MACROECONOMIC ANALYSIS SERIES: Indonesia Economic Outlook 2020

Since March 2019, the US bonds market has recorded an inverted yield curve, meaning that the yields of short-term bonds have surpassed those of long-term bonds. This condition indicates a negative perception of the US’s economic performance as the inverted slope of the yield curve is very frequently correct in predicting the occurrence of recession in the near future. Even though the transmission channel of the potential global shocks to the domestic economy by capital flow channel would not yet clearly materialize in 2020, the rising concern of recession that would take place in US  may spark speculative attacks in the foreign exchange and capital market. The speculative attack will notably affect Indonesia’s financial system by  triggering capital outflows, giving substantial pressure to Rupiah. However, if the government and Bank of Indonesia (BI) could manage expectations of the market, it will drive capital to flow back to Indonesia after the turbulence period ends. We expect BI might, at least, lower the policy rates one more time and then hold it in 2020 until the volatility of Rupiah requires hikes in 2020. The currently ongoing monetary easing will provide some  support for the credit growth in 2020.

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