In order to forecast economic activity in the near future, economists have a number of tools available at their disposal. One of the most useful of them is the Business Sentiment Index (BSI).
To construct the index, Danareksa Research Institute (DRI) surveys more than 700 chief executives or directors from the nation's leading companies across the full spectrum of industrial sectors.
DRI's most recent survey covers the two months of October-November 2007. In the previous seven surveys the BSI had been in an uptrend as economic growth picked up further. But in the October-November 2007 survey, the uptrend was broken: the BSI tumbled by 9.4 percent to 122.6.
What was behind this drop? And does it signal greater economic challenges ahead?
Well, in regard to current conditions, CEOs gave a much less positive assessment of the state of national economic conditions: this index tumbled 15.3 percent to 80.5, a low not seen since the beginning of 2007.
To a large extent, this decline might reflect the seasonal slowdown in economic activity during the period of the survey as a result of the long Idul Fitri holidays.
During the holidays following the fasting month of Ramadhan -- in which most factories shut down for at least a week -- many workers visit their hometowns. And it takes a while for economic activity to return to normal as many workers delay their return to the cities.
But more crucially, CEOs are having to contend with higher energy prices as crude oil prices remain stubbornly high despite recent declines from close to the US$100 a barrel level.
State owned oil giant Pertamina has consequently adjusted its fuel prices for industrial customers upward. And with prices of other types of energy also rising -- especially coal and gas -- corporate profitability may come under pressure.
Indeed, this is borne out in our survey with a 9.0 percent fall in the profitability index to 102.8.
Nonetheless, from a positive aspect, CEOs appear fairly confident about being able to raise prices to mitigate the negative impact of higher costs (the product prices index advanced 4 percent to 131.4).
Looking forward over the next six months, DRI's Business Sentiment Survey also reveals CEO concerns on the country's economic outlook. Worryingly, this index fell below the 100 level for more than a year to stand at 94.4 or down from 114.7 in the previous survey.
Such concerns reflect a number of factors, but especially -- as mentioned earlier -- soaring crude oil prices. This raises fears of higher inflation and possible monetary tightening in the year ahead.
And with high crude oil prices, the government said last year that it was strongly considering plans to limit sales of subsidized fuel. Although this would not affect industry directly since fuel sold to industrial customers is not subsidized, CEOs still had good reason to be concerned.
Note that back in October 2005 when fuel prices were more than doubled the economy received a severe shock. Inflation soared a phenomenal 8.7 percent month-on-month in that month and monetary policy was subsequently tightened. As a result, economic growth stuttered, as consumers reined in spending.
Consequently, corporate profits are expected to come under some pressure: the expected profits index slumped 10.9 percent to 124.7.
This finding certainly seems to be the case for the nation's automotive sector, for example, where automakers have said that despite rising inflationary pressures they would limit increases in car prices to only around 2 percent - 3 percent in 2008.
This, they say, is far below the level needed to take into account the impact of surging crude oil prices and other rising costs. According to the automakers it is not possible for them to raise prices too much given the elasticity of demand to hikes in selling prices.
Against this backdrop, CEOs are now less convinced that further cuts in interest rates are in the pipeline. The DRI survey shows that only 25.4 percent of CEOs now expect BI to cut rates in the next six months ahead vis-…-vis 35.3 percent in the previous survey.
Nonetheless, it is important not to come to any hasty conclusions on the nation's economic outlook given that the Business Sentiment Index has only fallen once after seven consecutive increases.
And despite mounting fears of recession in the U.S., Indonesia's economy is likely to remain vibrant with growth driven by low domestic interest rates, strong commodity prices, and greater investment activity.
In essence, the trend of the BSI is all-important and future surveys will show whether the uptrend in the business sentiment index has really come to an end or if the decline in the BSI in the October-November 2007 survey was merely a one-off.
The writer is an analyst at PT Danareksa Research Institute
Find Article by Date