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Jakarta Post

Worst could be over for Indonesia'€™s economy

  • Satria Sambijantoro

    The Jakarta Post

Jakarta   /   Sat, September 28, 2013   /  11:16 am

Indonesia may have weathered its recent economic woes as bold measures implemented by monetary authorities during the last two months will likely put its economy back on track, say analysts.

Bank of America Merrill Lynch economist Hak Bin Chua estimated that Indonesia, among the hardest hit by the recent financial market turmoil, would soon see a significant improvement in its macroeconomic indicators.

The country'€™s inflation, which rose sharply in the last two months, was already close to its peak, while the trade deficit would likely make a sharp U-turn and become a surplus in the coming months, he said.

'€œIndonesia has implemented a range of policies to tackle a mini balance of payments crisis. We think the worst is largely over and macro data will show signs of stabilization in the coming months,'€ he wrote in a report released on Friday.

Indonesia has suffered at the hands of capital outflows in the region in the past weeks, amid fears the US central bank would scale down its stimulus package.

This year, the rupiah and Indonesian bond yields became the worst-performers in Asia, as the nation'€™s high inflation and widening current account deficit exacerbated negative sentiment among investors already spooked by the prospect of tighter US monetary policy.

The Indonesian stock market was also among the hardest hit in the recent turmoil.

The latest data shows Indonesia'€™s annual inflation surged to a four-year high of 8.8 percent in August, while the trade deficit widened to a historic-high of US$2.3 billion in July. The Central Statistics Agency (BPS) is scheduled to announce new inflation and trade deficit data next week.

In the second quarter, the current account deficit swelled to a record high of $9.8 billion, equivalent to 4.4 percent of gross domestic product (GDP), raising concerns among foreign investors about the sustainability of Indonesia'€™s economy.

Chua, however, predicted the current account deficit would narrow to 3.8 percent of GDP in the third quarter this year, thanks to lower imports due to slower economic growth, combined with the expected increase in exports stemming from the weak rupiah.

'€œThe good news is that, before the end of this year and through the course of 2014, we are likely to see the trade and current account deficits narrow, as well as headline consumer price inflation fall,'€ Robert Prior-Wandesforde, an economist with Credit Suisse, wrote in a report released on Friday.

Meanwhile, observers have attributed the possible improvement in Indonesia'€™s external position to aggressive monetary tightening performed by Bank Indonesia (BI), which has raised its key interest rate by 1.50 percentage points to 7.25 percent since the middle of June.

The central bank will also gradually raise its secondary reserve requirement to 4 percent beginning in October, from 2.5 percent at present, to further curb inflation.

 '€œThe cumulative 150 basis points tightening since June has helped to restore monetary policy discipline and build credibility with foreign investors,'€ said Philip McNicholas, an economist with BNP Paribas.

The bout of interest rate hikes '€œshould help reduce the impact on the rupiah from a future tapering-related shock'€, he added.

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