JAKARTA: Indonesia’s top priority is to halt a widening current account deficit even if means deliberately slowing Southeast Asia’s largest economy, the finance minister said yesterday.
The former emerging market star has looked one of the most vulnerable to expected tapering in US monetary stimulus and a sharp rise in its current account deficit in the second quarter helped sap investor enthusiasm, hitting the rupiah harder than any other currency in Asia. It has fallen more than 15% so far this year.
“The government should address the issue of this current account deficit. That will be the first priority,” Finance Minister Chatib Basri told an investment conference.
The government is planning to introduce a second package of measures by year-end to bolster foreign investment and ease consumer demand for imports. The first, announced in August, included planned measures to open more sectors to outside investors.
“How Indonesia navigates through this current situation? The first thing is we have to come up with macroeconomic policies in which we have to accept slower growth.”
Basri said he was “quite happy” with government data on Wednesday that showed annual growth in the third quarter (3Q) at 5.62%, the slowest in nearly four years.
He believed GDP would hover near 5.5% to 5.6% in 4Q, translating into full-year growth of 5.6%. The full-year estimate would be the slowest since 2009.
Analysts warned, however, that the government should not be too complacent with slowing economic growth.
“It’s not a bad idea to address the current account problem. In fact, it may be necessary,” said Gundy Cahyadi, an analyst with DBS Bank.
“But sustaining GDP growth momentum is also crucial. The last thing the government would want to see is a sharp plunge in consumer confidence that could potentially be even harder to revive.”
Basri expected the current account deficit to narrow to around 3.3% to 3.5% of GDP in 3Q and ease further by year-end.
The widest measure of the flow of goods, services and money in and out of Indonesia was driven by price declines for its most lucrative commodity exports — from coal to tin and palm oil. The shortfall reached an unexpectedly large US$9.8 billion (RM31.2 billiion) in the quarter ended June 30, the biggest since the 1997/98 Asian financial crisis and equivalent to 4.4% of GDP.
Indonesia’s large trade and current account deficits this year have made it a target of portfolio investors shifting funds out of emerging markets. Apart from weak economic fundamentals, investors are also concerned about the country’s leadership transition as presidential elections are planned for July next year.
Indonesia is considering a number of reforms to attract foreign investment, including making the judicial system more transparent for insolvency and small claims cases, said Mahendra Siregar, chairman of the Indonesia Investment Coordinating Board, at the same investment conference.
He hoped the government would by month-end release its amended “negative investment list” of sectors, in which foreign investors are either barred or restricted. The list, which has existed for decades, limits foreign involvement in areas deemed sensitive.
After successive years of record direct foreign investment, growth has started to slow.
The government has blamed the global economic slowdown but investors say Indonesia also has to do more to make the economy attractive, such as dealing with mounting infrastructure bottlenecks to reducing bureaucratic impediments.
Foreign investments into Indonesian bonds and bills have however picked up since September, with net inflows so far over the two months exceeding US$2.3 billion and more than compensating for the US$2 billion outflows in June, according to BNP Paribas. — Reuters
This article first appeared in The Edge Financial Daily, on November 8, 2013.