Update COVID-19 in Indonesia: 927,380 confirmed infections, 26,590 deaths (19 January 2021)
19 January 2021 (closed)
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Benedict Bingham, Senior Resident Representative for Indonesia at the International Monetary Fund (IMF), expects that the central bank of Indonesia (Bank Indonesia) will remain committed to the tighter monetary policy in a bid to safeguard the country’s fiscal fundamentals amid external pressures. Apart from sluggish global economic growth, the looming interest rate hike in the USA (later this year) is expected to rock Indonesia as it will trigger capital outflows from emerging markets.
Between June 2013 and November 2014, Bank Indonesia raised its key interest rate (BI rate) gradually from 5.75 percent to 7.75 percent in a move to combat high inflation (caused by subsidized fuel price hikes in June 2013 and November 2014), to limit the country’s wide current account deficit (which touched 3.3 percent of gross domestic product in 2013), and to support the rupiah exchange rate (which had depreciated about 26 percent against the US dollar during 2013). A negative side effect of monetary tightening, however, is that economic growth is curtailed. Last year the economy of Indonesia was only able to expand 5.02 percent (y/y), the slowest growth pace in five years. Besides the tight-bias policy of Bank Indonesia, economic expansion was also curbed by weak global demand for Indonesian commodities and slowing investment growth due to political uncertainties (triggered by the country’s legislative and presidential elections).
Supported by worldwide low crude oil prices, Indonesian inflation has eased at the start of 2015. Based on the latest data from Statistics Indonesia (BPS), inflation eased to 6.96 percent (y/y) in January from 8.36 percent (y/y) at the end of 2014. Bingham said that the IMF expects inflation to ease further this year and is most likely to end in the central bank’s target range of 3-5 percent (y/y) at the year-end. Meanwhile, the country’s current account deficit is estimated to have improved to about 3 percent of GDP in 2014 (Indonesia is a net oil importer). Indonesia’s trade deficit was USD $1.88 billion in 2014, significantly improved from the USD $4.08 billion trade deficit that was recorded one year earlier. Still, the current account deficit needs to improve further in order to enhance investors’ confidence in the country’s financial fundamentals (a current account deficit signals that a country is dependent on foreign inflows).
However, given that various central banks around the globe have shifted towards a monetary stimulus policy (for example central banks in India, Australia, Eurozone and Singapore) in order to boost economic growth, Bingham expects Indonesia’s central bank to maintain a relatively high interest rate environment in order to attract foreign capital. The next Board of Governor’s Meeting, which discusses the policy rate, is to be held on Tuesday (17/02).
Meanwhile, international credit ratings agency Moody’s Investors Service believes that low global oil prices - which under normal circumstances should boost economic growth - are unable to spur the global economy as these low prices come at unfavourable economic times. In its latest report, Marie Diron (Moody’s Senior Vice President for Credit Policy) said that Moody’s will not revise its forecast for economic growth in G-20 economies (the group which consists of leading industrialized and developing nations) as high unemployment and new political uncertainty in several Eurozone member countries as well as Brazil’s tightened monetary and fiscal policy will offset the positive impact of low crude oil prices. Moreover, China and Japan are struggling to improve their economic performances, hence resulting in weaker global demand.
Moody’s expects the G-20 economies to grow slightly below 3 percent (y/y) in both 2015 and 2016 (implying an unchanged forecast from 2014). Regarding the Eurozone and Japan, Moody’s sees growth of under 1 percent (y/y) in 2015. On the other hand, the USA and India are estimated to benefit from lower oil prices as consumers and companies in both countries spend part of the gains in real income. The economies of the USA and India are projected to expand 3.2 percent (y/y) and 7 percent (y/y), respectively, this year. Russia, however, is expected to experience sharp recession until 2017 due to the oil price slump and for its involvement in geopolitical issues in the Ukraine.