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Why account deficits show a bittersweet outlook for Indonesia

Sr Emerging Markets Analyst

Why Indonesia's current account deficits are bittersweet (Part 5 of 5)

(Continued from Part 4)

Indonesia’s bittersweet outlook

The outlook for Indonesia (IDX) could be strong in the medium term. In the short term, though, the start of tapering will certainly dampen the market. In the long term, structural reforms are needed to improve the growth prospects of the country.

IDX vs SPY 2013-09-18

Aside from the ripple effects of quantitative easing tapering, the economy will also come under pressure in the short term due to continued low commodity prices. However, these effects are unlikely to last well into 2014. Within a year, commodity prices will strengthen as Chinese, European, and American demand picks up.

Plus, as we’ve seen, inflation has been driven by the depreciation of the rupiah. So once inflation comes under control, given the hawkish (aggressive) interest rate hikes, the foreign exchange should stabilize and attract foreign investors again.

Thomas Olsen, partner of the financial services practice of Bain and Company stated, ”This is a short-term phenomenon… It is a speed bump that is part of an adjustment in the macro environment, but it should not affect the structural medium-term story for Indonesia, and the structural factors that are providing growth. But in the medium-term, structural growth should be in line with… expectations, although the five-year GDP growth may be a bit lower than expected.”

In terms of market timing, perhaps it may be wise to wait for the dampening effect that the announcement of tapering will have on emerging markets (VWO) before jumping back in—though the horizon within the next year seems enticing.

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