Indonesia-Philippine Growth Gap Widens as Rupiah Spurs Rate Rise

Indonesia-Philippine Growth Gap Widens as Rupiah Spurs Rate Rise

Indonesia faces pressure to add to its most aggressive monetary-tightening cycle since 2008, underscoring a widening divergence in its growth outlook with the Philippines in a reversal of fortunes for the two economies. Bank Indonesia will probably raise its deposit facility rate tomorrow a fourth time this year, according to seven of 14 economists surveyed by Bloomberg News, with the rest forecasting no change. Analysts see the key reference rate rising as high as 7.5 percent in the first quarter of 2014 after staying at 7 percent this week. The Philippines will hold its benchmark at 3.5 percent the rest of the year, surveys showed.The split in policy direction highlights the resilience of the Philippines, which won investment-grade ratings and sustained growth of above 7 percent this year while Indonesia battles slowing expansion, a record current-account deficit and the fastest inflation since 2009. The rupiah fell 11 percent this quarter, the worst performer among 24 emerging-market currencies and about seven times the peso’s decline.

“We risk seeing markets punish Bank Indonesia again and hit the rupiah” if the central bank doesn’t raise rates further, said Robert Prior-Wandesforde, a Singapore-based economist at Credit Suisse Group AG. “Indonesia’s economic woes are worsening, while for the Philippines it all looks beautiful, as it is very much in the sweet spot of the growth cycle now.”

The Philippine benchmark stock index has risen almost 5 percent this year, outperforming the 1 percent gain for the Jakarta Composite Index. (JCI)

Reserves Fall

Indonesia raised its deposit rate, also known as Fasbi, eight times and the reference rate six times in 2008 to curb inflation. The central bank unexpectedly increased the benchmark rate to 7 percent during an unscheduled policy review on Aug. 29 after leaving it unchanged on Aug. 15. It also raised the Fasbi rate by half a percentage point to 5.25 percent.

Indonesia’s foreign-exchange reserves held near the lowest in almost three years last month. The central bank has intervened to support the rupiah and policy makers extended a bilateral swap deal with the Bank of Japan valued at $12 billion.

The economy expanded 5.8 percent last quarter from a year earlier, the slowest pace in more than two years. In contrast, gross domestic product in the Philippines rose 7.5 percent from a year earlier, matching China’s pace, as President Benigno Aquino boosted spending and investment. The nation is poised to be among the world’s five fastest-growing economies in 2013 and 2014, according to Bloomberg surveys.

Indonesian annual growth averaged 5.3 percent from 2001-2010, compared with 4.8 percent for the Philippines, according to official data.

Investment Grade

Fitch Ratings and Standard and Poor’s this year awarded the Philippines its first investment-grade scores, while Moody’s Investors Service, which ranks the nation a step below, has said it is reviewing its rating for an upgrade. San Miguel Corp., Ayala Corp. and JG Summit Holdings Inc., among the nation’s biggest companies are investing in airports and railways.

Philippine inflation will stay within the central bank’s target range this year and next, allowing interest rates to be held through 2014, Governor Amando Tetangco has said. Consumer-price gains eased to 2.1 percent in August from a year earlier, the slowest pace in four years.

“Indonesia’s star has been waning,” said Gareth Leather, a London-based Asia economist at Capital Economics Ltd. “In contrast, the economic turnaround of the Philippines has been quite remarkable and along with China, it would be the fastest-growing Asian economy in the next couple of years.”

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Manish Modi in New Delhi at mmodi6@bloomberg.net