Deputy Trade Minister Bayu Krisnamurthi said that the Indonesian government is preparing two strategic steps to anticipate the negative impact of the winding down of the Federal Reserve's quantitative easing program. In January 2014, the Fed's bond-buying program will be reduced from USD $85 billion to USD $75 billion per month. The two strategic steps, which will enhance financial stability in Southeast Asia's largest economy, involve the curtailing of Indonesia's current account deficit and high inflation.
The current account deficit of Indonesia has been a concern to many investor although it has already shown an easing trend. In the second quarter of 2013 the deficit stood at USD $9.8 billion, equivalent to 4.4 percent of gross domestic product (GDP), but moderated to USD $8.4 billion, or 3.8 percent of GDP, in the third quarter of 2013. The major contributor to the country's current account deficit is the large quantity of oil imports. The government aims to overcome large oil imports by increasing domestic production (palm oil based) biofuels.
Moreover, the sharply depreciated Indonesia rupiah exchange rate, which fell over 25 percent this year against the US dollar, causes imported inflation. The government aims to ease this imported inflation by reducing the costs and complexity of administration for imports. Indonesia's inflation accelerated to nearly nine percent (yoy) in the fall of 2013 after the government increased prices of subsidized fuels in June 2013. In November 2013, inflation stood at 8.37 percent (yoy).
Krisnamurthi expects that Indonesia will not be significantly impacted by the Fed's tapering issue because the macroeconomy is stable although GDP growth has been slowing. The Indonesian Employers Association (Apindo) estimates that Indonesia's economic growth in 2014 will range between 5.0 and 5.2 percent, down from its previous forecast of 5.5 to 5.9 percent. Apindo believes that the tapering will result in capital outflows from Indonesia and thus weaken the country's foreign exchange reserves as the central bank (Bank Indonesia) will use these for market interventions. The manufacturing industry is one of the worst hit sectors and growth of this sector will most likely not exceed 6 percent next year. Companies are suffering due to high inflation, the depreciating rupiah, higher interest rates and higher minimum wages. These problems have already resulted in many layoffs. In total, over 164,000 Indonesians have been fired in the manufacturing sector this year. It has been reported that if prices of electricity will increase, then over 400,000 people will be dismissed in the textile sector in 2014.