TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
Economy seen to remain weak next year
DBS IndonesiaEconomists at Singapore-based DBS Group expect Indonesiaâs economy to remain sluggish next year, with higher interest rates in the US seen to keep the rupiah under pressure
Change Size
DBS Indonesia
Economists at Singapore-based DBS Group expect Indonesia's economy to remain sluggish next year, with higher interest rates in the US seen to keep the rupiah under pressure.
DBS Group Research predicts that the US Federal Reserve (Fed) will raise its benchmark interest rate in early 2016 and again in the third quarter of that year.
The researchers also said the Fed's policy had the potential to weaken Indonesia's gross domestic product (GDP), if investment growth remained sluggish.
DBS Group Research economist Gundy Cahyadi explained that although the Fed fund rate hike would not be as aggressive as expected earlier, it would further strengthen the US dollar.
"This is because of the monetary policy divergence between the Fed, the Bank of Japan and the European Central Bank (ECB). DBS Group Research expects the US dollar to continue to gain in 2016," Gundy said at the DBS Media Luncheon in Jakarta on Tuesday.
The analyst noted that while the Fed had stopped its quantitative easing (QE) program aimed at increasing the money supply, he expected the Bank of Japan and the ECB to keep their own liquidity-providing measures going until 2016. The Fed's decision to halt QE would tighten money supply in the US and thereby likely lead to a monetary divergence between the US on the one hand and the EU and Japan on the other.
"As more money is printed and supplied, the value of the currency will fall, meaning the yen and the euro will weaken; the US dollar will strengthen," Gundy said.
This situation, he added, would contribute to weakening trend of the rupiah, which had depreciated by 20 percent against the US dollar, from about Rp 11,000 per dollar in 2014 to Rp 14,700 in September 2015. Compared to the euro and Japanese yen, however, the rupiah was relatively stable, he said.
"The main factor behind the continuous weakening of the rupiah against the US dollar is not merely the weakening of Indonesia's economy, but the weakening of currencies worldwide against the US dollar, which poses risks to global economic growth," he said, adding that he predicted the rupiah to be valued at around Rp 14,000 per dollar in 2016.
Taking a closer look at Indonesia's economy, Gundy said the growth in consumer spending had slowed during the past three years, while investment growth had also weakened. "We estimate there will be an 8-percent potential investment growth rate in the real sector, but in 2015, to reach growth of 5 percent is difficult. We predict that growth this year will stand at only 3.5 percent," he said.
Gundy pointed out that the weakening rupiah would affect the investment climate, since 60 percent of imported production content was paid for in US dollars, making such goods more costly. "The implication would be decreased investment. The weak purchase of imported goods, namely capital goods, indicates that Indonesia's investment growth is weak," Gundy said.
The DBS Group Research economist also noted that Indonesia's current account deficit (CAD) amounted to 2 percent of GDP in the first half 2015, down from 4.5 percent in 2013. According to the analyst, however, the lower CAD resulted from a significant drop in imports rather than a stronger export performance.
"If Indonesia's imports increased and exports have not risen, this, off course, will affect the CAD. We predicted our CAD will be around 2.5 to 2.7 percent of GDP next year," he said.
To improve the CAD, he suggested, the government should do more to drive foreign direct investment (FDI), so that the country's financial markets would not fluctuate so much. In the last three years, FDI accounted for an average 1.5 percent of GDP, while the CAD accounted for 3 percent, or only half covered by FDI.
"If [the current account gap] can be closed completely, we do not need to worry about CAD," said Gundy.
According to the analyst, opening more industries to foreign investment would be one way to increase FDI. "The most important thing is to prevent downward spiral risks that will impact the financial system's stability,' he said.
Gundy predicted Indonesian GDP growth of 5.2 percent next year, up slightly from this year's forecast of 4.8 percent, while economic growth in 2017 was estimated to be between 5.3 and 5.5 percent. (ebf)
