Indonesia Pain Threshold Looms on Rate Increases: Southeast Asia

Indonesia’s most aggressive rate-tightening in eight years has barely dented a current-account deficit, prompting calls for more increases and other measures before the Federal Reserve cuts stimulus.

Bank Indonesia has raised borrowing costs by 1.75 percentage points to 7.5 percent since mid-June, the quickest since 2005. Following data last week showing the country recorded its second-highest current-account shortfall on record in the three months through September, JPMorgan Chase & Co. and Standard Chartered Plc now see a further 50 basis points of increases in the first half of next year.

Foreign funds pulled $3.8 billion from Indonesian stocks and local-currency bonds in June after the Fed said it could cut stimulus, and a lack of progress on improving the current account before the U.S. does eventually taper leaves the country vulnerable to another sudden outflow. The government said this week it will raise import taxes for consumer goods, showing policy makers are looking for other bullets to slay the deficit.

The rate rise on Nov. 12 came after a pause in October and was forecast by just one of 25 analysts surveyed by Bloomberg. A day later, the government reported a current-account deficit of $8.4 billion in the third quarter, compared with a record $9.9 billion in the previous three months.

(Source: Bloomberg)