Thursday, May 28, 2009

Business sentiment is still improving

Thanks to the country's large domestic economy and limited reliance on exports, Indonesia has been spared the worst of the global economic crisis.
The precipitous drop in the value of the rupiah to the Rp12,000 per US dollar level did invoke fears of another currency meltdown and subsequent economic turmoil, but since May the rupiah has performed remarkably well and recovered strongly.
Another sign that the Indonesian economy is headed in the right direction comes from the stupendous performance of the country's stock exchange: the Jakarta Composite Index (JCI) has already risen about 40 percent so far this year.
But despite these encouraging developments, it is unwise to rely on them to gauge the strength of the economy and its future prospects. After all, the positive trends shown by these indicators can be ephemeral and quickly reversed.
A look at any chart depicting the performance of Indonesian stocks or the domestic currency unit will tell you that.
So what is a better way to gauge the strength of the economy? Well, one way is to simply ask the people who run the country's largest companies what they think.
Because if they don't know, then who does? 

By aggregating the views of more than 700 chief executives and directors from the nation's leading companies, Danareksa Research Institute (DRI) is able to gain a valuable insight into the views of CEOs on a range of important economic and business issues - for both the present time as well as the future. 
In its latest survey covering the two months of February and March, the main index formulated from this survey - called the Business Sentiment Index (BSI) - climbed 3.5 percent to 117.4.
More impressively still, this gain came after a huge 15.7 percent increase in the index in the previous survey.
In regard to the current conditions, however, the CEOs said that their companies were booking lower sales and lower profits (the respective indices fell 22.9 percent and 19.2 percent respectively).
However, this does not appear to constitute a lasting slowdown in economic activity as CEOs are much more upbeat looking forward.
Indeed, some 55.0 percent of the CEOs surveyed expect business conditions to be "good" over the next six months while 32.6 percent of them believe that business conditions will be "normal".
Only a small 11.2 percent of CEOs expect business conditions to be "bad".
And as for the economic outlook, CEOs now see light at the end of the tunnel after a worrying period marked by the turbulence in the world's leading economies.
Quite simply, the CEOs surveyed believe that the economy will quickly reverse its direction (i.e. the economic recovery will be V shaped rather than U shaped).
Against this backdrop, CEOs expect their companies to show much stronger performance going forward.
Most notably, both sales growth and profits growth are expected to increase.
One area where CEOs are less sanguine, however, is inflation.
This particular index showed a surprising 30.1 percent increase to 134.1 and suggests some pressures on prices - most likely arising from a pick-up in commodity prices in addition to the pass through effects of rupiah depreciation.
However, this does not herald a new period of rising inflationary pressures as inflation is generally subdued and the longer-term inflationary trend is clearly downward.
Despite the rising inflationary expectations, CEOs remain confident that the central bank will cut interest rates in the months ahead (this index declined a further 2.6 percent after a massive 36.9 percent drop in the previous survey).
Currently, the central bank's benchmark interest rate stands at 7.25 percent after six straight rate cuts from a peak of 9.5 percent in November 2008, while bank lending rates are starting to ease, although they remain fairly sticky.
Lower lending rates will help to move key areas of the economy - such as property for example - where banks are already starting to entice prospective property buyers with attractive lending rates.
Interestingly, confidence in the government ebbed slightly in the latest Danareksa survey (the business confidence in the government index or BCGI slipped 1.3 percent).
Nonetheless, it still remained at a high enough level to suggest that CEOs are largely satisfied with the way in which the government is carrying out its duties.
Moreover, the component of the BCGI measuring sentiment toward the government's ability to provide public utilities rose again. It added another 14.6 percent to 130.8 and has climbed rapidly from its low of just 76.40 in May 2008.
This bullishness suggests that the government is at last delivering on some of its pledges to get much-needed infrastructure projects such as toll roads underway.
In conclusion, it can be seen that the CEO survey has been a useful tool to gauge the state of the economy and the direction it is taking.
Even when many people were citing their concerns that the Indonesian economy would be badly affected by the global economic recession - late last year - CEOs remained upbeat. In fact, they have become increasingly upbeat.
Yes, better times do lie ahead. But I didn't tell you that - the nation's CEOs did.
The writer is an analyst at Danareksa Research Institute (DRI) 


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