Indonesia has executed its most aggressive rate tightening policy in eight years to combat an expanding current-account deficit but it may not be enough to buoy the economy and country-specific exchange traded funds.
Bank Indonesia hiked rates by 175 basis points to 7.5% since mid-June, the fastest pace since 2005, Bloomberg reports.
The country experienced a $8.4 billion current-account deficit, its second-highest shortfall on record in the third quarter, after seeing a record $9.9 billion difference in the second quarter.
“In order to have the current-account return to surplus, it may take at least three to five years,” Eric Alexander Sugandi, an economist at Standard Chartered, said in the article.
Consequently, JPMorgan Chase & Co and Standard Charter Plc forecast the central bank will raise rates another 50 basis points in the first half of 2014. [Indonesia ETFs Could Face Tough 2014]
“Fifty to 75 basis points should be fine, but more than that, the pain will be more than the gain,” Sugandi added.
The pace at which Indonesia is raising rates helped bolster its depreciating rupiah currency, but the tighter monetary policy has held back economic growth and could leave the country vulnerable to problems down the road.
“I’m afraid that when we really need to raise the reference rate, Bank Indonesia will have no ammunition left,” Anton Gunawan, chief economist at PT Bank Danamon Indonesia, said in the article. “There was no urgent need to raise the rate last week.”
The trade gap and potential tapering in U.S. stimulus pulled the rupiah down 18% this year.
Meanwhile, Indonesia’s gross domestic product only expanded 5.6% in the third quarter, the weakest since the global recession.
Indonesia country-specific ETFs include:
- iShares MSCI Indonesia ETF (NYSEArca: EIDO): down 21.2% year-to-date
- Market Vectors Indonesia Index ETF (NYSEArca: IDX): down 21.6% year-to-date
- Market Vectors Indonesia Small-Cap ETF (NYSEArca: IDXJ): down 15.9% year-to-date
iShares MSCI Indonesia ETF
For more information on Indonesia, visit our Indonesia category.