Goldman Sachs Group Optimistic on the Indonesian Economy
American multinational finance company Goldman Sachs Group Inc believes Indonesia currently has strong enough economic fundamentals to cope with monetary tightening in the USA. Indonesia is in a better position now compared to 2013 when the taper tantrum (the winding down of the US Federal Reserve's quantitative easing program) led to massive capital outflows from emerging markets (and Indonesia was among the biggest victims with the rupiah weakening more than 25 percent against the US dollar in 2013).
Again, there were a couple of shocks that originated from the USA and caused volatility across the globe's financial markets near the end of 2016: Donald Trump winning the US presidential election in November 2016 and the Federal Reserve's interest rate hike in December 2016. As a consequence of the high degree of uncertainty (and the more attractive yields in the USA), foreign investors sold a net USD $2.8 billion of Indonesian stocks and bonds in the fourth quarter of 2016.
Due to capital outflows in Q4-2016 and the bullish US dollar, the Indonesian rupiah was again under pressure. However, rupiah weakening was rather short-term only, while the central bank of Indonesia (Bank Indonesia) intervened heavily to support the currency. Regarding, full-year 2016 the Indonesian rupiah actually managed to appreciate 2.60 percent against the US dollar, hence becoming the best-performing currency in Asia after Japan's yen.
Andrew Tilton, Chief Asia-Pacific Economist at Goldman Sach’s, said the rupiah may not depreciate further significantly in Q1-2017 as the high yield that is offered by Indonesian government bonds give some buffer against capital losses. However, risks remain, he said. Most importantly, the legal cap on government’s fiscal deficit and the high sensitivity of the rupiah to US policies and capital flows.
Indonesia's economic fundamentals are considered stronger at the start of 2017 (compared to 2013) because the current account deficit has narrowed, higher foreign exchange reserves, lower gross external indebtedness, a stable rupiah exchange rate, and accelerating economic growth. Meanwhile, Tilton added that modestly improving commodity prices may also help to further narrow Indonesia’s current account deficit over the next 12 months.
Goldman Sachs expects Indonesia's economy to grow 5.3 percent year-on-year (y/y) in 2017, from an estimated 5.0 percent (y/y) in 2016, supported by rising private consumption and public sector investment. Tilton said much of the boost is expected to come after the government's tax amnesty window closes on 31 March 2017.
On Tuesday (03/01) Indonesia's Statistics Agency (BPS) announced that Indonesia's inflation rose 3.02 percent in full-year 2016, a very low inflation rate for Indonesian standards. Low inflation throughout 2016 was, partly, reason for Bank Indonesia to cut its benchmark interest rate six times in 2016 in an effort to boost credit growth and economic activity. However, Bank Indonesia will likely remain on hold for a prolonged period amid potential rupiah volatility considering high foreign ownership of rupiah-denominated sovereign bonds, particularly in times of risk aversion and a broader emerging markets sell-off.
US Dollar vs Indonesian Rupiah (JISDOR):
| Source: Bank Indonesia