Asia Girds for Europe Fallout With Indonesia Rate Cut, Philippine Stimulus

Asian policy makers are bolstering efforts to protect their economies from weakening global growth, as Indonesia unexpectedly cut interest rates and the Philippines unveiled a stimulus plan.

Bank Indonesia lowered its reference rate by a quarter of a percentage point to 6.5 percent yesterday, defying the predictions of all 15 economists surveyed by Bloomberg News. Philippine President Benigno Aquino announced a 72 billion-peso ($1.7 billion) spending package today as his government cut growth estimates, while Singapore’s central bank is forecast by economists to say this week that it will slow or end its currency appreciation.

“We want to be ahead of the curve in anticipating the impact of the global economy,” Perry Warjiyo, Bank Indonesia’s director of economic research, said in a Bloomberg Television interview today. “It will impact through the region, and we will see there is a decelerating trend of inflation and a downward revision to economic growth. Sooner or later, central banks need to rebalance the preference of their monetary policy response.”

Emerging-market nations have turned from fighting inflation to supporting growth as a struggling U.S. recovery and deepening European crisis threaten the global economy. Brazil, Turkey, Russia and Pakistan have cut borrowing costs in 2011, while Asian countries from the Philippines to South Korea have refrained from further rate increases in recent weeks.

Taking Insurance

“It’s primarily because of the weaker global economic backdrop that they are taking out some insurance against the global economic headwinds,” said Leif Eskesen, a Singapore- based economist at HSBC Holdings Plc.

The MSCI Asia Pacific Index of stocks has slumped 15.4 percent this year as investors pare bets on emerging markets. Some Asian currencies have tumbled against the dollar in the same period, led by a slide of about 9 percent in the Indian rupee, according to data compiled by Bloomberg.

Indonesia’s rupiah has weakened 3.5 percent in the past month. Bank Indonesia said yesterday it has sufficient foreign- exchange reserves to support the currency.

“We are confident we can stabilize the market,” Warjiyo said in the interview today.

Asian nations from Malaysia to the Philippines are shifting their focus to shielding growth even as elevated inflation prompts policy makers in countries such as Vietnam and India to persist with monetary tightening.

India’s industrial output rose 4.1 percent in August from a year earlier, less than the median 4.7 percent estimate in a Bloomberg News survey, a report showed today.

Philippine Spending

Aquino said today the additional spending he authorized for the stimulus package includes 5.5 billion pesos for infrastructure. The Philippine government cut its growth forecasts for the Southeast Asian nation for 2011 and 2012.

“If the fiscal stimulus does its job, this should give the necessary push to keep our economic growth in a solid upward trajectory,” central bank Governor Amando Tetangco said today. The Philippines has sufficient liquidity, a stable exchange rate and a “manageable” inflation outlook along with “fiscal space” to help support economic growth, he said in an e-mail reply to questions.

Bangko Sentral ng Pilipinas will consider global developments, including Indonesia’s rate cut and the slump in Philippine exports in next week’s policy meeting, Tetangco said.

“In most jurisdictions, inflation seems to have become less of a pressing concern,” he said. “The weakness in advanced economies is seen to weigh more on emerging economies than previously anticipated.”

Malaysian Budget

In neighboring Malaysia, Prime Minister Najib Razak announced in the country’s annual budget last week that he will distribute cash to low-income families, raise wages for civil servants and boost spending on transportation.

“As growth weakens, the policy makers elsewhere in the region may well follow a similar path,” Edward Teather, an economist at UBS AG in Singapore, said after Indonesia’s rate cut. “We do actually forecast lower policy rates for Malaysia, Thailand and the Philippines” over the next six months, he said.

The Monetary Authority of Singapore will reduce the degree of policy tightening by adjusting the exchange-rate band for its currency, according to 14 of 22 economists surveyed by Bloomberg News before the central bank releases its decision on Oct. 14. The island uses the local dollar to manage inflation and reviews its stance twice a year.

Indonesian Stimulus

Consumer prices in Indonesia, Southeast Asia’s largest economy, rose 4.61 percent in September from a year earlier, after climbing 4.79 percent in August. The inflation rate may be less than 5 percent this year and next, Warjiyo said.

Indonesia is preparing a stimulus package that it may implement in the first half of 2012 if needed, the government said last month. It agreed to maintain subsidized fuel prices for 2012 at this year’s level, Melchias Mekeng, head of the parliament’s budget committee, said yesterday.

Indonesia’s gross domestic product rose 6.49 percent in the second quarter from a year earlier, after increasing 6.47 percent in the three months through March. HSBC has cut its estimate for the 2011 expansion to 6.4 percent from 6.5 percent.

“If the global economy is slowing, inflationary pressures will be declining,” Governor Darmin Nasution told reporters yesterday. “Many countries may shift their policy focus from maintaining low inflation to supporting economic growth.”

‘Jumped the Gun’

Still, Bank Indonesia needs to ensure inflation expectations remain under control, said Wisnu Wardana, an economist at PT BNI Securities in Jakarta. A weaker currency may fan import prices, impeding the moderation in inflation in the world’s fourth-most populous nation.

Before yesterday’s cut, the central bank had refrained from boosting its key rate after raising it by a quarter of a percentage point in February. Credit Suisse AG called the rate reduction “premature” while HSBC said there is a risk Indonesian policy makers may have “jumped the gun.”

“Bank Indonesia might have beaten its peers in the region in loosening its monetary policy, but the move might be seen as a little hasty,” Gundy Cahyadi, an economist at Oversea-Chinese Banking Corp. in Singapore, said in a note. “There is no clear sign that inflation would ease going forward.”

Indonesia is one step away from its first investment-grade credit rating in more than a decade, as President Susilo Bambang Yudhoyono targets growth of as much as 6.6 percent on average through the remainder of his term ending in 2014.

He plans to double spending on roads, ports and airports to $140 billion by then. Toyota Motor Co. and Unilever NV (UNA) are among companies investing in the $707 billion economy.

To contact the reporters on this story: Novrida Manurung in Jakarta at nmanurung@bloomberg.net; Widya Utami in Jakarta at wutami@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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