19/12/2012 (Financial Times) - The full palm oil storage tanks at the Chinese ports near Guangzhou and Shanghai are seriously bad news for small Indonesian farmers like Sugang Suprayetno.

Farm-gate prices for palm oil in his village of Pulo Dogom have fallen by more than a third over the past six months as Chinese and Indian demand for commodities has shrunk in line with slowing growth in the big Asian economies

“We can’t afford to pay for fertiliser or the proper maintenance of our land,” says Mr Suprayetno over coffee and clove cigarettes.

As the world’s biggest exporter of palm oil and coal for power stations, Indonesia has felt the pinch from slowing growth in China and India.

Despite this short-term pain, however, Indonesia’ economy has proved remarkably resilient, mainly because of the strength of domestic consumption and the fast-growing middle class in the nation of 240m people.

The two faces of Indonesia’s economy are neatly encapsulated in the data on vehicle sales, says David Fletcher, chief executive of Permata Bank, a local lender that is 45 per cent-owned by Standard Chartered.

After the central bank introduced new minimum downpayments for vehicle loans in June, sales of new motorbikes fell, down 12 per cent year-on-year in October, while car sales are set for their best-ever year, up by 24 per cent in the same period.

Buying a car is a symbol of success for the upwardly mobile middle class but most Indonesians still rely on cheap two-wheelers for everyday transport.

“This shows the resilience of the higher-earning market,” says Mr Fletcher. “The worst-affected people are in rural, commodity-reliant areas.”

That includes Mr Suprayetno, who currently earns only Rp1.1m ($115) a month from his 2.5 hectares of palm oil trees – barely enough to support his wife and child, who are scrimping food to save money.

As prices of palm oil, a key ingredient for everything from shampoo to instant noodles and even biofuels, rose steadily in the last few years, many small Indonesian farmers rushed to buy new motorbikes on credit.

“But now they can’t afford the repayments so the finance companies are repossessing them,” says Muhammad Rulis, another farmer.

Palm oil and rubber farmers have been squeezed, coal miners have been forced to shutter sites and send home workers and sales of Komatsu heavy machinery, vital for the mining and plantation industries, are down 20 per cent on last year.

And recent, tentative signs that China’s economy is starting to pick up again have not yet passed through to commodity prices.

But while commodities make up 60 per cent of exports, domestic demand drives Indonesia’s economy, accounting for about two-thirds of gross domestic product. Coal and palm oil, by contrast, generate only five per cent of GDP.

Heriyanto Irawan, head of Indonesia research for Deutsche Bank, says economic growth remains “very vibrant” even though the economy slowed to an annualised 6.2 per cent pace in the third quarter, from 6.4 per cent in the previous quarter.

The resilience of this domestic demand is evident in Medan, the capital of north Sumatra, which lies 250 kilometres north of Labuhan Batu, the vast palm oil growing region where Mr Suprayetno’s village is located.

Indonesia’s middle-class consumption boom is clear to see in the city’s traffic-clogged streets, where five-star hotels and shopping malls have sprung up and a major new international airport is near completion.

The flourishing commodities industry helped kick start growth in Medan, which is close to the main palm oil exporting port of Belawan, but local businessmen say the development of the city of 2m has now taken on a pace of its own.

Tomi Wistan, a Medan property developer and head of the North Sumatra real estate association, says the impact from the falling palm oil price will be limited.

“We are still seeing strong demand for middle-class houses in the Rp200m-Rp300m range and prices are growing by around 20 per cent a year,” he says, sitting in a garish club that is popular with the city’s nouveaux riches. “The new infrastructure projects should drive growth even higher.”

Deutsche’s Mr Irawan says the slowdown in China, India and developed markets could be an unexpected boon, as it makes Indonesia relatively more attractive to investors.

As he prepares to welcome a delegation of 50 Chinese businessmen keen to invest in the agriculture and power generation sectors in North Sumatra, that is all too obvious to Mr Wistan.

“The long-term outlook is still good,” he says. “Medan is one of the fastest growing cities in the country, with GDP growing even more quickly than in the capital Jakarta.”