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China slowdown to affect Indonesia, says ADB

Publication Date : 02-04-2014

 

The economic slowdown in China could have a negative impact on Indonesia’s economic recovery especially amid the government’s efforts to address the current-account deficit, the Asian Development Bank (ADB) warns.

China, the world’s second-largest economy and Indonesia’s top export destination, saw its gross domestic product (GDP) growth plunge further to  a 12-year low of 7.7 per cent last year after it recorded 7.8 per cent economic growth in 2012.

“Although this year ADB predicts Indonesia’s current-account deficit will narrow to 2.9 per cent, the government must still be cautious over China’s lack of growth,” ADB deputy country director for Indonesia Edimon Ginting said on Tuesday.

The economy was clouded by ballooning current-account deficit last year, which topped a record 4.4 per cent of the country’s GDP in the second quarter, as a result of slowing global demand and rising imports.

Bank Indonesia (BI) considered the sustainable level of current-account deficit at between 2 and 2.5 per cent of the country’s GDP, but ADB said external conditions would be challenging.

“Currently China is going through a rough patch. As it is one of Indonesia’s main export markets, we must anticipate the negative effects that China’s slowing economy will have on our economy,” Edimon said during an Asian Development Outlook 2014 presentation.

Indonesia’s non-oil and gas exports to China declined by almost 13 per cent to US$1.59 billion in February from $1.82 million in January this year, the Central Statistics Agency (BPS) announced on Tuesday. China remains Indonesia’s top export destination this year with a total of goods worth $3.4 billion exported in the first two months, representing 14.29 per cent of total exports.

An increase in investments and exports to other countries, including diversification of exports instead of relying mainly on mining products, could help Indonesia minimize the impact on its economy of China’s economic slowdown, but those would only be short-term answers.

“The solution is not only macroeconomic policies but also structural reforms,” Edimon stressed, citing sustainable development in productivity and competitiveness as key to addressing the country’s trade issues. The economy is primarily driven by domestic consumption, but exports made up a big chunk as well at more than 20 percent of the overall GDP, hence, a slowdown in exports would negatively affect the country’s economy.

ADB forecasts Indonesia’s GDP to grow 5.7 per cent this year, slightly lower than last year’s 5.78 per cent, and 6 per cent economic growth will be reached in 2015, according to the Manila-based bank’s latest report.

Fiscal reforms should also be carried out by the government to not only narrow the current-account deficit, but also to narrow the widening inequality, according to ADB economist Priasto Aji.

“The budget for fuel subsidies can instead be used for education, health care, social protection and infrastructure,” said Priasto at the same event.

“When the government gave fuel subsidies, the people overconsumed fuel. If the government gave education subsidies, wouldn’t it be great if the people overconsumed education?” said Priasto, adding that accessible education can increase the quality of human resources.

Priasto added that the government could also explore other options such as increasing the use of corrective tax and non-tax revenues such as cigarette tax, as well as introducing progressive taxes on property, capital gains and inheritance.


 

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