Indonesia's economic growth plagued by 'the impossible trio'

Some factors just won't go well together.

According to Morgan Stanley, Indonesia’s uncomfortable current account deficit (CAD) and still healthy domestic
demand do not go hand-in-hand with a stable IDR – we called this the “Impossible Trio”.

Here's more:

Macro stability is not in the hands of policymakers given the uncomfortable external imbalances and dependence on external funding, and further policy tightening and currency depreciation are required to bring Indonesia to a more sustainable near-term equilibrium of lower cyclical growth, narrower CAD and a less overvalued currency.

Indeed, expectations of QE taper and rising real rates in the US since late May have exposed this macro vulnerability and forced policymakers’ hand in undertaking a cumulative 125bps policy rate hike.

The reversal in carry trade has led IDR/USD to depreciate by 18% ytd, even after policymakers spent US$20bn in foreign reserves this year, of which US$12.5bn happened since May.

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