Asia’s developing nations might have to sacrifice some growth next year and focus on keeping their economies stable amid a potential fallout from higher US interest rates, Indonesian Minister of Finance Chatib Basri said.
Capital outflows are a threat facing emerging markets as the prospect of the US Federal Reserve lifting rates lures funds, Basri said yesterday in an interview in Cairns, Australia, where G20 finance chiefs were meeting to discuss the global economy.
In Indonesia, where the benchmark interest rate is already at its highest since 2009, policymakers may have to tighten further to preserve the nation’s relative appeal to investors, he said.
“In the short term, some emerging markets may have to choose stabilization over growth,” Basri said. “You cannot promote economic growth when dealing with this issue. It will exacerbate the situation.”
The US dollar has appreciated as the Fed edges closer to its first rate increase since 2006, while Indonesia’s rupiah has dropped for five straight weeks amid global funds pulling money from local stocks in anticipation of higher US borrowing costs. As some of the world’s fastest-growing economies adapt to changing policy at the Fed, their contribution to global expansion might weaken, Basri said.
Basri’s concern highlights the task facing G20 finance chiefs as they attempt to lift collective economic growth by an additional 2 percent or more over five years.
Officials agreed monetary policy should continue to support the economic recovery and should particularly address deflationary pressures where they are evident, Australian Treasurer Joe Hockey said yesterday in Cairns.
The prospect of higher interest rates in the US is the single biggest challenge facing Indonesia’s new government, Basri said.
Indonesia’s president-elect Joko Widodo — known as Jokowi — will inherit an economy growing at the slowest rate since 2009 and a persistent current-account gap that is weighing on the rupiah.
Basri is the top candidate to keep his finance job under Jokowi, who takes office next month, according to a Bloomberg survey of 11 Indonesian analysts and academics.
Basri has called for the incoming government to focus on narrowing the budget deficit, raising fuel prices and luring foreign investment.
In Indonesia, where the key rate is at 7.5 percent, policymakers may have to hold firm to prevent funds flowing out of the country, Basri said.
“Maybe the tightening cycle will continue, from both the fiscal and the monetary side,” he said, adding that such a step “is not really conducive to promoting economic growth.”
To mitigate the risk of losing funds to the US, Indonesia also needs to diversify its base of investors, Basri said. Relying more on domestic bond buyers would help, he said.
“If global liquidity becomes tighter because of this tightening policy at the Fed, it will be more difficult for a country like Indonesia to get foreign financing,” he said.
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