Chillies are to Indonesia, what onions are to India. If the common vegetable has been emblematic of the Manmohan Singh government’s faltering fight against rising food prices in India, then in Indonesia it is chillies, a staple that has seen a fivefold rise in the past year, which represents Jakarta’s ineffectiveness in curbing inflation.
Across Southeast Asia, governments and central banks are readying themselves to balance resurgence in economic growth in the coming year, along with the spectre of rising inflation; a situation that India is all but familiar with.
Even as Indonesia on Monday posted a 6.1 per cent increase in gross domestic product (GDP) for 2010, from a growth of 4.5 per cent in 2009 and in-line with the recent robust numbers put out by others in the region, including the Philippines, the country’s central bank late last week increased its benchmark interest rate by 25 basis points.
But economists believe that Southeast Asia’s most populous country, much like India, is still behind the curve in dealing with inflationary pressures.
“Even though the Indonesian central bank’s inflation target is 4 – 6 per cent, and inflation has been above 6 per cent for five of the last seven months, Indonesia did not raise its policy rate at all in 2010, and only moved by 25 basis points last week. The inflation target set by Bank Indonesia (the central bank) is losing credibility,” said Prasenjit K Basu, Chief Economist, Asia ex-Japan at Daiwa Capital Markets.
And it is also unlikely to be the last rate hike in Indonesia, part of the 10 member Association of Southeast Asian Nations (Asean) trade bloc, with which India has a free trade agreement in place.
“In Indonesia, although core inflation is still below the central bank’s upper target, the upturn in inflationary pressures, notably from rising food prices, has prompted the central bank to hike interest rates this month. But this won’t be the last move, particularly given buoyant Q4 GDP data showing Indonesia grew at a 6.9 per cent rate on a year ago. We expect there to be several more rate hikes in the course of the year,” said Rajiv Biswas, Asia-Pacific Chief Economist at IHS Global Insight.
Vietnam, Biswas pointed out, was also suffering. “The rebound in inflationary pressures is a concern there, and monetary policy has been slow to react. There are also challenges on the balance of payments and significant pressure on foreign exchange reserves,” he said.
Along with rising commodity prices, particularly oil and coking coal that have been supported by the Egyptian crisis and the Australian floods, respectively, increased hot money flows have made managing inflation a priority for governments in the region.
“In a number of countries inflation pressures have increased in recent months. The pressures are coming both from the region’s strong recovery and also loose monetary policies in advanced countries, which have increased capital flows to emerging economies contributing to their excess liquidity,” said Joseph Zveglich, Assistant Chief Economist at the Manila-based Asian Development Bank (ADB).
But there are also those who have acted swiftly to curb the risk.
“In Thailand there is mild inflationary pressure, but the country has seen the benchmark interest rate rise by 100 basis points in the last 10 months. Also, Malaysia in the last year has increased its rates by 75 basis points although inflation has only ranged between 1.3 per cent and 2.2 per cent year-on-year,” explained Basu.
Nonetheless, the ADB believes that inflation still remains manageable for the region. “However, authorities must monitor inflation vigilantly, particularly for countries where signs of overheating are emerging, and in light of pressures from rising commodities prices,” Zveglich added.
Robust growth to remain
Economic growth in the region, however, is expected to be robust. The Philippines, along with Taiwan, last week posted their strongest GDP growth rates in decades, and Indonesia’s performance is also part of the trend.
“The strong Q4 2010 growth figures recently released reinforce our view of a strong recovery in the region. Some slowdown in the coming months is expected as economies face the challenge of phasing out their crisis-response stimulus measures and on the back on uncertain growth in the major industrial countries,” said Zveglich.
The overall Asean growth outlook, according to Biswas, remains strong in 2011, helped by the improved outlook for the US economy, which is expected to grow by more than 3 per cent, as well as continued rapid GDP growth in China, at 9.5 per cent this year, and healthy domestic demand in the East Asian bloc countries.
