Indonesia – Riding the rupiah - CLSA

Tony Nafte visited Jakarta and he likes the fact that Bank Indonesia has astutely employed exchange rate appreciation. For greater reassurance, Tony thinks that Bank Indonesia should be raising interest rates while the govt should be preparing the public for a domestic fuel price hike.

Key points from the report:
We remain confident that real GDP growth will be sustained at 6 – 6.5% over the next two years.
It is tempting to disregard government policy entirely and assume that the economy will continue to grow at this rate, led by the private sector.
Stress factors include rising fuel subsidies, declining oil output, volatile capital flows, and latent inflationary pressures.
The policy response to these challenges could either calm or unsettle the market.
Bank Indonesia has astutely employed exchange rate appreciation as its choice policy instrument to address these challenges.
A strong exchange rate will mitigate both inflation and fuel subsidy pressures.
However, as a solitary policy instrument it will not be sufficient.
As the pressures mount, market sentiment could shift and actually undermine the exchange rate.
For greater reassurance, Bank Indonesia should be raising interest rates while the government should be preparing the public (and the market) for a domestic fuel price hike.