How will Indonesia deal with escalating China woes?

Exports and currency stability is at risk.

China's economic convulsions will have an indirect but big effect on Indonesia's exports and currency stability, according to a report from OCBC.

OCBC said that given China's role as a big buyer of commodities, its growth prospects will immediately affect prices of commodities, which form a huge chunk of Indonesia's economy.

"Even though the long decline in both the prices and volumes of commodities have shrunk their share in Indonesia’s total exports, the proportion is still significant at around 25%. In turn, any further slump in the commodity market, courtesy of fears about China, will put Indonesia in a tough spot," said OCBC.

To counter China's slowdown, Bank of Indonesia (BI) might decide to cut rates, OCBC said.

"With an eye on China, the debate on whether Bank Indonesia will cut rate this Thursday is raging. We think that it will, even if we have to slap on the big fat caveat that it is contingent on calmness in currency market. Whatever the decision is, BI would want to be as clear in its communication as possible," OCBC noted.

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