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Indonesia keeping policies despite industrial slowdown

Publication Date : 03-04-2014

 

The government and Bank Indonesia (BI) have ruled out the possibility of revising policy to cope with the slowdown in the country’s manufacturing sector, saying that the decline in factory output is needed in order to reduce the current-account deficit.

Finance Minister Chatib Basri said on Wednesday there were no plans for a policy revision as the slowdown was intended due to concerns over the country’s widening current-account deficit.

“We don’t need any policy response because the deceleration is the consequence of the government’s move to slow down the economy to lower the current-account deficit to 2.5 per cent at the end of year and achieve a desirable level for the rupiah,” he said on the sidelines of the ASEAN Economic Congress.

A current-account deficit is considered manageable when it is less than 2.5 per cent of the country’s gross domestic product (GDP). Last year Indonesia’s current-account deficit reached US$28.5 billion, representing 3.3 per cent of GDP.

The government aims to attain 6 per cent economic growth this year, after only achieving 5.78 per cent last year.

A survey released by banking group HSBC on Tuesday showed that manufacturing-sector growth fell for the second consecutive month in March to reach a seven-month low.

The HSBC Indonesia Manufacturing Purchasing Managers’ Index (PMI), which measures factory production, fell to 50.1 in March, down from 50.5 in February, signaling a further decline in factory output.

The situation was attributed to unfavourable weather and raw material shortages, the survey said. Manufacturing employment throughout the country decreased for the third consecutive month, it said.

“The ongoing decline in work backlogs suggests that manufacturing conditions could remain flat in the coming months. Although the output and input price indices remain elevated, we are comforted that the pace of gains continues to slow,” said Su Sian Liam, Asean economist at HSBC.

Despite the poor production results, March data indicated that new orders surged in the month, extending the current sequence of growth to six months.

New export orders also gained although the rate of expansion was marginal and eased from February. Monitored companies recorded higher demand from clients in America, Asia and Europe.

BI senior deputy governor Mirza Adityaswara concurred with Chatib, saying that the drop in the PMI resulted from intended efforts to curb economic activities.

“Our focus is on slowing down the economy in a bid to reduce the current-account deficit. If we do not lower the deficit, there will more uncertainty in the economy,” he told reporters at his office.

The Industry Ministry expects non-oil manufacturing industry to expand by 6.8 percent after growing by 6.1 per cent last year. However, business analysts say that the target is too ambitious and is difficult to achieve.

Imports of raw materials and intermediary goods in the first two months of the year dropped by 7.65 per cent to $21.85 billion, while purchases of capital goods plunged by 11.02 per cent to $5.18 billion, according to data recently released by the Central Statistics Agency (BPS).

Exports of industrial goods in January and February dipped by only 0.44 percent to $19.2 billion from the previous year.

With the decline in imports, the country’s external trade recorded a surplus of $785.3 million in February after a deficit of $430.6 million in January.

Institute for the Development of Economics and Finance (Indef) economist, Ahmad Erani Yustika, said the government’s curb on economic activities that caused the slowdown in manufacturing activities was necessary as there needed to be a systematic effort to reduce the current-account deficit.

However, such a solution had to be short term rather than long term. “In the long term, there should be an attempt to reduce imports of raw materials and substitute them with locally produced materials,” he said.

 

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