Things Look Better...But Will it last?

Early this year, after the lowering of Bank Indonesia's interest rate to 6.75 percent, the rupiah surprisingly strengthened to Rp13,100 per US dollar level from Rp14,000 in December last year. Incoming foreign portfolio funds have helped this trend as it bought our government bonds. This is not surprising, given the 7 percent interest on our government bonds, compared to near zero rates in advanced market bonds. Inflation at home has also been kept at 4.45 percent and the current account deficit at 2 percent of GDP. Still, market players have doubts whether this positive trend will last.

This is because business activity remains weak. For the first few months this year, auto and motorcycle sales have not shown any significant improvement. With exports still sluggish and consumer spending low, the sole driver of economic growth now is government spending. But with tax revenue still below target, there are doubts whether this can be relied on.

April 19, 2016