Bank Indonesia Governor Nasution said this week that he expects GDP growth of 6.3%-6.8% this year, up from an estimated 6.3% growth in 2012. To support growth, loans need to grow by 22%-24% this year, close to the current growth rate. With the overnight FASBI rate at 4.18% and inflation running at 4.3% (upside risk after electricity tariff hikes this month), real interest rates could turn more negative. Foreigners’ holdings of Indonesian bonds have been stagnant at around IDR271 trillion in the past month, down from a record high of IDR274 trillion in early
December (after a strong run-up of IDR37 trillion over September to November). The Jakarta Composite Index (JCI) is the only bourse in Asia with negative USD returns to date this year. The risk is if investor expectations of IDR depreciation become entrenched. “We remain bearish on the IDR until the central bank tightens monetary policy, slows domestic demand growth and takes steps to curb the current account deficit.” Goh warns.