On Wednesday (04/09), the International Monetary Fund (IMF) released a report that describes a change in the current global economic dynamic as developed economies are showing signs of recovery, while growth in emerging markets is slowing down. These two developments are interrelated because stagnating developed economies from the late 2000s meant that investors started to look for lucrative assets in rapidly-growing emerging markets, including Indonesia.

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Emerging markets, such as Indonesia, have been feeling the impact of a recovering economy in the United States. Last month, the Federal Reserve announced that, if the economy of the USA continues its improving trend, it will end its quantitative easing program gradually in 2013 until a complete stop in 2014. As Indonesia is one of the emerging economies that benefited from the spillover effects of the Fed's monthly bond-buying program, the country now feels the negative impact of the possible stop to the program.

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After the World Bank signaled slowing economic growth in Indonesia, American multinational financial services corporation Morgan Stanley also detects problems in Southeast Asia's largest economy. According to Jonathan Garner, chief Asia and emerging-market strategist for Morgan Stanley, Indonesia’s stock market is the most vulnerable stock market in Southeast Asia in terms of sudden capital outflows. Morgan Stanley downgraded Indonesia's equities to underweight from equal weight and labeled the country as "a relatively over-owned country".

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Whether it was caused by pressure from the Indonesian government, or, whether US multinational banking and financial services firm JP Morgan Chase itself came to the conclusion that its decision to double downgrade Indonesia from overweight to underweight (in November 2016) was excessive remains unknown. What is known is that JP Morgan upgraded its investment recommendation on Indonesian stocks to neutral from underweight on Monday (16/01). Main reason for this upgrade is that redemption and bond volatility risks have now played out, in the view of JP Morgan.

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In 2013, Indonesia experienced a rough year in terms of stock trading. The world was shocked by Ben Bernanke’s speech in late May 2013 in which he hinted at an end to the Federal Reserve’s large monthly USD $85 billion bond-buying program known as quantitative easing. Through this program, cheap US dollars found their way to lucrative yet riskier assets in emerging economies, including Indonesia. But when the end of the program was in sight, the market reacted by pulling billions of US dollars from emerging market bonds and equities.

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Again positive news for Indonesia's trade balance. Last week, Statistics Indonesia announced that the largest economy of Southeast Asia posted a USD $776.8 million trade surplus in November 2013 (the largest monthly trade surplus since March 2012). After the (revised) USD $24 million trade surplus in October 2013, November was the second straight month in which the country posted a surplus. This development is important to gain investors' confidence as Indonesia's current account deficit has been a major cause for concern.

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Both the Jakarta Composite Index (Indonesia's benchmark stock index) and the Indonesia rupiah exchange rate are under pressure this morning as market participants are waiting for results of the central bank's Board of Governor's meeting that is held today (12/12) in Jakarta. Speculation has emerged that Indonesia's central bank (Bank Indonesia) will raise its benchmark interest rate (BI rate) one more time in 2013 in order to combat the country's current account deficit as well as mitigate the impact of a possible winding down of QE3.

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Currently, one of Indonesia's main financial issues (and one which puts serious pressures on the Indonesian rupiah exchange rate) is the country's wide current account deficit. According to data from Statistics Indonesia, Indonesia's current account deficit totaled USD $8.4 billion in the third quarter of 2013. This figure is equivalent to a whopping 3.8 percent of Indonesia's gross domestic product (GDP). Generally, a current account deficit that exceeds 2.5 percent of GDP is considered unsustainable.

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Emerging East Asian countries should use the window of opportunity opened by the delay in US monetary policy normalization to strengthen their economies and financial systems, the latest quarterly Asia Bond Monitor from the Asian Development Bank (ADB) urges. “A delay in US bond tapering gives the region a bit of extra time to make sure its economy and financial systems are resilient enough to face the likely market volatility ahead,” said Iwan J. Azis, Head of ADB’s Office of Regional Economic Integration which produced the report.

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In the last three months, Indonesia's benchmark stock index (IHSG) experienced continued selling pressures causing the index to plunge from a high of 5,215 to a low of 4,026. The country's economic slowdown and net selling by foreign investors triggered the rapid decline. Up to the third week of November, net selling of Indonesian stocks amounted to IDR 14.9 trillion (USD $1.3 billion). The looming winding down of the Federal Reserve's USD $85 billion per month bond buying program has brought significant negative market sentiments.

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The government of Indonesia will release two additional fiscal policy packages at the end of November or start of December that both aim to heal Indonesia's current account deficit. The two packages constitute follow ups of the policy package that was released in August 2013. Previously, deputy minister of Finance, Bambang Brodjonegoro, announced that an additional package would be released in October. However, it turned out that the government needed some more time to prepare the two additional packages.

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Anoop Singh, Director of the Asia and Pacific Department within the International Monetary Fund (IMF), conducted a media roundtable in Tokyo today (30/10) in which he outlined the IMF's view on the economy of Asia. Asia will remain the global growth leader, although the IMF has lowered growth forecasts. Both tighter global liquidity and homegrown structural impediments will weigh on growth, but for most economies a gradual pickup in exports to advanced economies and resilient domestic demand should help support growth.

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After a decade of high growth and a swift rebound after the collapse of US investment bank Lehman Brothers, emerging markets are seeing slowing growth. Their average growth is now 1½ percentage points lower than in 2010 and 2011. This is a widespread phenomenon: growth has been slowing in roughly three out of four emerging markets. This share is remarkably high; in the past, such synchronized and persistent slowdowns typically have only occurred during acute crises.

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