The New Normal
    Category: Outlook 2014 By : Forbes Indonesia team Read : 641 Date : Monday, November 04, 2013 - 08:42:37


    Ahmad Zamroni / Forbes Indonesia

    Indonesia's economic situation has entered a period of uncertainty after a long period of relatively benign growth. With the U.S. Federal Reserve signaling the end of quantitative easing, investors have shifted out of emerging markets, and Indonesia is no exception. The JCI dropped just below 4,000 in late August, while the rupiah broke through the 10,000 barrier to hover at current levels around 11,500 to the dollar. Foreign reserves are at their lowest since 2010, with inflation soaring to its highest point since the 2008 crisis—all factors that should slow growth.

    With the easy money gone, fundamental problems in the country's economy are now clearly visible. In July, the government noted the current account deficit had continued for seven quarters in a row. With its growing reliance on imports, the economy has become more vulnerable to external shocks.

    As with last year, we hosted four prominent financial experts in early October for a long lunch and a roundtable discussion on the outlook for Indonesia's economy in 2014. All agreed that the current phase is the start of the new normal. Greater uncertainties may be looming for the global and Indonesian economies, though the consensus was that the worse might be over. Indeed, since the roundtable took place, the JCI has bounced back, and the currency has slightly improved. Bank Indonesia's decision to raise its benchmark rate to 7.25% from 5.75% also helped ease investor worries. One bright spot is that next year's elections should pump funds into the economy, at least temporarily, for consumption. “But we should not be complacent,” notes JP Morgan's Haryanto as many fundamental problems remain unresolved. The following are highlights of the roundtable discussion.

    How bad is the situation and how long will it last?

    Haryanto: We have been having a current account deficit since 2011, so it has been seven quarters in a row. In the past when external factors were still favorable, the flow coming into emerging markets was strong with the Fed's quantitative easing, and there was less concern. The situation is now getting more complicated, partially because of what happened with the European economy and Greece creating uncertainty.

    Going back to the deficit. Usually currency devaluations benefit exports because your product is cheaper on the international market. The challenge for Indonesia is that our exports are energy and raw commodities and those two are not dependent to exchange rates. They are driven by global supply and demand.

    So clearly this is an issue. On top of that, due to inflation, the government even open imports for basic foods. The easiest way to address the problem is to slow down the economy, which will slow down imports. This choice, however, is not easy to accept.

    Our analyst is predicting much lower growth than anybody else. Last year he predicted 5.6% and revised it 5.5%, and next year is predicting 4.9% with upside potential—though the number keeps changing. We are in a new normal where everything is changing.



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