The Economy: Not Out of the Woods Yet

Our economy has gone through a rough patch last year and, unfortunately, the prognosis for this year remains cloudy. Depending on one's view of the market's potential reaction to a much-awaited US interest rate hike, there are two opposing views emerging. At the optimistic end are those who expect a slight bump, noting that asset prices have already factored in the upcoming rate hike. But, at the other end are those expecting a bigger jolt. People in this camp are worried about a toxic mix of a significant weakening of emerging-market currencies and a large US dollar public and private debt burden, all of which could translate into a major crisis. With the continuing global economic malaise, even the US economy might not be immune to this potential crisis, the pessimists further argue. For Indonesia, this camp points to a weaker 2016 growth of 4.5 percent, at best.

However, even the optimists are cautious, with their subdued 5.0-5.3 percent forecast. The positive scenario starts with a weak first half of 2016, a carryover from this year. The difference, however, is that with inflation brought down to Bank Indonesia's comfort range of 4-5 percent and a benign market reaction to a rise in US interest rates, a much sought-after cut in Bank Indonesia's interest benchmark rate could happen as early as the second quarter of 2016. This, the optimists argue, should breathe some life into the lackluster economy in the second half of 2016 and point to a stronger 2017 outlook.

December 29, 2015