Indonesia, India leading wave of strong growth momentum among Asia’s emerging markets: Pimco
[LONDON] With Indonesia heading to the polls this week and India set to follow in a few months’ time, the prospects are strong for both their economies to flourish if they can deliver more political and economic reforms.
In a report on its outlook on the Asia-Pacific region, US investment management firm Pimco said that it is “positive” on the performance of the Indonesian rupiah and Indian rupee in 2024.
“We expect reform-based governance to continue post-elections, and the two economies to remain secular drivers of emerging-market (EM) growth,” said Pimco, one of the world’s largest asset managers overseeing assets worth in excess of US$2 trillion.
Pimco has forecast Indonesia’s economy – the largest in South-east Asia – to grow by around 5 per cent this year.
“Although we expect a small current account deficit of minus 1 per cent in 2024 due to lower commodity prices, Indonesia’s economic prospects remain promising with a shift towards higher value metal exports and a reduction in the fiscal deficit to minus 1.8 per cent in 2023 from minus 6.1 per cent in 2020,” explained four of Pimco’s fund managers in an analysis of the report.
The report pointed out that the government under outgoing President Joko Widodo has kept inflation under control and is likely to remain within the range of 1.5 per cent to 3.5 per cent in 2024.
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And with Bank Indonesia placing a “top priority” on the stability of the rupiah, the report said that there was a risk that the central bank would underdeliver on the base case for rate cuts, which stands at 75-100 basis points in 2024.
As for India, Pimco noted that it is “especially constructive” on the economy and projects “continued strong growth” of around 7 per cent in 2024. This forecast is driven by resilient domestic demand and strong growth in capital expenditure.
Despite India’s foreign portfolio investment being weaker, the country’s foreign direct investment is improving and Pimco expects a US$50 billion balance of payments surplus in 2024, versus a US$9.1 billion deficit last year.
This, it added, was due to strong equity market performance and the likely inclusion of Indian government bonds in global EM bond indices later in the year – factors that have also helped the rupee outperform other Asian currencies.
Compared to the rates 12 months ago, the rupee and rupiah have been fairly stable against the US dollar. The rupee currently trades at around 83 to the greenback, while the rupiah hovers at just around the 15,000 mark.
Pimco is concerned, however, that India’s current level of 4 per cent inflation may accelerate in the coming months. The Reserve Bank of India (RBI) has a target range of 2 per cent to 6 per cent, with core inflation falling below 4 per cent in December.
“However, due to food inflation and El Nino risks and taking financial conditions into consideration, the RBI might be cautious about cutting interest rates too soon. We expect cuts of 25 to 50 basis points in 2024,” the fund managers said.
More than 204 million Indonesians are set to head to the polls on Wednesday (Feb 14), with numerous opinion polls listing Defence Minister Prabowo Subianto as the favourite of the three presidential candidates.
In India, the elections are expected to be held in April and May with Prime Minister Narendra Modi widely expected to achieve an overwhelming victory.
“Modi’s sustained structural reforms are widely credited for helping the Indian economy enhance its overall efficiency,” said Pimco. It added that digital technology is bolstering the reforms in India, with improvements to public infrastructure, more trustworthy governance and less red tape when it comes to doing business.
There’s a similar situation in Indonesia, said Pimco, where infrastructure investment and structural reforms, as well as relaxed foreign investment restrictions have helped the country achieve positive growth.
As for the other EMs in Asia, Pimco expects to see strong gross domestic growth expansion in the Philippines and Vietnam.
“EM currencies tend to benefit from lower US interest rates as this can ease the burden from US dollar-denominated debt and also enhance the appeal of local investments. EMs finished 2023 on a strong footing, and we continue to see space for some EM Asia currencies to appreciate,” the fund managers added.
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