How real is the economic recovery?

Winarno Zain ,  Jakarta   |  Fri, 05/08/2009 1:21 PM  |  Opinion

While the signs are still faint on the horizon, without doubt they are becoming clearer. While analysts all over the world are not convinced that the global recession has reached the bottom, or that a recovery is around the corner, economic data that has been coming out of the US, Germany, Japan, Korea and China shows an unmistakable pattern that much awaited global economic recovery may be with us sooner rather than later.

In the US, consumer spending was up 2.2 percent on an annualized basis, and sales of houses, cars and durables have broadly stabilized. The US economy contracted by 6 percent in first quarter, but according to the Fed, "the pace of contraction appears to be somewhat slower, while household spending has been stabilizing".

In Germany and Japan, industrial output has improved for the first time in 6 months. In South Korea, exports are still falling, but the pace of the decline was less than the forecasts. China's GDP grew 6 percent in first quarter of 2009 after it stalled in the fourth quarter of 2008; its industrial production rose to 8 percent from 3 percent previously. Retail sales grew 16 percent, while fixed investment ( meaning infrastructure) grew by 30 percent, a sign that China's fiscal stimulus , the biggest amount fiscal stimulus of any country in the world, has started working.

If you don't really believe the trends those countries are reporting, then what is happening in Indonesia may give you another surprise. Figures released by the Central Bureau of Statistics (BPS) last week show that exports, after declining for the last eight months, rebounded strongly in March 2009. Exports grew 20 percent to US$ 8.5 billion from previous month, although they were down 28 percent from March the previous year. This growth came largely from increased mining and edible fats exports.

However, Indonesia's exports of manufactured products such as textiles and electronics, and other labor intensive industries has still declined. This means the shedding of workers by exporting industries continues. However, there have been some encouraging signs that exports could be less severely affected by the economic slump in developed countries. Export figures in March showed that two-thirds of the growth came from exports to non-traditional markets. Exports to countries other than the traditional 12 countries of destination have grown rapidly.

In the first quarter of this year, exports to non-traditional export destinations accounted for 40 percent of the total exports, up from 35 percent in first quarter last year. Shrinking global demand in developed countries has forced Indonesian exporters to diversify their marketing, and their hard work has shown encouraging results. If this trend continues, the impact of the global recession will be less severe on Indonesian exports than anticipated.

Another positive sign came from the financial market when Indonesian banks surprisingly showed growth in earnings in the first quarter of this year, in the midst of a slowing economy. Unlike banks in other countries, Indonesia's banks remain strong in terms of capital and loan-to-deposit ratios.

As confidence returns to world capital markets, the Indonesian stock market continues its rally, with the index surpassing the 1700 mark last week, the highest since the crisis hit six months ago. The strong influx of overseas funds into the capital market has boosted the value of the rupiah to below Rp 10,700 to the US dollar.

Even in the manufacturing sector, the sector that has received the hardest blow in the crisis, several industries, such as food and drinks and consumer goods, have managed to post positive growth. Sales of motor vehicles in the first quarter dropped nearly 30 percent year-on-year, but have crept up from January onward, albeit at low levels, indicating that we may have already hit the bottom.

Nevertheless, despite some glimmering signs of recovery, the risk that the global financial crisis will deepen - and be prolonged - still remain. In a recent statement that brought a chill to the financial market, the IMF said that loan losses suffered by financial institutions all over the world would reach the staggering figure of $4 trillion. This is more than two-and-a-half times more than its previous estimates in January.

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Battle scars from the elections will linger for some time, and if the new government fails to form a decisive majority it will be difficult for them to govern.

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This revelation indicates that the devastation suffered by the financial system is more severe than was previously thought. At the same time, banks have to adjust to a new playing field with new rules of the game. Regulatory frameworks and government supervision on banks all over the world will become more stringent, as a reaction to the massive disaster.

As in previous bank crises, the overreaction of authorities will likely to result in too many constraints on banks. Banks themselves have to overhaul their loans approval mechanisms and risk management. These processes will take time, and it could be several years before loan growth is back to normal levels.

In the mean time, massive deleveraging will still have to be carried out by financial institutions as they recapitalize and improve their corporate governance. And as long as financial institutions remain under-capitalized and dependent on government bailouts, the flow of lending will remain at a trickle.

This is also a situation faced by Indonesian banks to some extent. Since October, lending growth has been weak and erratic, and if this situation persists it will be hard for them to support economic growth.

The success of the Rp 72 trillion fiscal stimulus program is becoming uncertain, as political haggling among political leaders will drag on until later in the year when the new president forms a new cabinet. And even if the package is successful, the impact of the Rp 72 trillion stimulus package will only be a ripple in the Rp 5,000 trillion Indonesian economy.

Another risk for the Indonesian economy stems from politics. After the elections, haggling among presidential hopefuls of various political parties has showed how deep the enmity between them is.

As each presidential candidate fights hard to win, it is possible that bitter campaigns will ensue, and this could be carried over into the new House, making it hard for the new government to mount effective economic policies to stimulate growth.

Battle scars from the elections will linger for some time among House members and other political establishments, and if the new government fails to form a decisive majority it will be difficult for them to govern.

The writer is an economic analyst.

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