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Currency News

Indonesian economy remains sluggish, central bank likely to ease policy further in 2016

Indonesia’s central bank, Bank Indonesia (BI) has lowered the policy rate in its past three meetings from 7.5% to 6.75%, continuing with its easing policy. Low price pressures might encourage the central bank to further ease policy in 2016 because of weak economic growth. Due to base effects and low oil prices, inflation continued to decelerate in February to 3.62% y/y.

The economic growth continues to be weak though. Indonesia’s GDP growth continued to slow down and reached 4.5% in 2015, lowest since 2009. The central bank forecasts economic growth to expand to abound 5% in 2016 and 6% in 2017; however, recent data indicates that risks on the downside have strengthened. The country’s external accounts have performed well as the current account deficit is likely to be close to 2% of GDP in 2016, according to BBH. Weakness in domestic demand and lower oil prices have led to weak imports.

Fiscal policy is not yet a major cause of worry. Indonesia’s budget deficit is likely to narrow to about -2% of GDP in 2016 and 2017, added BBH. But there are risks on the upside given weak growth and Jokowi’s plans to boost growth through infrastructure spending.

The Indonesian rupiah has performed quite well; however it continues to be vulnerable because of weak fundamentals, according to BBH. The country still relies very much on foreign inflow, while foreign reserves have been declining steadily.

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