Monday, February 10, 2014

Indonesia Stays on Course

The string of data out of Indonesia last week is encouraging for the country. Its consumer price index (CPI) inflation stabilised,
the trade account posted a surplus for the third consecutive month and GDP growth for the December quarter beat expectations. While not completely sheltered from the broader selloff seen in emerging markets, the rupiah and local bourse have been doing relatively better compared to regional counterparts. Barring any sharp moves in the markets kicking off this week, Bank Indonesia (BI) is likely to keep its benchmark interest rate unchanged this week.

The central bank has made it clear that inflation and the current account deficit are the two key tasks for 2014. CPI inflation has been moving sideways since September and it is likely to start easing from March onwards. Given the high base effect from the second half of 2013, CPI inflation is likely to be around 5% on-year by December, which is right where BI wants it to be.

Indonesia’s current account deficit may have narrowed to about 2.5% of GDP in the December quarter. That will be quite an improvement, considering it was at a multi-year high of 4.4% of GDP in the June quarter. The central bank will take some comfort from this although it will remain cautious on the outlook ahead. The strong US$1.5 billion trade surplus seen in December could be temporary – there needs to be stronger signals for a definite improvement in the trade account. Yet, it still looks likely that the current account deficit will fall below 3% of GDP in 2014.

Bank Indonesia has been kept busy trying to curb loan growth by commercial banks. It has also been open to voice out its intent to keep a tight monetary policy. Looking further ahead, it will be interesting to see if the central bank may tinker with other instruments, including the reserve requirement ratio or even the overnight deposit facility rate, known as the FASBI rate. For now, there seems to be no reason to change its course.