Bank Indonesia says it is closely watching the unfolding economic developments in Europe and bracing for any potential fallout from the upcoming election in Greece in particular.
Darmin Nasution, the BI governor, said in a statement issued on Friday that the central bank was prepared to intervene to stabilize the rupiah exchange rate as deemed necessary, buy government bonds in the secondary market and issue term deposits.
However, he said the fallout on the Indonesian economy from the ongoing European crisis appeared small.
“BI believes that the direct impact to Indonesian corporations or the Indonesian banking sector has so far been relatively limited,” Darmin said.
“Our debt exposure to the PIIGS countries is very small,” he added, referring to the hard-hit economies of Portugal, Ireland, Italy, Greece and Spain.
“Our banking sector’s exposure to Europe is also relatively small,” he said.
But Fauzi Ichsan, a senior economist at the Standard Chartered Bank, said the Southeast Asian region would not escape the contagion should Greece exit the eurozone.
“If the EU [European Union] is not swift in containing the crisis, we will see a spillover effect to the region,” he said. “Regional markets will be affected and the rupiah could fall as low as Rp 10,000 to the dollar.”
Anton Gunawan, chief economist at Bank Danamon Indonesia, said that in the short term, regional markets in Asia would immediately fall if the eurozone headed into a deeper crisis, and in the worst-case scenario the real sector could also be impacted.
Other Southeast Asian nations similarly stepped up pledges this week to protect their economies ahead of the Greek election on Sunday, even as analysts say the region is the best position to weather the potential fallout.
“All countries in Asia are saving ammunition in case the contagion spills over from Europe into the US and international financial markets,” said Wai Ho Leong, a Singapore-based senior regional economist at Barclays Plc.
“That’s when all countries in Asia will stimulate through fiscal spending quite aggressively. They are all prepared.”
Vietnam will accelerate state spending and boost bank lending to bolster the economy, Deputy Prime Minister Nguyen Xuan Phuc told the National Assembly in Hanoi on Friday.
Malaysia’s government asked its parliament on Thursday to boost the annual budget by RM 13.4 billion ($4.2 billion).
While cutting Asia’s already low borrowing costs would risk asset bubbles, China, South Korea, the Philippines, Indonesia, Singapore and Hong Kong are in the strongest position to boost fiscal spending if needed, HSBC Holdings Plc said in a note on Friday.
“Asia, fortunately, has sufficient fiscal muscle to lift growth,” Frederic Neumann, Hong Kong-based co-head of Asian economics at HSBC, wrote in the report.
“This can be targeted at weaker sectors without dousing the entire economy with stimulus, and be rolled out, as well as withdrawn, quite rapidly.”
ID, JG & Bloomberg