem to have been affected by the changes in the economic climate.

But looking forward, the survey also shows CEOs remain fairly optimistic with the Expectations Index (EI) standing at 106.7, above the 100 neutral level, albeit not as optimistic as before. Things may have gotten worse, but they are not that bad. Optimism prevails.

The writer is a researcher at PT Danareksa Sekuritas

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