Indonesia set for weakest growth in 5 years, policy rates seen on hold

[JAKARTA] Indonesia's economic growth likely slipped to its weakest in five years in 2014, but the central bank is expected to maintain a tight policy stance to hold down its current account deficit.

The G20 economy is heavily dependent on foreign portfolio flows to finance its large current account deficit, and has had several bouts of capital outflows triggered by high inflation and currency volatility.

The economy is expected to have grown 4.95 per cent in the fourth quarter, and 5.07 per cent for 2014, the slowest since 2009, analysts in a Reuters poll forecast. The data is due around 0400 GMT on Thursday.

OCBC Bank economist, Wellian Wiranto, said Bank Indonesia will consider the wide current account gap when deciding policy as it has warned of an uptick in capital goods imports. "Hence, even though growth remains relatively sub par and the decline in fuel prices will tame inflation down, BI is likely to retain a relatively hawkish bias." While other central banks are cutting rates to prop up slowing growth amid easing inflation, Bank Indonesia may opt for other ways to ease liquidity.

Sliding global oil prices have brought headline inflation down, but core inflation accelerated slightly. "This should validate BI's current stance that it will not change its tight bias unless it is sure headline inflation will return to its 3-5 per cent target," Euben Paracuelles, an economist at Nomura Securities, said in a research report.

The central bank's tight stance, in place since 2013, has been one of the factors dragging on growth along with political uncertainty and shrinking exports last year.

Putting more pressure on growth, BI hiked its benchmark rate again in November by 25 basis points to 7.75 per cent, a day after fuel prices were raised, to anchor inflation expectations.

The government has set a growth target of 5.6-5.8 per cent for 2015 based on higher investment and government spending.

To achieve that, President Joko Widodo set up a government agency to serve as a one stop service for investment licences in a bid to make things easier for investors.

The president, in his first full year in office this year, will also use the fiscal windfall from removing gasoline subsidies to improve the country's creaky infrastructure - increasing the budget on building projects by 50 per cent and injecting 72.97 trillion rupiah (US$7.8 billion) to state-owned firms to support such projects. All that is subject to parliamentary approval later this month.


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