Fears over rising cost pressures

16 01 2008

In the October-November survey, the Business Sentiment Index (BSI) dropped by 9.4 percent to 122.6, snapping its upward streak in the last seven surveys. Both components of the BSI showed declines: the component measuring sentiment toward current situations, the Present Situations Index (PSI), dropping 8.8 percent and the component of the BSI measuring expectations over the next six months, the Expectations Index (EI), retreating 9.9 percent to 129.0.

CEOs still maintain that both business and corporate conditions are good: these two indices may have posted declines, yet they are still way above the 100 level. It is rather in regard to the current state of the overall economy where CEOs have the most concerns – the 15.3 percent fall in this index to just 80.5 brings it to a low not seen since the beginning of 2007. The seasonal holiday period reduced economic activity while rising energy prices – especially for oil and coal – are increasing costs for many businesses. Yet as the economy should quickly pick up following the Idul Fitri holidays, the CEO pessimism appears to be overdone.

Given the rising inflationary expectations – especially amid fears that oil prices were set to break through the US$100/barrel level – CEOs were much less hopeful than before that Bank Indonesia would be able to cut interest rates. In the latest survey only 25.4 percent of CEOs expect interest rates to be cut in the six months ahead, or down from 35.3 percent previously.

Since CEOs fear that costs will balloon over the next 6 months, they expect profitability to be hurt to a certain extent. Yet at the same time, CEOs also claimed that they would be able to pass on some of the cost increases to customers by raising prices. This should help companies to prevent their profit margins from being eroded too much.

Looking forward, CEOs are concerned over the country’s economic prospects. This index fell below the 100 level for the first time in 2007 year. Such concerns reflect a number of factors, but especially soaring

crude oil prices. This raises fears of higher inflation and possible monetary tightening in the year ahead. Meanwhile, the outlook for the global economy is less rosy after the sub-prime mortgage crisis broke out in the US.

Business confidence toward the government declined again in the latest survey: the business confidence in the government index (BCGI) dropped 7.46 percent to 90.49, after falling 1.78 percent in the earlier survey. Download Report



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