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Boston, MA -- (SBWIRE) -- 11/13/2013 -- Market trends in Indonesia point to a less bullish short-term scenario than BMI had previously predicted; however, the country will remain a significant growth market in South East Asia over the medium term. The ability to maximise growth potential is limited by several downside factors, with currency depreciation adding to a number of other negative factors, such as a deepening deficit, rising inflation, bottlenecks in project execution and the 2014 presidential elections.
Currency depreciation saw an increase in raw material costs on the Indonesian market in Q313. It also prompted some speculative buying as buyers feared that a further fall in the rupiah would hit their margins. In September 2013, the currency fell to its lowest level since 2009. This was a result of the country's current account deficit, which has reached record levels, and there are fears that the currency could devalue even further. Inflation has also surged to a four-year high and economic growth has slowed to the lowest rate since 2010, suggesting that domestic petrochemicals demand could come under pressure. While domestic petrochemicals producers should benefit from depreciation, they are insufficient to cover domestic demand.
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Key views for the sector:
- In response to depreciation, buyers and suppliers that are exposed to exchange rate fluctuations will exhibit increased caution in the short term. This will make it difficult for raw material buyers to pass on increased costs associated with depreciation, particularly in polymer converters.
- Some government tenders for construction are being delayed due to tight monetary supply and lower foreign cash reserves. This is affecting demand in the PVC sector; however, BMI remains optimistic about Indonesia's construction sector, with growth forecast at 7.5% for 2013 and activity set to remain at or exceed this level over the medium term, which should stimulate PVC demand.
- In BMI's Asia Pacific petrochemicals Risk/Reward Ratings, Indonesia ranks 10th out of 12 countries with 51.8 points. It sits 10.2 points behind India and 9.5 points ahead of the Philippines. Plans for capacity expansion, coupled with improved risk, could raise the country's petrochemicals rating in the future, but BMI thinks it highly unlikely that the country will close the gap with its Asian peers.
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