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Record-high manufacturing index in July alarms government
The manufacturing sector continued to improve in July, alarming the government, which has been trying to put the brakes on the countryâs too-fast economic growth
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The manufacturing sector continued to improve in July, alarming the government, which has been trying to put the brakes on the country's too-fast economic growth.
Indonesia saw its purchasing manager index (PMI), a leading indicator of the economic health of the manufacturing sector, hold at a record high of 52.7 in July, the same level as the previous month, according to a manufacturing survey conducted by HSBC Bank released on Friday.
The index has been on an upward trajectory for three consecutive months since March.
PMI surveys private industries over major indicators, namely output, new orders, employment and stock of goods purchased. Any score standing above 50 marks an improvement in the sector.
However, while the robust PMI level might signal a pick-up in economic growth in the upcoming months, the index's upward trajectory might lead to rising imports that might disrupt economic stability, Finance Minister Chatib Basri has warned.
'I noticed that we are already in a position where [the government] must be careful over the pressure in the current account due to the strong growth of imports,' the minister commented on Friday when asked about the latest PMI report.
The Finance Ministry has performed various fiscal tightening moves ' from the introduction of new import taxes to the limitation of state spending ' to put the brakes on Indonesia's too-fast economic growth, which analysts consider unsustainable and posing risks of overheating.
Signs of economic overheating were particularly reflected by the fact that Indonesia's current-account deficit throughout 2013 topped a historic-high level of US$29 billion, equivalent to 3.3 percent of the gross domestic product (GDP).
Chatib targeted the current-account deficit, the major worry among foreign investors to Indonesia last year, to be pushed down to below $26 billion throughout this year.
An economic research team from HSBC Bank has described that a pick-up in domestic demand in PMI levels might be 'not the best news', given the import-driven pressures on Indonesia's external balance health.
'We remain wary over these signs of robust domestic activity, given the ongoing pressures on Indonesia's current-account and budget deficits. Input and output prices were also higher in the month, adding to our concerns,' explained Lim Su Sian, an economist with HSBC Bank.
'Given the cracks that are already showing in the twin deficits, however, the new president may have to act more rapidly, and more aggressively, on subsidy reform than currently planned,' she added.
Nevertheless, other Asian economies also saw a pick-up in PMI last month in a signal that regional economic recovery is progressing.
India's headline PMI rose to a 17-month high of 53 in July, from 51.5 a month earlier. China's index rose to 52.0 from 50.7 in the corresponding period, while the index rose to 49.3 from 48.4 in industrial giant South Korea.
'The July PMIs for Emerging Asia show that the region's manufacturing sectors generally fared well over the past month. Encouragingly, rising new orders suggest the recovery has further to run,' Krystal Tan, an economist with UK-based research firm Capital Economics, said on Friday.
