Mainstream media appears worried over the Indonesian economy.
From the Wall Street Journal Real Times Economic Blog: (bold mine)
Indonesia squeezed out a narrow trade surplus in July but the Southeast Asian nation’s economy remains fragile and exposed to sudden shifts in capital flows.The country trade balance is in deficit for the year, and the government also runs a budget deficit, a reflection of costly state subsidies on the price of fuel. These twin deficits mean the country is reliant on foreign funding to make up the difference, largely in the form of hot money flows into the nation’s stock and bond markets.A year ago, a reversal of these flows caused by fears that U.S. yields would move higher, hurt Indonesian assets. The government has set about trying to readjust the economy, but as Monday’s figures show, there’s still a way to go.The region’s largest economy posted a $124 million surplus on about $28 billion in trade in July. But the return to surplus in July masks weakness in the economy. Exports fell 6% on year, reflecting lower commodity export growth as China’s growth moderates. Imports fell 19.3%, keeping the trade balance positive.Both figures were partly distorted by the Muslim holiday period. Still, the underlying trend is worrisome. The commodity-dependent economy’s main growth engine is stalling, and the contraction of imports shows low domestic investment and consumption.Business activity in July also contracted in Indonesia for the first time this year, as measured by HSBC’s manufacturing purchasing managers’ index, although some analysts said it could be a temporary lull after robust readings in recent months.After the data, ANZ said there are downside risks to its estimate Indonesia’s economy will grow 5.4% in 2014.Indonesia’s trade balance remains about $1 billion in deficit for 2014, hard hit by low prices for commodities—which comprise more than half of all its exports—and new rules that have prevented miners from exporting billions of dollars in unrefined and semirefined minerals.
Does the financial markets share the same sentiment as with media?
From the perspective of the stock market, where the Jakarta Stock Exchange Composite is about to test the 2013 highs, the answer is a NO
But Indonesia’s currency the rupiah (US-IDR) hasn’t shared the same buoyancy as with the stock market, where the rupiah has remained weak.
And so with Indonesia’s sovereign bond markets where the 10 year yield has been drifting near at 2013 highs.
Indonesia’s balance of trade as noted above popped to the surplus side last July, even as the current account balance continues to deteriorate. 1Q deficit 2014 signifies the second largest since 4Q 2012. This combines with the largest deficit on government budget since the new millennium.
Aside from foreign fund flows, those deficits have been financed by soaring government external debt. The once revered fiscal discipline via low debt to gdp seems to have reversed.
But like the Philippines, government debt hasn’t been a stand alone story. While the economy has been shown as having increased downside risks, what media ignores is that private sector debt has been ballooning,albeit at a declining rate. This credit build up has been despite 5 interest rate hikes and pronounced in consumer credit. Curiously growth in retail sales has almost halved y-o-y as of June which came along with a miniscule m-o-m growth.
Indonesia’s money supply growth continues to skyrocket
And all these borrowing ramp implies that borrowed money may have most likely been diverted away from investments In the real economy (thus the unfolding slack) and instead has partly been channeled to wild stock market speculation. Of course much of it could have also been directed at inflating her domestic housing bubble as I pointed out here.
So rising stocks and properties financed by heavy debt accumulation only means that once the breaking point of the bubble have been reached, the unraveling of imbalances will be disorderly.