Bank Indonesia likely to remain cautious in setting its policy stance

Next week's BI policy meeting is eagerly awaited by the markets. BI officials themselves will be eagerly monitoring the markets in the aftermath of the US Fed rate decision, prior to the BI meeting. Not less important is the Indonesia's November trade data, which is also due early next week. 

Current account (C/A) deficit has narrowed to 2% of GDP, from as high as 4.4% in mid-2013. This is a good thing, considering that the rupiah selloff in 2013 was sparked by the high C/A deficit. Yet, the narrowing C/A deficit has been driven almost solely by a slump in import demand rather than a rebound in export growth. Monthly imports have fallen by some 30% since early-2014, dragged by a weak rupiah. Meanwhile, on both value and volume terms, exports have continued to fall this year. 

Given that a mild recovery is projected in investment growth, expect import demand to also rise. This is likely to lead to the C/A deficit widening again next year. Unless we have a sudden surge in commodity prices, export growth is likely to remain tepid in 2016 as Indonesia's manufacturing sector continues to disappoint. 

"We forecast C/A deficit rising to 2.5% of GDP, if GDP growth were to return to 5% trend", notes DBS Group Research.

External financing risks could once again hit sentiment in the markets, especially amid the anticipated rate hikes by the US Fed next year. Bank Indonesia (BI) should continue to lean on the side of caution in determining its policy stance ahead.