Boston, MA -- (ReleaseWire) -- 05/02/2014 -- While Indonesia's economy may have recorded consensus-beating growth in Q413, we believe that the economy is not yet out of the woods. We believe that the recent improvement in trade momentum is likely to reverse, and we expect investors to remain cautious towards further spending in light of the impending elections. Also, we believe that tighter credit conditions and the petrol fuel price hikes have yet to fully feed through the economy and this is likely to adversely affect the Indonesian consumer.
We believe that adverse macro implications from the mining ban introduced in January are definitely in order, given the importance of the mining sector to the economy. While we highlight that nationalist rhetoric or policies are likely to be ramped up in the coming year, such measures are unlikely to be too restrictive in light of mounting economic headwinds. We believe that Indonesia will be a more compelling growth story if policymakers put structural reforms ahead of near-term political and vested interests.
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The Indonesian government's plan to push through greater subsidy reforms bodes well for its fiscal trajectory. The scaling back of subsidies, taken together with a realistic 2014 budget that has cut allocations to welfare spending, in spite of impending elections, helps the Indonesian government repair its policy credibility and points towards a healthier structural fiscal space. We consequently expect the country's fiscal deficit to remain manageable.
Key Risks To Outlook
Indonesia risks a crisis of confidence similar to past panics as hot money outflows continue to batter the country's asset markets. Should sentiment continue to worsen, the government and central bank will need to do more to address the weakening rupiah, as well as the country's current account woes.
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