The Jakarta Post
A recent slowdown in the Chinese economy could persist in the long-run, affect global demand and depress commodity prices down even further, eventually hurting its trade partners, including Indonesia.
The Indonesian government earlier targeted its economy to grow 6.3 percent this year, but the slowdown in China may force Indonesia to face the reality of less than 6 percent growth for the first time in almost three years.
'Economic slowdown in China is one of the reasons why we cut our economic growth forecast to between 5.8 percent and 6.2 percent this year,' Bank Indonesia (BI) Deputy Governor Perry Warjiyo said on Friday, citing the fact that China accounted for around 15 percent of Indonesia's exports.
China posted economic growth of only 7.5 percent in the second quarter, its slowest pace since the 2009 global recession, with a further slowdown expected.
A slower growth of China would consequently drag down Indonesia's growth, according to Eugene Leow, a regional economist with the Singapore-based DBS Bank.
'If China's growth faces a slowdown, then commodity prices will become more lackluster,' he told reporters in a press briefing in Jakarta on Friday.
'This has important implications for Indonesia.'
In addition, low commodity prices would weigh on Indonesia's export earnings. This would consequently put pressure on its current account deficit and ultimately the rupiah, Leow said.
China is Indonesia's biggest export destination, absorbing US$21 billion of exported goods ' mostly commodities, such as coal or palm oil ' from the archipelago throughout last year, according to data from the Central Statistics Agency.
A 1 percent deduction of economic growth in China could decelerate Indonesia's economy by up to half a percent, attributed to strong linkage between the Asian giant and Southeast Asia's largest economy, noted the International Monetary Fund (IMF).
Responding to the recent slowdown, Chinese Premier Li Keqiang has stated that his government viewed a 7 percent growth as the bottom line for tolerance of an economic slowdown, and that he would not tolerate anything below that.
China, now the world's second-largest economy, once grew by 10.4 percent in 2010.
'[China] once had double-digit economic growth, demanding a lot of commodities to support it, and Indonesia was more than able to supply,' Leow said.
'The situation for the next three to five years will be very different for China, and very different for Indonesia.'
Besides hurting Indonesia's economic growth from the export side, a deceleration in the Chinese economy would also hurt the archipelago from investment channel, which is Indonesia's second-biggest growth driver after household consumption.
A gloomy economic outlook in China would prompt local, commodity-reliant companies in Indonesia to hold back from increasing their investments, Leow said.
'I don't think there will be huge demand for investments in commodity-related sectors because the prices of commodities are likely to remain low as China is moderating.'
In its report released earlier this month, the Asian Development Bank (ADB) also warned that slower economic growth in China was 'weighing on the outlook for developing Asia'.
'The drop in trade and scaling back of investments are part of a more balanced growth path for the People's Republic of China, and the knock-on effect of its slower pace is definitely a concern for the region,' ADB chief economist Changyong Rhee said in a statement.
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