Actual finance blog

Indonesia can’t replicate the “high single digit” economic growth of China and India because of impediments to investment and high credit costs, according to Credit Suisse Group AG.

“We don’t expect investment to take off,” Cem Karacadag, an economist at Credit Suisse in Singapore, said in a report received yesterday. “It will take the government many years to fix the structural obstacles to investment, including corruption, regulatory risks, and a weak legal framework.”

President Susilo Bambang Yudhoyono’s re-elected government has “neither the mandate nor the capacity” to implement quickly the reforms needed to overcome these obstacles to investment, according to Credit Suisse. Borrowing costs are also too high as the central bank isn’t committed to keeping monetary policy “stable and tight,” Karacadag said in the report.

Indonesia wants to be included among the so-called BRIC nations of Brazil, Russia, India and China, according to Emil Salim, an adviser to President Yudhoyono and a former Cabinet member. The nation’s accelerating growth provides a case for its inclusion among BRIC economies, Morgan Stanley said in June.

Credit Suisse said it was likely that gross domestic product growth in Southeast Asia’s largest economy would remain below that of China and India.

“The key question for Indonesia is will investment accelerate quickly and be efficient enough to lift GDP growth to high single digits?” Karacadag said. “Our answer is no.”

‘Bright’ Outlook

Still, Indonesia’s long-term economic outlook is “bright” and annual GDP growth may average 5.6 percent from 2010 to 2014 and 6.5 percent from 2015 to 2019, according to Credit Suisse. That will see per capita income almost triple to $6,800 by 2019 from $2,300 in 2009, it said.

Indonesia’s economic growth accelerated in the three months to Sept. 30 for the first time in five quarters, with GDP expanding 4.2 percent from a year earlier. The $514 billion economy may expand 4.3 percent this year and between 5 percent and 5.5 percent in 2010, the central bank said yesterday.

“The country has a sound fiscal policy, good balance of payments, declining government and external debt ratios, and an improving political situation,” Karacadag said. “However, we don’t expect investment and real GDP growth in Indonesia to take off in a hurry.”

China and India will continue to achieve faster rates of GDP growth until Indonesia fixes structural impediments to investment and shows a “credible commitment to low inflation,” according to Credit Suisse.

Inflation Target

Bank Indonesia kept its benchmark interest rate unchanged at 6 payday loan.5 percent for a fourth straight month yesterday, after nine consecutive cuts that ended in August.

The central bank said monetary policy would be directed toward “keeping inflation low while taking into account the recovery of the economy.” Inflation this year may be “lower than” the target of 3.5 percent to 5.5 percent, the bank said.

“Unfortunately, we don’t perceive the government and Bank Indonesia to be committed to keep monetary policy stable and tight enough to rein in inflation and persistently high inflation expectations,” Karacadag said. “Even if the central bank was committed to bringing inflation under control once and for all, it first would probably have to keep real interest rates high for many years.”

Indonesia’s inflation rate has hovered around 4 percent to 17 percent over the past decade, according to Credit Suisse.

Weak Credibility

“Being able to deliver on their inflation targets in the coming two years would be a significant breakthrough for Indonesia,” said Enoch Fung, an economist at Goldman Sachs Group Inc. in Hong Kong. “Weak inflation credibility is the biggest issue overhanging the Indonesian risk premium.”

Indonesia’s inflation unexpectedly slowed in November, suggesting that the central bank may take more time before it follows other Asia Pacific nations including Australia, India and Vietnam in withdrawing monetary stimulus.

Consumer prices rose 2.41 percent last month from a year earlier after gaining 2.57 percent in October.

“There is less pressure for Bank Indonesia to increase rates earlier in 2010 following Vietnam and Australia,” said Destry Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta. “The central bank may maintain the benchmark rate at the current rate of 6.5 percent at least until the second quarter of 2010 before gradually increasing it to 7.25 percent.”

Bank Indonesia needs to show a stronger commitment in its fight against inflation in order to bring down borrowing costs to companies and consumers, according to Credit Suisse.

“The higher the rate of inflation, the higher are real lending rates because of the inflation risk premium that is built into nominal interest rates,” Karacadag said. “It would only be much later, once tight and consistent policy has raised the credibility of the central bank, that the payoff would come in the form of lower real interest rates.”

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Business managers interviewed by Federal Reserve researchers conducting their eight-times-a-year review of the New England economy “cite mixed results amid signs of improvement, although activity generally remains below year-earlier levels,” the analysts wrote in the report, which was released Wednesday.

“Some respondents are beginning to hire and/or reverse pay cuts or freezes, or planning to in 2010,” the researchers wrote in the summary often referred to as the “beige book.”

“Prices are generally said to be stable,” they wrote. “Contacts in a number of sectors express uncertainty about whether recent improvements will last, but most — outside of commercial real estate — expect recovery to take hold in 2010.”

By sector:

• A number of retailers told the researchers “consumers are much more cautious than in previous years.” And executives in the category worried about the impact of unemployment on consumer spending.

Several retail concacts told the researchers they are maintaining lower inventory levels than a year ago.

Capital spending in the sector is “guarded,” the Fed team wrote, though there is some spending planned on renovations and IT.

“Seasonal hiring is mixed,” the report states. “Wages remain mostly steady, although one respondent reports wage cuts were successfully taken in order to prevent a cut in headcount. Selling prices are reportedly stable.”

• In manufacturing, the report states, “biopharmaceuticals companies indicate that their revenues continue to increase. Some equipment makers report that sales have picked up from their depressed levels in the first half of the year, while others say their business remains in a slump.”

The researchers wrote: “Respondents across a variety of industries note that sales to retailers, restaurants, and personal services establishments remain depressed.”

Materials costs and selling prices remained largely unchanged.

“Some firms that cut wages and salaries earlier in 2009 have recently restored pay to pre-cut levels or plan to do so in 2010,” the researchers wrote. “Most contacts say that they have held their domestic headcounts relatively steady in recent months, but biopharmaceutical firms continue to expand employment.”

They add: “Some seeking to fill specialized technical positions indicate they are disappointed with the quality of the applicant pool.”

“For the most part, capital spending remains subdued,” the report states. “Many note that they have adequate cash to fund both needed and discretionary investments.”

For the sector, it concludes: “Most manufacturers and related services providers are anticipating modest to moderate revenue increases over the coming six to 12 months.”

• Software and Information Technology Services could see some new hiring in 2010.

“Those firms that implemented wage freezes this year anticipate lifting them in 2010, with raises expected to be in the 3-percent to 5-percent range,” the report states.

It states: “Expectations range from gradual upticks over the course of 2010 to high levels of growth from the start of the year.

• “New England staffing contacts report upticks in activity through the end of the third quarter and

into the fourth,” the report states. “While year-over-year revenues are still down — from 10 percent to 60 percent — revenues are improving on a sequential basis, with increases reported in billing hours and number of assignments.”

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The author of a statewide ballot initiative that would permit full-strength beer and wine sales in Colorado grocery and convenience stores said he plans to modify the measure to increase the percentage of shelf space that must be devoted to craft beer and boutique wine.

Blake Harrison said Tuesday at a hearing for Initiative 29 that he had thought his proposal, which was largely copied from a failed 2008 legislative effort, required 25 percent of alcohol shelf space go to smaller breweries and wineries.

When a Denver Business Journal reporter pointed out its wording actually called for only a minimum of 20 percent shelf space for the products, he said that he plans to grow that area as the measure moves along in the process.

That alteration of the language appears to be the only part of Harrison's proposal that is changing after weeks of discussions with affected parties such as grocers and convenience store owners, however.

Grocers are working on a separate bill or ballot initiative to let them sell all alcohol and a convenience store association is unlikely to back Harrison's plan, but Harrison said he feels his idea can win popular support in the 2010 election.

"I recognize that this bill can be improved … We're just trying to break the stalemate," the Denver deputy district attorney and Democratic legislative candidate said after the Capitol hearing. "The real answer to this may be something that neither side likes."

The measure, submitted to the Legislative Council on Nov. 17, goes next to a title-setting board in the Secretary of State's office. While Harrison can submit his initiative quickly to that board — which must approve its wording before he can collect signatures to put it on the ballot — he said he may wait for a few months to see what the Legislature does first.

Legislative committees have killed bills the past two years that would have ended the post-Prohibition ban on grocery and convenience stores selling any wine or selling beer stronger than 3.2 percent alcohol by volume. While grocers and convenience stores have backed those bills, liquor stores and craft-beer makers lobbied for their defeat, claiming their businesses would be hurt.

Harrison hopes the Legislature will come up with a solution and even included in his proposal a clause saying that any legislative action

allowing grocery stores to sell full-strength beer or wine will supersede his measure.

Grier Bailey, government affairs manager for the Colorado Wyoming Petroleum Marketers and Convenience Store Association, said he expects several legislative proposals will seek incremental changes in the law this year.

Association officials met with Harrison in recent weeks to see if they could back his plan but generally are not supportive of it, Bailey said. They believe a provision in the initiative limiting full-strength beer and wine sales to just 5 percent of a store's shelf space is too restrictive and would help large grocers far more than smaller local proprietors, he said.

"I think the language is, from a small-business perspective, not well thought-out," Bailey said.

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European consumer prices increased for the first time in seven months in November led by energy costs as the economy recovered from the worst slump since World War II.

Prices in the 16-nation euro region rose 0.6 percent from a year earlier after falling 0.1 percent in October, the European Union statistics office in Luxembourg said today. Economists had projected a gain of 0.4 percent, the median of 30 forecasts in a Bloomberg News survey showed.

Oil prices have risen 9 percent in the past three months as the economy has gathered strength. While the euro-area economy returned to growth in the third quarter, companies continue to cut costs and eliminate jobs to bolster earnings. The European Central Bank has signaled it sees “moderate” inflation and is in no rush to withdraw stimulus measures.

“The medium-term outlook for euro-zone inflation remains very subdued,” said Martin van Vliet, a senior economist at ING Bank in Amsterdam. ING anticipates the ECB will “adopt a very gradual approach to withdrawing its emergency liquidity measures, and to keep interest rates on hold for an extended period,” he said.

The euro was higher against the dollar after the inflation report, trading at $1.5050 at 10:52 a.m. in London, up 0.4 percent on the day. The yield on the German 10-year benchmark bond dropped 0.1 basis point to 3.15 percent.

Latest Forecasts

The ECB said on Nov. 12 that professional forecasters project European inflation will average 0.3 percent this year and 1.2 percent in 2010. The Frankfurt-based central bank, which aims to keep annual gains in consumer prices just below 2 percent, will release its latest forecasts for economic developments and inflation on Dec. 3.

For now, a recovery may remain too fragile for companies to start adding workers. European unemployment probably rose to 9.8 percent in October from 9.7 percent in the previous month, according to the median estimate in a Bloomberg survey of economists. The statistics office will release the unemployment report tomorrow at 11 a.m.

Remy Cointreau SA, France’s second-largest liquor company, on Nov. 25 forecast “modest” third-quarter sales after profit dropped 18 percent in the year’s first six months. Hugo Boss AG, Germany’s largest clothing maker, said earlier this month that it projects sales will remain “challenging” in the first half of 2010.

Coming Months

European households anticipate prices will decline further in coming months. A gauge of consumers’ price expectations over the next 12 months rose to minus 11 in November from minus 14 in the previous month, the European Commission said on Nov. 27.

“Economic activity is unlikely to be strong enough to generate significant inflationary pressures for some considerable time to come,” said Howard Archer, chief European economist at IHS Global Insight in London. “There remains a compelling case for the ECB to only very gradually withdraw its emergency liquidity measures.”

The ECB has cut borrowing costs to a record low, purchased covered bonds and injected billions of euros into markets to encourage lending. Policy makers meeting in Frankfurt on Dec. 3 may keep the key rate at 1 percent, a Bloomberg survey shows.

“We still don’t know to what extent the incipient global recovery has enough support on its own to allow for exceptional stimulus to be withdrawn without the danger of a relapse in activity,” ECB council member Miguel Angel Fernandez Ordonez said on Nov. 23. Inflation “although positive, will remain at moderate levels in the near future.”

The statistics office will release a breakdown of November inflation data on Dec. 16.

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