QNB Group has published its Indonesia Economic Insight 2014. The report examines the outlook for the Indonesian economy and the challenges faced by the new Jokowi administration, such as capital flight and an infrastructure gap, amidst the constraining environment of a slowing economy.
According to the report, the tightening of global liquidity emanating from the tapering of Quantitative Easing (QE) in the US has led to periodic bouts of capital outflows from Indonesia, exchange rate weakness and higher inflation since mid-2013. In response, the Indonesian central bank has hiked interest rates to combat inflation and used international reserves to support the currency, while the government has introduced export restrictions to reduce domestic price increases.
The weaker IDR should help reduce the current account deficit over the medium term, by making imports more expensive and exports cheaper. However, gains from greater export competitiveness may be limited by the large share of imported intermediate goods in finished exports. The removal of subsidies should help reduce the fiscal deficit in 2015-16, while allowing greater fiscal space for much needed infrastructure investment. Banking sector growth is expected to continue slowing in 2014–16 on tighter domestic liquidity and rising interest rates.