Press Release No. 12/251

Press Release No. 12/251
July 6, 2012

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

“An IMF mission led by Mr. Sanjaya Panth, Division Chief in the Asia and Pacific Department, visited Jakarta during June 25-July 6, 2012 to conduct the 2012 Article IV Consultation discussions. The team exchanged views with the government and Bank Indonesia on global economic developments and the Indonesian economic outlook. The team also met with a wide spectrum of the public and private representatives. Based on the visit, the team will prepare a staff report to be presented to the IMF's Executive Board in early September.¹

“Indonesia’s economy continues to perform well. At 6.5 percent, economic growth in 2011 was the highest in over a decade; inflation is currently within the central bank’s target range, credit growth is robust, and measures of business and consumer confidence remain strong.

“In recent months the global economic environment has, however, shown some signs of renewed weakness, which is having a knock-on effect on Indonesia. Indonesia’s external current account has turned from a surplus to a small deficit recently, as exports fell by more than imports, reflecting a combination of the deteriorating external environment and continued strong domestic demand. Relatively easy domestic monetary conditions, combined with the weaker current account, have contributed to exchange rate pressures during bouts of global risk aversion. However, foreign reserves are adequate and the policy mix of letting the exchange rate adjust and increased supply of foreign exchange by the central bank is softening the impact.

“Growth is expected to continue to ease modestly in the near term. The current account should end the year with a deficit of about 1 percent of GDP, which is fully consistent with Indonesia moving towards its medium-term equilibrium as suggested by fundamentals. A somewhat widened budget deficit is appropriately helping offset the impact on growth of slowing external demand. On this basis, GDP growth is projected at 6.1 percent in 2012 but should pick up again subsequently. Annual inflation bottomed out at 3.6 percent in January but has since edged up to 4.5 percent and is expected to reach 5 percent by year-end, still within the authorities’ target range.

“The external environment continues to pose risks to this outlook. Risks include an intensification of the Euro area problems, as well as a sharper-than-expected slowdown in China. Exchange rate flexibility, combined with interventions to smooth temporary sharp mismatches in supply and demand of foreign exchange, is key to helping buffer the economy from shocks. A gradual withdrawal of excess liquidity in the domestic banking system would allow money market rates to continue to drift back up toward the existing Bank of Indonesia policy rate, thereby helping strengthen resiliency to capital account pressures. It would also help arrest any acceleration of inflation and ensure continued financial sector stability.

“The government remains committed to increase the pace and quality of economic growth in the medium-term through a sustained increase in infrastructure investment. While the overall 2012 budget stance is consistent with the government’s firm commitment to fiscal sustainability and strong public finances, increasing fuel subsidies are distorting the structure of the budget. Therefore, fiscal policy needs to be re-oriented away from poorly targeted subsidies, which could be replaced with cash transfers to the vulnerable. This would also free up resources to increase necessary infrastructure and social spending.

“Implementation of financial sector reforms and improvements to the supervisory framework are proceeding. Once implemented, they will enhance financial system stability, promote capital market development, and widen the domestic investor base. Strengthening investor confidence, including by maintaining a free and open trade regime and investment climate, will be important to propel growth further.”

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.