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Indonesia cautious on US fiscal-cliff quick fix

Publication Date : 04-01-2013

 

The Indonesian government says it will remain cautious following the US “fiscal-cliff” budget deal, with a top Indonesian minister deeming the agreement inked by the US Congress as a temporary remedy.

“We don’t see that the problem is over. Many points of the agreement tend to postpone [US debt problems], hence we still have to stay on guard,” Finance Minister Agus Martowardojo said yesterday.

The fiscal cliff refers to the drastic measures involving steep tax increases and cuts in government spending that the US would have been forced to implement on Monday at midnight, when George W. Bush-era tax cuts expired, barring a deal.

Analysts had feared that the measures might push the US economy back into recession, given that there would have been a whopping US$607 billion cut at a time when the US economic recovery remains sluggish and needs more spending.

However, the US House passed a bill on Wednesday that averted automatic implementation of the measures.

Agus said that the deal reached by the US Congress was only temporary, referring to the fact that the newly passed legislation has only postponed for two months decisions on deep federal spending cuts that are at the centre of the fiscal-cliff predicament.

Investors have now turned their attention to impending confrontations between US lawmakers on increasing the nation’s debt ceiling in February to plug a growing deficit as well as $110 billion in automatic spending cuts that were postponed in the January 1 tax deal.

“There was a lot of euphoria [Wednesday] about the US budget deal, but that was just a band-aid,” said Kully Samra, who manages UK clients for Charles Schwab Corp., which has $1.8 trillion of assets globally, as quoted by Bloomberg.

“You can make projections about economic activity, but when it comes to politicians, no one’s privy to what they’re going to do. The deficit will be the next big talking point.”

Nevertheless, Agus said that the deal to avert an economic calamity was “good news” for Indonesia, as it would help expedite the global economic recovery, consequently easing pressure on Indonesia’s trade balance.

Indonesia’s trade balance remained under pressure, as the Trade Ministry has estimated that there will be a historic trade deficit of $2 billion for 2012.

The US was Indonesia’s third-biggest export destination, after China and Japan, accounting for 9.53 per cent of Indonesia’s total non-oil and gas exports of $140.76 billion in the January-to-November period.

“A solution to the fiscal cliff is better for Indonesia, a country that has been trying to safeguard the trade balance,” Agus said.

Continuing economic uncertainties in the West, such as the stalled US economic recovery and piling debts in eurozone nations, have made analysts pessimistic that Indonesia would meet its economic growth target of 6.8 per cent for last year.

The government’s target was also met with scepticism by Bank Indonesia (BI), which forecast that the economy might only expand between 6.3 and 6.7 per cent in 2013.

The US is the world’s largest economy, and its woes affect the economic growth of all emerging nations, including Indonesia, according to BI spokesperson Difi Johansyah.

The central bank would convene its board of governors meeting on Jan. 10 to determine monetary policy to anticipate global developments.

“Nevertheless, we see that there have been many positive developments in the global economy, such as recovery signs in the US, Europe and China, as well as good policy-making decisions in Japan,” he said yesterday.

For Indonesia, this means that there will be increased economic growth contribution from exports, weak growth has served as a drag on Indonesia’s economic expansion last year, according to Mandiri Sekuritas economist Aldian Taloputra. “Exports will see a net positive growth this year,” he predicted.

 

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