Economic Outlook: More Moderate economic growth for stabilisation purposes

Please use the following link to download the report:

http://rhbosk.ap.bdvision.ipreo.com/NSightWeb_v2.00/Files/GetFile.aspx?FileVersionID=17110&ieHack=.&_nsz=55%3B55%3B10b01c08-9557-4fa6-80e8-afdd3b4b3d9d%3Ben-US%3BSE%20Asia%20Standard%20Time

Economic Outlook: More Moderate economic growth for stabilisation purposes

¨      Indonesia economy is envisaged to grow at a more moderate pace of 5.4% in 2014, compared with +5.8% in 2013 due to the earlier aggressive monetary policy tightening to stabilise macro economic conditions affected by the US quantitative easing (QE) tapering. As a result, domestic demand is envisaged to grow at a slower pace due to softer total investment that will likely be affected by the uncertainty over the general election as well. This, however, will likely be mitigated by a pick-up in both private and public consumption during the year.

¨      Despite an improvement in global economic outlook, Indonesia’s real exports are projected to expand at a slower pace in 2014, mianly on account of weak demand from China and India, while commodity prices are likely to remain relatively stable in spite of the envisaged recovery in the developed economy.

¨      On the back of higher funding cost and a modest recovery in the global economy, capital-intensive sector will likely be impacted further in 2014. In addition, primary sector will likely remain weak amid the global commodity price volatility and the mineral export ban policy. The tertiary sector, however, will likely be more resilient to the recent macro turmoil and is expected to provide a cushion to the economic growth during the year.

¨      Indonesia’s state budget will likely face pressure from weaker-than-expected revenue growth and higher energy subsidy costs due to higher actual weaker exchange rate level from the budget’s assumption. Taking into account our macro assumptions for 2014, no subsidised fuel price adjustment, as well as the expected effect of the minerals export ban on state revenue, we project the fiscal deficit to be higher at 2.5% of GDP in 2014, up from a deficit of 2.2% in 2013.

¨      Monetary stance will likely be kept on tightening bias in 2H 2014 in order to maintain the stability of the economy. However, as the economy has regained its stability we predict the monetary stance to be held unchanged in 1H 2014.

¨      We expect an improvement in the currenct account of the balance of payments in 2014 as a result of a combination of weak IDR and higher interest rates that will lead to an improvement in trade balance. Indeed, the current account deficit is projected to improve to USD22.8bn or 2.6% of GDP in 2014, from a deficit of USD 28.5bn or 3.2% of GDP in 2013.

¨      On the prices outlook, we expect the inflation to ease to 6.2% in 2014, from +7.0% in 2013, as we currently do not expect the Government to change its administrative pricing on the subsidised fuel price. The price movement so far was broadly in line with the historical trend, indicating no structural price break caused by inadequate supply or a spike-up in demand. Thus, we expect the benchmark rate to be kept unchanged at 7.5% by the Central Bank in 1H 2014.

Best regards,

RHB OSK Indonesia Research Institute