The twin threats of 2018 - a trade war between the United States and China moving in tandem with a hawkish Federal Reserve - buffeted currencies across emerging markets. The three currencies that had been hit the most were those whose economies ran substantial current account deficits, with the IDR joining the INR and PHP at the back of the line. For the year, Indonesia recorded a current account deficit of 2.98% of GDP, the widest since 2014 as the deficit swelled to $31.1bn. With the trade gap ballooning to $8.496bn, Indonesia rolled out several reforms to help boost exports, with incentives and tax perks doled out to exporters while some infrastructure projects requiring substantial imports were postponed in order to achieve import compression.
Indonesia is now targeting a current account deficit of 2.5% of GDP which should alleviate some pressure on the IDR, especially with the turn in risk sentiment in the first quarter of the year. In 2019, market players will continue to monitor whether Indonesia can continue to whittle down the current account deficit, with early 2019 trade data showing a surplus recorded, but at the expense of a large contraction in imports.
Growth prospects for Indonesia remain favourable, given still robust domestic consumption which will be aided further by benign inflation dynamics. Elevated borrowing costs, raised last year to ensure IDR stability, however may limit capital formation to some extent but government spending is expected to continue to provide a lift. Reforms and investment may be needed in order for the economy to break out of the 5% trend, something that incumbent Jokowi has pledged to do with improvements in infrastructure seen as a priority.
Meanwhile, Indonesia will need to secure other more stable sources of foreign currency, given the economy’s susceptibility to foreign outflows and its reliance on low value added exports for foreign currency. A shift to higher value added export products would help address two concerns at once by securing a stable source of foreign flows and at the same time offering an alternative outlet for the young labour force in the manufacturing sector.
(source: ING and The Jakarta Post)