Only a stronger GDP growth momentum would boost sentiment in Indonesia

Since mid-2013, Bank Indonesia (BI) has worked hard to improve the economy's macro risk profile. Apart from pushing for a narrower current account (C/A) deficit, the central bank has also managed the growth of external debt. Total external debt grew a multi-year low 3.7% (YoY) in July 2015. More importantly, short-term external debt has been kept steady circa USD 45bn, less than 50% of foreign reserves level. 

Yet, the rupiah remains vulnerable, as external factors continue to weigh on market sentiment. Other than the uncertainties over a US Fed rate hike this year, global growth concerns have also been dominant in the markets. For now, only stronger capital inflows will help to boost sentiment on the currency. But downside risks to GDP growth mean that it is difficult for investors to justify putting more money into the economy at this juncture. A case in point is gross foreign direct investment, which may slip to about USD 25bn this year after recording USD 28bn in the last 2 years. 

While the government remains optimistic that GDP growth will come in above 5% this year, 4.8% seems more likely. Acceleration in public investment remains crucial going into 2016, but data out of 3Q15 has provided no indication of a strong turnaround in growth momentum as yet.