Statement at the Conclusion of the 2010 Article IV Consultation Mission to Indonesia

Press Release No. 10/237
June 10, 2010

Mr. Milan Zavadjil, Senior Resident Representative of the International Monetary Fund (IMF) in Indonesia made the following statement today in Jakarta:

“An IMF mission led by Mr. Thomas Rumbaugh, Division Chief in the Asia and Pacific Department, visited Jakarta during May 31-June 9, 2010 to conduct the 2009 Article IV Consultation discussions. The team exchanged views with the government on global economic developments and the Indonesian economic outlook. The mission also included discussions with the authorities on the findings of the recently conducted joint IMF/World Bank Financial Sector Assessment Program (FSAP), co-led by Mr. Hervé Ferhani, Deputy Director, IMF Monetary and Capital Markets Department. Based on these discussions, the team will prepare a staff report and a Financial System Stability Assessment (FSSA) report, scheduled to be presented to the IMF's Executive Board in mid-July.1

“Indonesia’s economy has shown resilience despite dramatic shifts in the global economy. Strong balance sheets for the government and the private sector, as well as relatively low dependence on external demand, combined with timely policy responses, have supported the economy through the 2008-09 global financial crisis and recent turbulence in Europe. In contrast to several countries now facing difficulties, Indonesia's public debt has declined to under 30 percent of GDP. This performance has led to a series of ratings upgrades, and contributed to an influx of portfolio capital from the second half of last year as international capital flows resumed.

“Against this background, Indonesia’s economic growth is expected to accelerate to 6 percent in 2010, as recovering credit and surging capital imports point to a robust outlook for private investment. Average inflation is expected to remain under 5 percent. While volatile capital flows complicate the appropriate policy mix, continued exchange rate flexibility, which has consistently served Indonesia well in responding to changing global conditions, will remain an important part of the policy toolkit.

“Other economic policies have been consistent with macroeconomic stability. The current monetary policy stance remains appropriate for now. As credit growth recovers, Bank Indonesia (BI) should stand ready to act as needed to anchor inflation expectations within the target range of 4-6 percent and build on its recent communication efforts to emphasize such a strategy. Reducing the level and volatility of inflation over time in line with other emerging markets would further improve economic performance. The government’s fiscal outlook in 2010 is also supportive of economic stability and is consistent with plans to further reduce public debt relative to GDP. Emphasis in fiscal policy over the medium term should be on structural reforms—improving budget execution, broadening the tax base, and reducing costly subsidies combined with higher transfers to the poor. This would provide additional room for infrastructure spending and better social services to support sustained growth.

“The FSAP’s findings indicate that the financial system has made remarkable progress over the last decade which helped it withstand the adverse effects of the 2008 global crisis. Fundamentals have strengthened, with most Indonesian banks reporting high capital, comfortable levels of liquidity and solid profitability. Banking supervision has been enhanced significantly, although there is still scope for further improvements particularly in dealing with problem banks. Development of a viable capital market will also help reduce reliance on banking sector funding. Fundamental to improving the efficiency of the financial sector is the need to strengthen contract enforcement, which involves issues that go well beyond the financial sector.”

1 The "Article IV" mission is an annual visit by an IMF team to all member countries to hold discussions and gather information on economic policies. The FSAP aims to increase the effectiveness of efforts to promote the soundness of financial systems in member countries. The FSAP forms the basis of Financial System Stability Assessments (FSSAs), in which IMF staff address issues of relevance to macroeconomic stability coming from the financial sector.



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