IMF Cuts Global Growth Outlook on Brexit, Indonesia Affected?

The United Kingdom's surprise vote to leave the EU provides additional uncertainty in an international environment that is already plagued by fragile business and consumer confidence. The IMF cut the outlook for the UK economy in 2016 by 0.2 percent to 1.7 percent (y/y). Next year, the UK's economic growth is estimated to slow to 1.3 percent (y/y), down 0.9 percentage point from the IMF's April estimate. Regarding the EU, the IMF raised its forecast by 0.1 percentage point to 1.6 percent (y/y) in 2016, but lowered the growth forecasts in 2017 by 0.2 percentage point to 1.4 percent (y/y).

Meanwhile, Japan will also feel the negative impact of Brexit as the Japanese yen is expected to strengthen, thus limiting growth of the world's third-largest economy. The IMF cut its 2016 growth forecast for Japan by 0.2 percentage point to 0.3 percent.

International Monetary Fund (IMF) Growth Forecasts:

Country/Region	2015	2016F	2017F
World	3.1%	3.1%	3.4%
USA	2.4%	2.2%	2.5%
Euro Area	1.7%	1.6%	1.4%
Japan	0.5%	0.3%	0.1%
United Kingdom	2.2%	1.7%	1.3%
Emerging Market & Developing Economies	4.0%	4.1%	4.6%
China	6.9%	6.6%	6.2%

^{Source: World Economic Outlook Update IMF, July 2016}

The Economy of Indonesia

For Indonesia the positive news is that the Brexit issue is expected to have a particular impact on the economies of the United Kingdom, Japan as well as advanced economies in Europe, but not so much the emerging market nations, which includes Indonesia. In its World Economic Outlook Update report the IMF left its growth forecasts for emerging market and developing economies unchanged at 4.1 percent (y/y) in 2016 and 4.6 percent (y/y) in 2017.

However, there is an indirect threat for Indonesia and other Asian emerging markets. The IMF states that "policymakers in the UK and EU will play a key role in tempering uncertainty that could further damage growth in Europe and elsewhere." Indeed, an emerging market such as Indonesia is not so much affected by slowing economic growth in the UK as trade relations between both nations are not too significant (there exists small export exposure). However, if economic growth in the EU is dragged down by low UK growth, then the impact (on Asia's emerging markets' export performance) starts to grow bigger.

This then implies another potential threat. Recently, Credit Suisse pointed out that the common theme across Asian economies is a high correlation between exports and private investment cycles. In other words, falling exports from Asia can frustrate private investment in these markets.

On the other hand, the Brexit issue managed to stop speculation about another interest rate hike in the USA (a move that would encourage capital outflows from emerging markets). This context provides renewed opportunities for Asia's central banks to implement monetary policy easing, particularly as these banks' benchmark interest rates are currently higher than when the US 2013 taper tantrum occurred. In the case of Indonesia, the majority of analysts seem to predict another interest rate cut at Thursday's policy meeting (21/07). So far this year, Bank Indonesia has already cut its key interest rate (BI rate) gradually, yet aggressively from 7.50 percent to 6.50 percent.

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