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The global economy and Indonesia in 2015

The past year has not been an easy one for Indonesia’s slowing economy, as the global environment generated disturbances, such as sharp falls in commodity prices, substantial uncertainty over geo-political stresses in Eastern Europe, the Middle East and East Asia, destabilizing capital flows and renewed doubts about major engines of growth such as the eurozone, Japan and China

The Jakarta Post
Mon, December 8, 2014

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The global economy and Indonesia in 2015

T

he past year has not been an easy one for Indonesia'€™s slowing economy, as the global environment generated disturbances, such as sharp falls in commodity prices, substantial uncertainty over geo-political stresses in Eastern Europe, the Middle East and East Asia, destabilizing capital flows and renewed doubts about major engines of growth such as the eurozone, Japan and China.

So as we approach the end of an eventful year, we have to ask '€” what does the global economy portend for Indonesia in 2015?

Our take is generally a positive one '€” while some very real geo-political and economic risks remain, we believe that the world economy should be largely supportive of Indonesia'€™s economic outlook.

The main reason for our optimism is the robust state of the United States economy as we head into 2015.

Despite China'€™s expanding footprint in the global economy, the United States remains the world'€™s pre-eminent market, while its monetary policies determine international flows of capital vital to an economy such as Indonesia.

The good news is that, after a patchy recovery, the United States economy is now expanding at a reasonably vigorous pace.

Most of the segments of its economy that were damaged by the financial crisis are now surging: the credit market has revived, with even small and medium enterprises now reporting easier access to loans.

As these businesses hire more workers, jobs are becoming more plentiful, boosting consumer confidence to the highest levels since 2007.

The housing market, which helped to trigger the crisis, is now recovering, with prices rising gently and the stock of unsold housing down sharply.

Unsurprisingly, the lead indicators that forecast economic activity a year ahead are moving up strongly, giving us confidence that the American economy will be an engine of global growth in 2015.

Over the next year, the American economy is likely to get a significant additional boost from higher capital spending.

So far in this recovery, companies have been wary of spending the roughly US$1.6 trillion hoard of cash that they have built up, deterred by a lack of confidence.

But with capacity utilization rising and new technologies such as cloud computing, solar energy and 3D printing reaching critical takeoff points and needing huge new investments, a turnaround in capital spending is now more likely.

Oil prices have fallen by about 35 percent from their peak, cutting energy costs and encouraging producers to boost output.

As consumers'€™ transportation and electricity costs fall, they have more money in their pockets to spend on other items, thus expanding demand.

Lower oil prices also imply lower inflation, giving central banks more reason to ease monetary conditions, providing another leg-up for global growth.

Also, such sharp falls in oil prices essentially transfer wealth from oil-exporting countries, which tend to have high savings rates, to oil-consuming nations, which tend to spend much more '€” that alone helps to rev up global demand.

These two factors '€” the improving US economy and much lower energy costs '€” are massive positives for the global economy. Still, since media commentaries are full of all the many things that can go wrong, it is worthwhile understanding these risks and assessing just how much downside there really is:

The eurozone recovery has hit a rough patch: slower growth, even in the region'€™s powerhouse, Germany, and almost non-existent inflation have instigated worries of a deflationary bust in the region.

However, there are three reasons not to be too pessimistic '€” the European Central Bank has aggressively eased monetary policy, the European Commission has launched a new investment program and the weaker euro will help boost competitiveness.

So long as the region'€™s political leaders hold their nerve, the eurozone economies should produce slightly faster growth next year.

Japan, too, has lost momentum this year. But as the effects of the sales tax-increase in April wear off and the massive Yen depreciation and bold monetary policies of the central bank take effect, the economy should continue growing, albeit slowly.

China, however, is more of a concern because of massive excess capacity, a deflating property
bubble and multiple financial imbalances.

Still, policymakers have not disappointed us before '€” in the past few weeks, the central bank
has reversed course to inject substantial liquidity into the economy while the government is vigorously stepping up spending on infrastructure.

China still has some positive growth drivers as well '€” urbanization is proceeding rapidly and the online retail revolution is generating employment and major new capital spending.

Chinese growth will be slower than in previous years but should still add nicely to global demand.

A faster US economic recovery also means a quicker pace of interest rate increases in the United States, as its central bank, the Federal Reserve, will be forced to raise rates.

As we saw in May 2013, when the Fed first hinted at rate increases, the mere suggestion of tighter money scares financial markets and drives capital out of emerging economies such as Indonesia.

However, the Fed has been preparing global investors for such a move so that they are unlikely to pull money out of Indonesia in the way they did before.

Moreover, President Joko '€œJokowi'€ Widodo'€™s bold and energetic policies have boosted global investors'€™ confidence in Indonesia, thus reducing this risk.

That leaves geo-political risks as the remaining concern. The area that poses the largest risk to global growth is the Middle East '€” if the civil wars in Libya, Syria, Yemen and Iraq and the growing insurgency in Egypt turn more violent and spill over to oil-producing regions or affect oil transportation routes such as the Suez Canal, oil prices will spike, reversing much of the benefit of lower oil prices that we have been enjoying. This risk is difficult to quantify.

In conclusion, the two huge positives of the US economic rebound and lower oil prices will boost global demand for Indonesia in 2015.

Of the risks we can identify, the economic ones '€” the eurozone, Japan and China '€” can be contained through policy measures already being put in place.

So long as the wild card of Middle East political risks does not materialize, the global economy is likely to be kind to Indonesia.

__________________

President Joko '€œJokowi'€ Widodo'€™s bold and energetic policies have boosted global investors'€™ confidence in Indonesia.

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The writer, a former transportation minister, is chairman of the Matsushita Gobel Foundation and president commissioner of PT Telkom Tbk. The views expressed are his own.

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