The potential for weeks of uncertainty over Indonesia’s presidential-election result puts the onus on the nation’s central bank to contain a current-account deficit that has hurt the rupiah.
Bank Indonesia, which met to set policy today, kept its benchmark interest rate unchanged at 7.5 percent for an eighth meeting even as Southeast Asia’s biggest economy cools. The decision was forecast by all 21 economists surveyed by Bloomberg News. Lower rates would add to domestic demand that has spurred the nation’s current-account deficit.
Jakarta Governor Joko Widodo won yesterday’s vote in most unofficial counts, even as ex-general Prabowo Subianto declared victory ahead of official results due by July 22. With months to go before a new administration can take charge, scope is limited for fiscal-policy and budget fixes to effectively address the country’s financing shortfall.
“Right now the best way is to continue to keep monetary policy relatively tight because BI’s priority this year really is financial market stability,” said Gundy Cahyadi, a Singapore-based economist at DBS Group Holdings Ltd., Southeast Asia’s biggest lender. “The current-account deficit summarizes what has been wrong with the economy in recent years.”
The central bank’s focus on a current-account gap that made the rupiah Asia’s worst-performing currency last year underscores the economic challenge for the next government. State subsidies that keep local fuel prices low have spurred energy imports, straining the trade balance and tying up funds that could be used to build roads, bridges and railways. The current administration has had to cut 2014 budget spending to fund rising subsidy costs.
Should official results later this month give the presidency to Widodo, known as Jokowi, with a narrow win, he could still face a fragmented parliament in any bid to cut the nation’s reliance on fuel subsidies and free up funds to invest in infrastructure. The camps of both presidential candidates have signaled they will cut fuel subsidies gradually.
“The new president inherits a slowing economy which is in dire need of infrastructure investment and strong leadership,” said Chua Hak Bin, a regional economist at Bank of America Corp. in Singapore. “Reviving growth, investment and exports should be key.”
Bank Indonesia isn’t the only central bank in the region with a greater burden on monetary policy from political uncertainty. The Bank of Thailand lowered interest rates twice between late November and mid-March, after months of public protests and political turmoil undermined domestic demand.
Indonesia’s central bank also kept the deposit facility rate unchanged at 5.75 percent today. Governor Agus Martowardojo has held the reference rate at 7.5 percent since last raising it in November even as inflation eased to a one-year low in June.
“Until there is further clarity on the political situation, stability in rates is favored to change,” Australia & New Zealand Banking Group Ltd. economists Daniel Wilson and Glenn Maguire said in a note after the decision. The current-account deficit is expected to widen, “suggesting upside risks to rates,” they said.
Indonesian stocks rose to a one-year high and the rupiah touched the strongest level in seven weeks earlier today after Jokowi said unofficial counts at polling booths showed him winning yesterday’s presidential race.
“We are still looking for no policy moves in the near term,” said Lim Su Sian, an economist at HSBC Holdings Plc in Singapore. “Regardless of the election outcome, we do want to see continued hawkishness from the central bank and indications it does remain vigilant particularly with the external imbalances, which are still looking very vulnerable.”
Consumer prices gained 6.7 percent from a year earlier in June, slowing from 7.32 percent the previous month. Policy makers aim to narrow the current-account deficit to 2.5 percent of gross domestic product by the end of this year from 3.3 percent in 2013.
Indonesia’s $878 billion economy expanded 5.21 percent in the first quarter from a year earlier, the weakest pace since 2009. Jokowi has said the economy can grow more than 7 percent with a conducive investment and regulatory framework. He has promised to give incentives for export-oriented industries and plans to build double-track railways in Java, Sumatra and Papua.
Prabowo has pledged to raise wages from about 3 million rupiah a month to 6 million rupiah within five years, and to establish banks for farmers and fishermen.
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