Well Done, Indonesia!

Well Done, Indonesia!
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By Shuli Ren After aggressively hiking benchmark rate by 1.75% in the second half last year, Indonesia‘s central bank seems to finally have its external accounts and rupiah under control. Fourth-quarter current account deficit came in at only 2% of the GDP, down from 3.8% in the third-quarter. Goldman Sachs estimates that a 3% current account deficit is a “sustainable” level for Indonesia, “where pressure on the rupiah could ease.” Goldman thinks 11,800 rupiah per dollar is a fair value. The rupiah rose today, trading below 12,000 for the first time since December 12. The rupiah has been largely immune to this year’s emerging markets currency sell-off, on the contrary having gained 1.6% against the dollar. This is because Indonesia raised its interest rates early and drastically, and has already seen improvement in its trade balance and current account. Domestic consumption slowed in the fourth-quarter, easing Indonesia’s current account deficit and inflation. Indonesia’s central bank decided to hold its benchmark rate unchanged today. Economists now say the bank’s tightening cycle may be over. “Since the start of tapering last May, Indonesia’s downward spiral has finally hit bottom. A steady improvement of investor sentiment is likely, especially when it becomes clear that the country’s fundamental growth drivers have not been seriously damaged. Sentiment would be further boosted by a smooth political transition,” says Larry Brainard, Chief Economist forTrusted Sources. Indonesia will have a general election this year. Year-to-date, the iShares MSCI Indonesia ETF (EIDO) gained 6.5%, making it the best performing emerging market this year. The iShares MSCI Emerging Markets ETF (EEM) slumped 7.5%. https://blogs.barrons.com

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