Domestic activity holds up as elections bear on reform agenda
Indonesia is facing slowing growth, sharply rising inflation, a falling exchange rate for the Indonesian rupiah (IDR) and a widening current account deficit. With elections due next year, the first priority for the authorities is to curb inflation, which has squeezed real incomes. Since June, interest rates have risen by a combined 150bp to 7.25%. But the IDR has continued to depreciate. We expect the currency to settle in Q4 2013 as stronger global demand should help to stabilize the external deficit. However, a sharper fall in the IDR would increase inflationary pressures and slow growth.
To help maintain reasonable momentum in domestic activity, the Government will introduce more fiscal stimulus in the coming months. The Government has said that the IDR18.4t of savings it expects to make from the fuel subsidy cut will go toward the 2014 budget. But there is a risk that reform efforts could be delayed by next year’s elections.
We have lowered our GDP growth forecasts slightly, from 6.1% to 5.6% for 2013 and from 6.0% to 5.4% for 2014. Strong domestic fundamentals should support medium-term growth above 5.5%.
Source: Oxford Economics.
Bank lending growth
Source: Bank Indonesia; Haver Analytics.
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