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lthough Indonesian growth is likely to slow, the slowdown ought to be accompanied by an improvement in inflation and the current-account deficit. Elections add a source of uncertainty for 2014, but the post-election administration could follow a business-friendly reform agenda.

We believe that despite slower growth, Indonesia'€™s domestic balance sheet and foreign reserves will prove sufficiently healthy to avoid a crisis in 2014.

Indonesia is coming to the end of a long commodity- and credit-fuelled investment boom. In addition to lower commodity prices, tighter monetary and fiscal policies should slow growth. The decline in investment and slowdown in consumption we expect as a result is likely to overwhelm the modest positive impulse from the export sector and election-related spending. We forecast 5.2 percent real gross domestic product (GDP) growth in 2014 after 5.6 percent growth in 2013. We doubt things will get much better in 2015 as we anticipate the export impulse to slip and subsidized fuel prices to rise while commodity and financial market conditions remain unfavorable.

While a slowdown in growth may prove disappointing for some, we believe it will be an important driver of a reduced current-account deficit.

That matters because Indonesia'€™s current-account deficit has been a major source of concern for investors and contributed to downward pressure on Indonesian financial markets last year. It was that pressure that spurred the authorities to pursue a series of policy adjustments over the last 12 months '€” including the subsidized fuel price hike, three separate fiscal policy packages plus a series of policy rate increases and macro prudential measures on the part of Bank Indonesia (BI). We expect the current-account deficit to fall from 3.8 percent of GDP in 2013 to 2.8 percent of GDP in 2014, as a result of these policy measures and the associated weaker domestic demand dynamic.

We judge the policy adjustments to date alongside the financial market price adjustments that have been allowed to take place may be sufficient to put and keep the current-account deficit on a moderating path. The more than 250 basis point (bp) increase in short-term money market rates and 350 bp increase in 10-year local currency bond yields from their lows earlier last year should act to curtail domestic demand. Likewise, the 20 percent on the year decline in the rupiah against the US dollar and 15 percent on the year fall in the rupiah on a trade weighted basis should help reduce import demand and support export competitiveness.

Exports should also get a lift from external demand in 2014. UBS economists forecast global real GDP growth to accelerate to 3.4 percent this year from 2.5 percent in 2013 '€” largely as a result of improvement in European and US growth. Indonesian exports, which are denominated by commodities, are not particularly exposed to these markets but the network effects of a pickup in global actively ought to modestly boost export growth.

The improvement in the current-account balance alongside the looming election will probably sap the authorities'€™ willingness to keep tightening policy or pursuing a reform agenda. So, for example, we expect no further subsidized fuel price reform ahead of the elections (although some adjustment is warranted).

Indonesia will elect a new legislature and a new president in 2014.

The general election will be held on April 9, and the first round of the presidential election will be in mid-July. If needed, a second round presidential election will be held in September. The new president will take office in October. Because incumbent President Susilo Bambang Yudhoyono has reached his term limit and his party (Democratic Party) has lost ground in the polls, a change in political leadership seems certain.

Presidential candidates will not be known for sure until after the general election and so uncertainty could lead to a hiatus of private investment as well as public policy while the political process plays out.

Inflation should slow in 2014. We project 6.7 percent consumer price index (CPI) inflation on average in 2014 after 7 percent in 2013. The impact of higher subsidized fuel prices and the sharp weakness in the exchange rate in 2013 should fade, while the slowing growth dynamic should help depress pricing power. However, inflation may slow less than is widely anticipated. We expect the exchange rate to continue to weaken through 2014 and an additional subsidized fuel price hike by end 2014 (after the elections). Government intervention in product markets alternately to support farm prices and mitigate food price spikes could add to inflation volatility in an election year. Nonetheless, we think the peak in CPI inflation may have been 8.8 percent in August 2013, with CPI inflation finishing 2013 at 8.5 percent and 2014 at a little over 6 percent '€” assuming a moderate subsidy adjustment toward year-end.

The risk is on the upside for BI policy rates, but on balance we think the central bank is done raising policy rates for now.

BI'€™s hawkish rhetoric on inflation and the current-account balance should diminish with weaker growth and signs of moderating inflation in 2014. Money market rates, which have risen far further than policy rates, may be allowed to rise anew if global financial market conditions tighten with a G3 growth recovery and less easy US Federal Reserve policy. We forecast the BI rate at 7.5 percent come the end of 2014, with three-month Jakarta Interbank Offered Rate (JIBOR) rates a little under 8 percent.

We expect the rupiah to trend lower in coming quarters. The rupiah should decline because of weakening Indonesia growth, relatively elevated inflation, the inability of the authorities to execute on structural reform during the election period and the stronger US dollar we project. The narrower current-account deficit we forecast and the sharp decline in the currency during 2013 are the key reasons for not looking for a larger decline in the rupiah during 2014-2015.

What are the risks to the view we have laid out? Beyond the often discussed external risks, growth could slow much more sharply than we expect, especially if BI feels the need to aggressively tighten policy to bring a wider than expected current-account deficit under control.

The policy focus on the current account has led to a nod in the direction of reform, but the momentum toward an easier business environment has arguably slipped in recent years. A negative risk is that this slippage persists post election.

The positive risk is that the new administration pushes ahead with a business reform agenda.

One risk we are inclined to play down for 2014 is the potential for slower growth and a lingering current-account deficit to lead to a financial crisis for Indonesia. It may be that Indonesia'€™s financial markets may come under pressure from the Fed tapering of its QE program during the year. However, a crisis should be avoided. Domestically, key metrics of the banking system'€™s balance sheet are far from extreme '€” the loan-to-deposit ratio is below 100 and non-performing loans are still low as a share of assets. Externally, foreign exchange reserves are still more than 165 percent of short-term debt owed to foreign investors.

Moreover, central bank currency-swap arrangements with China and Japan in particular provide an additional layer of insurance.