Indonesia's New Fiscal Policy Packages for Financial Stability Expected Soon
The government of Indonesia will release two additional fiscal policy packages at the end of November or start of December that both aim to heal Indonesia's current account deficit. The two packages constitute follow ups of the policy package that was released in August 2013. Previously, deputy minister of Finance, Bambang Brodjonegoro, announced that an additional package would be released in October. However, it turned out that the government needed some more time to prepare the two additional packages.
Amid global and domestic market turmoil, brought on by uncertainty about the Federal Reserve's quantitative easing program, falling commodity prices, a sharply depreciating rupiah exchange rate, high inflation, a wide current account deficit as well as slowing economic growth, the Indonesian government and central bank had released policy packages in August 2013 that aimed to restore the country's financial stability after large-scale capital outflows from the country's capital markets emerged.
The additional policy packages that will follow focus on curbing imports while increasing exports, as well as boosting (foreign) investments in the country. The government is busy preparing various tax incentives and tax holidays to attract foreign direct investment (FDI), while also opening up several sectors to foreign investment through a revision of the country's negative investment list.
Indonesia's current account deficit slipped to a record USD $9.8 billion in the second quarter of 2013. This amount was equal to 4.4 percent of the country's gross domestic product (GDP), a worrying ratio. In the third quarter of 2013, the current account deficit eased to USD $8.4 billion, equivalent to 3.8 percent of GDP. This is a positive development but should not make the Indonesian government and central bank (Bank Indonesia) complacent. The easing deficit was supported by Bank Indonesia's 1.75 percent rate hike between June and November 2013. The country's benchmark interest rate (BI rate) was raised from 5.75 percent to 7.50 percent and clearly shows that the institution is choosing financial stability at the expense of higher economic growth. In the third quarter of 2013, GDP growth slowed to 5.62 percent (yoy). Although the higher BI rate has as main aim to curb high inflation (8.32 percent yoy in October 2013), it also limits imports and thus improves the trade balance.
Market research firm Citi Research expects Indonesia's current account deficit to fall to 3.5 percent (yoy) by the end of 2013. The research firm believes that this deficit is currently the core problem of the Indonesian economy. According to Citi Research, the moderating trend of the deficit is caused by improved export figures in the third quarter of 2013, and which is expected to continue into the fourth quarter.