Why Indonesia is likely to take things slow this year

Growth forecast could be lowered at 5.5%.

According to DBS, Indonesia's budget deficit target is set at 1.7% of GDP in 2014, compared to a projected 2.5% of GDP in 2013. Chief Econ Minister Rajasa suggests that the government will not push for too much growth this year. Official GDP growth forecast for 2014 is in the 5.8-6.2% YoY range. Finance Minister Basri indicates that it may be even lower at 5.5%.

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The slowdown in GDP growth in 2013 has been associated with the 175bps rate hikes done by BI in 2H13. Yet, loan growth has slowed only slightly. It came in at 21.4% YoY in Dec13, compared to the 23% recorded in Jan13.

Historically, thetime lag for interest rate moves to have any impact can be as much as 9-12months. Loan growth is expected to slow further to 15-17% in 2014, but this is also partly due to BI’s moral suasion on commercial banks to curb their loan growth.