Aug. 30, 2013 - Comments from the Federal Reserve to begin reducing its stimulus operations have weighed heavily on markets across Asia in recent weeks. Growing investor concerns have largely centered on those economies that have been running current account deficits and that are likely to be further impacted by lower growth forecasts and reduced capital inflows. More short term, speculative flows from investors into fast-growing Asian economies have also fallen as expectations for higher interest rates in the U.S. have risen.
Two of the most affected markets in the region have been India and Indonesia as their economies face similar challenges. In order to grow their economies, both India and Indonesia require sufficient capital inflows in the form of exports and Foreign Direct Investments (FDI). However, with a lackluster manufacturing sector and falling FDI inflows, both countries run the risk of further weakening currencies and higher inflation that will ultimately lead to lower economic growth. A recent World Bank report downgraded Indonesia's growth to 5.9% citing weaker-than-expected Foreign Direct Investment and softer commodity prices. Headline inflation for July also came in at 8.61% year-over-year— much higher than the consensus estimate of 8.04%—driven by the Muslim fasting period, Ramadan and a hike in fuel prices. In June, policymakers in Indonesia aimed to reduce wasteful subsidies by increasing the price of gasoline as much as 44%.
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