Indonesia could face small current account deficit this year

A shortfall in revenue is looming even as the Federal Reserve promises low rates until 2014, says DBS.

In its report, Indonesia's domestic shift from comsumption to investment – a strategy that helped it achieve record growth last year. In 2002, gross fixed capital formation made up 20.4% of GDP, but the figure has steadily increased to 24.5% of GDP by 2011. Over the same period, private consumption growth has declined from 61.2% of GDP to 55.6% of GDP.

Since the global financial crisis of 2008/09, low global interest rates and capital inflows have facilitated this shift. Bank Indonesia, the central bank, has taken advantage of the favorable environment by cutting policy rates to record lows, lowering the cost of capital and supporting the extension of credit to businesses and households.

Meanwhile, despite annual wage inflation of around 10% over the last few years, wages in the country are still competitive. Average monthly manufacturing wage in Indonesia is still around USD100, compared to USD400 in China. Given these reasons, BI will be able to maintain its pro-growth stance and rates can stay structurally low for the medium term.