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Companies in Indonesia, Southeast Asia's largest economy, are the most optimistic in Asia, with almost 9 out of 10 firms expecting their businesses to improve in the third quarter of the year,while Hong Kong, whose open economy is increasingly tied to mainland China, is the most pessimistic, according to a quarterly survey conducted by Standard Chartered.
Indonesia is less dependent on exports and more reliant on domestic demand compared to its peers elsewhere in Asia, and its middle-class, along with per-capita income, is growing, the British bank said in the survey. These themes shield the country from weakness in demand in U.S., Europe and China, Asia's biggest export markets.
"The overall (global) economy is still very much focused on defensive mode," Clive McDonnell, Head of Equity Strategy, Standard Chartered, told CNBC Asia "Squawk Box" on Wednesday. "Yes, Indonesia does export quite a bit of coal to India and China so there are nuances there. Indonesia stands out from its North Asian peers because it is domestic-demand focused."
Because of this domestic demand, about 81 percent of Indonesian companies expect new orders to rise 10 percent in the current quarter, compared to a regional average of 66 percent, according to the survey. Eight out of 10 Indonesian firms also expect margins to improve, far higher than the average of 45 percent among respondents.
Conversely speaking, because of weakness in foreign markets as well as increasing reliance on domestic buying, demand has become the biggest concern in the region. Respondents worried this indicator jumped from to 26 percent from 4 percent in the previous quarter. Concerns about input costs fell as inflation moderated in the second quarter.
The most pessimistic respondents in the region were in Hong Kong, which is the most vulnerable to a slowdown in the global economy because trade makes up 223 percent of GDP . Respondents in Hong Kong expect to invest and hire less as growth opportunities decline. While they also forecast input costs to drop and hence margins to rise, they also think that a slowdown in China's economy would offset any benefit of a margin increase.
"The drop in Hong Kong's ranking to the market with the lowest corporate sentiment reflects a confluence of negative factors including the slowdown in mainland Chinese tourist arrivals and, in turn, the absence of their spending," Standard Chartered said in the report. "It may also reflect the slowdown in China's economic growth."
Unlike in Hong Kong, the domestic consumer should be able to prop up Indonesia, for which trade accounts for only 25 percent of the economy. Vishnu Varathan, Market Economist at Mizuho Corporate Bank in Singapore, agrees that the Indonesian consumer looks resilient now, but warns that risks are building for the Indonesian economy.
"I think people are getting a little bit more cautious. Credit growth has been very strong, but I don't know how sustainable these straight-line projections of consumption are," Varathan told CNBC. "Wage growth has actually not been keeping up with inflation and GDP growth."
For the second-quarter survey, Standard Chartered interviewed about 350 'C-level' executives across all markets and industry groups in Asia ex-Japan in June.