07/13/2015
Indonesia / GDP
The onus is on Indonesia’s government to improve the country’s GDP growth momentum by speeding up fiscal disbursement. And, it may be time to rethink the tolerance for currency weakness.
Indonesia’s GDP growth momentum remains weak at this juncture and we continue to see downside risks to our 5.1% forecast for the year. The June trade data due this week is likely to show that export growth remains poor while imports might have continued to slump. The slowdown in domestic demand has yet to be arrested.
At the same time, inflationary expectations remain tilted toward the upside. Core inflation remains steady around 5% and the US dollar continues to trend up against the Indonesian rupiah. While consumer price index (CPI) inflation is likely to ease quite markedly from August onward, one risk to food prices is the impact of El Nino weather conditions. There are also risks that CPI inflation may continue to average in excess of 6% in 2016.
Against this backdrop, expect Bank Indonesia (BI) to keep policy rates steady. The central bank is likely to ponder whether another rate cut is needed to boost growth. The underlying sentiment among private investors remains low as long as fiscal disbursement is slow. There is, presumably, not much that a 25 basis point rate cut could do. As far as GDP growth momentum is concerned, the onus is on the government to change things around in the year’s second half. At the current rate, the government’s capital expenditure may only reach 55%-60% of its full-year target.
It will be interesting to monitor the central bank’s comments on the rupiah. A weak rupiah is thought to help boost export growth, but we have yet to see signs of it this year. Meanwhile, the central bank’s sustained tolerance for a weak rupiah might have weighed down domestic sentiment even further. While we don’t expect BI to make a sudden U-turn in its assessment on the rupiah, expect the central bank to be more active in smoothing market volatilities ahead.
