World Bank Warns of ‘Global Tightening’

BY :DION BISARA & VANESHA MANUTURI

JANUARY 13, 2015

Jakarta. The World Bank has warned Indonesia against the risk of a sharp tightening of global financial conditions, which could hamper the country’s fragile recovery amid the push for structural reform.

The Washington-based lender said that there is a chance that episodes of abrupt global financial tightening would repeat this year, stemming from, among others, an extended period of low oil prices, which would gradually erode oil producers’ fiscal and foreign exchange reserves.

Asynchronous monetary policy tightening among high-income economies, such as the United States, Europe and Japan, would result in a currency swing.

In turn, that would expose weaknesses in emerging countries with currency mismatches between export earnings and debts, the World Bank said.

“Financial stress in one or more of [the emerging countries] could trigger a reassessment of emerging market assets more broadly,” the World Bank wrote in its “Global Economic Prospects” report, released on Tuesday.

The World Bank said the Indonesian economy would grow by 5.2 percent this year, from an estimated 5.1 percent last year on the back of gradual increase in investment and domestic spending.

President Joko Widodo’s push for greater infrastructure spending and reduction of fuel subsidies offers a stronger base for growth, the lender said.

But that growth hangs in a balance. Tighter external financing would increase domestic interest rates, increasing pressure on banks, businesses, and households in servicing their debt, hampering their ability to invest or spend.

“Countries with historically high private sector debt service ratios, resulting from rapid debt accumulation since the global financial crisis, are particularly at risk,” the World Bank said.

“Other sources of vulnerability are a reliance on short-term borrowing to finance current-account deficits or roll-overs.”

The World Bank noted that Indonesia’s short-term external financing needs are estimated at 10 percent of gross domestic products and 77 percent of foreign exchange reserves in 2014, relying heavily on volatile portfolio inflows.

Indonesia’s foreign debt rose 11 percent to $294.5 billion in October last year compared to the same period last year, according to data from Bank Indonesia.

Short-term loans, due under a year time, stood at $48.8 billion, up 12 percent from a year earlier.

Bank Indonesia said last week that the country’s banks, companies and households could survive a 20 percent drop in bond prices and a weakening rupiah of up to 15,500 against the US dollar, in the case of capital outflows, according to the central bank stress test.

European companies are more bullish on business in Indonesia this year on the back of the government’s reforms promises, a recent survey by the British Chamber of Commerce Indonesia showed.

Businesses from the European Union countries accounted for more than a third of the total realized foreign direct investments in Indonesia during the July to September period last year.

In the Business Confidence Index 2014 — which questioned 206 business executives over the October to November period last year — released on Tuesday, the outlook on business in Indonesia as seen by European companies has increased to 72 percent this year from 66 percent last year, coupled with a projected increase in revenue and profit growth.

Ease of doing business is also perceived to improve to 62 percent this year from 50 percent last year, according to the report.

“There needs to be evidence [in government regulations] to support the initial optimism, but there is a strong belief from businesses that things are getting better,” British Chamber of Commerce chairman Adrian Short said during the Business Index launch event in Jakarta on Tuesday.

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