Indonesia’s “Great Moderation”


Graph prepared by The Economist


By John Richardson

INDONESIA has enjoyed eight consecutive quarters of 6% GDP growth and so – along with several other mainly domestically-demand driven Asian economies – is viewed as a haven of stability in an increasingly uncertain world.

The country’s 2012 demand growth for polyethylene (PE), polypropylene (PP), polystyrene (PS), polyvinyl chloride (PVC) and acrylonitrile-butadiene-styrene (ABS) will be 7.5%, according to the Indonesian Olefin & Plastics Industry Association (INAPLAS).

Around 50% of Indonesia’s polyolefins demand is covered by imports, with substantial imports of ethylene and naphtha also needed to meet the very steady, and very strong, demand growth, says ICIS.

Hence, notwithstanding problems with bureaucracy and an unclear regulatory environment, Chandra Asri plans to build an $8bn refinery and expand ethylene capacity, while also adding a butadiene extraction unit. Honam Petrochemical, which owns PE assets in Indonesia, has plans for a 1m tonne/year grass-roots cracker, adds ICIS. 

Indonesia has done a fantastic job to recover from the economic misery inflicted by the 1997-1998 Asian Financial Crisis. Along with Thailand and South Korea, it suffered enormously from the collapse of its currency against the US dollar. This led to soaring inflation and unsustainable debts dominated in the greenback.

Since the crisis, the affected countries have switched from dollar debt to investment by foreigners in local equity markets and lending in domestic currencies.

There is also talk of “macro-prudential policies” smoothing out the peaks and troughs of economic cycles.

But, as The Economist writes: “Wise monetary policy was also one of the reasons cited for the Great Moderation enjoyed by the G7 economies.

“Another was the supposed depth and sophistication of the rich world’s financial systems, which, it was said, allowed households to smooth their spending, firms to diversify their borrowing and banks to unburden their balance-sheets.

“Both of these pillars of stability proved false comforts. Economists had not quite settled on an explanation for the Great Moderation before it inconveniently ceased to exist.”

Hyman Minsky believes that drops in volatility allows firms and households to borrow more of the money they invest, the magazine continues.

“Stability, in Minsky’s formulation, eventually becomes destabilising. Over-leverage does not require excessive optimism, merely excessive certitude; not fast growth, merely steady growth,” it adds.

According to Fred Neumann of HSBC, Asian leverage is now higher than at any time since the Asian Financial Crisis (see the above chart).

Excessive exuberance might also be driven by possibly misplaced confidence over China’s economic future.

The Indonesian manufacturing sector faces the additional problem of very competitive imports from China, including of finished BOPP film, as a result of  overcapacity in China and the Asean-China Free Trade Agreement.

These imports could well increase as China’s economy further decelerates and it attempts to unburden itself of huge inventories of finished and semi-finished goods.

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