2014 Outlook Slashed As Headwinds Mount
BMI View: Indonesian assets have been hit hard by the confluence of a global flight to the US dollar as well as a record current account deficit and high domestic inflation. Although both the government and central bank have made efforts to stem high levels of volatility, we note that the measures introduced thus far are unlikely to be sufficient, and that tighter monetary policy may still be needed to avert a crisis of confidence. As a result of the hit that rising borrowing costs and inflation will take on investment and private consumption, we have downgraded our 2014 real GDP growth forecast materially to 5.4% from 6.0% previously.
Indonesian asset markets have been roiled recently following the release of worse-than-expected Q213 current account data, which reflected a record US$9.8bn deficit against a previous central bank estimate of US$9bn. The deficit, which was equivalent to 4.4% of GDP (harkening back to blow-out deficits in the mid-1990s), proved to be the catalyst for a substantial sell-off in Indonesian assets. Equities and the rupiah were particularly hard-hit, shedding 9.9% and 5.0%, respectively, over the past week.
BI, Government Measures Still Insufficient
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