(MENAFN- QNA) The new administration of Indonesian President Joko Widodo that will be inaugurated on October 20, will face a number of major economic challenges.
Real GDP growth slowed to 5.1% in Q2 2014 amidst declining exports and a slowdown in investment (although this may be partly related to the elections), a QNB press release said.
The new administration will be constrained in its ability to respond to the unfavorable global environment, where rising short-term interest rates in advanced economies could lead to further capital outflows from emerging markets. We therefore expect Indonesia’s real GDP growth to slow further in 2014-15. Nonetheless, Indonesia's long-term potential remains large if these challenges can be overcome.
The tightening of global liquidity emanating from the tapering of Quantitative Easing (QE) in the US has led to periodic bouts of capital outflows from Indonesia since mid-2013 as well as a weaker exchange rate.
In response, the central bank has hiked interest rates to combat inflation and used international reserves to support the currency, while the government has introduced export restrictions on raw minerals. This has contributed to a widening of the current account deficit to 4.3% of GDP in Q2 2014 at the same time as the economy slowed.
The authorities are relatively constrained in the stimulus they can provide to the economy in order to counteract this slowdown. The budget deficit (projected at 2.4% of GDP for 2014) is close to the statutory limit (3.0%) imposed by law.
In addition, the latest data suggests that Indonesia experienced portfolio outflows in August (see our Economic Commentary dated September 7, 2014). There is, therefore, little room to cut interest rates or raise public spending. (MORE)
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