FX Market and IDR Bond Report - August 2014

SUMMARY
 
Strong economic growth in the US as indicated by strong labor market, rising consumption and improving property market have led to much smaller monetary stimulus from Federal Reserve. Monetary stimulus could soon be ended and followed by interest rate hikes. Market volatility could increase as global market investors fear that economic growth could be stalled or worse.
 
Rising military tensions in Ukraine and Middle East are the new challenges faced by global economy. The crisis is feared could be worsened and threatened fragile global economic recovery. The military crisis and less monetary stimulus from The Fed could lead to high volatility in the financial market and major correction to risky assets.
 
Improving inflation outlook in Indonesia, peaceful condition after presidential election result and steady Rupiah are great news for Indonesia economy. Government budget deficit and current account deficit are the main threat to Indonesia economy. To achieve low interest rate and high economic growth in the long run, government must keep government budget deficit and current account deficit under control.
 
To address Indonesia government budget deficit, fuel subsidy could be cut within six months after the inauguration of the newly elected President and VP in October. The impact of fuel subsidy cut would be higher inflation rate and possibly interest rate hikes. Higher fuel price will be negative to economic growth as household demand wanes. Higher infrastructure spending must be taken to compensate lower fuel subsidy and will have stronger impact on growth.