## 1idnea2019001 - 2.98 percent of GDP in 2018 (1.6 percent in 2017), mainly due to lower commodity exports and

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### Macroeconomic performance and outlook
- Recent performance:
  - Real GDP growth: 5.2 percent in 2018 (5.1 percent in 2017); growth remained broadly stable at 5.1 percent in 2019:Q1.
  - Gross fixed investment grew 6.7 percent in 2018.
  - Private consumption grew 5.1 percent in 2018.
  - Output gap: estimated at about -0.3 percent of GDP in 2018.
  - Bank loan growth: 12 percent (y/y) in February 2019 (from 8 percent in 2017).
  - Credit gap: -1.2 percent of GDP in 2018:Q4.
  - Residential property prices: grew by 3 percent (y/y) in 2018:Q4; commercial property prices flat since 2017.
- Projections:
  - Real GDP growth: 2019: 5.2 percent; 2020: 5.2 percent; medium term: rise to potential of 5.3 percent.
  - Credit growth: projected about 12 percent (table projections include 12.3 percent in 2019 and 12.4 percent in 2020; another projection notes 12.5 percent in 2019 and 2020).
  - Inflation (consumer prices): period average 3.2 percent in 2018; projected 3.1 percent in 2019 and 2020; core inflation stable at 3 percent.
  - Current account deficit: 2018: -3.0 percent of GDP (−31.1 billion U.S. dollars); projected -2.9 percent in 2019 and 2020 and gradual decline to 2.6 percent of GDP over the medium term.
  - General government balance: -1.8 percent of GDP for 2018; projected -1.8 percent of GDP in 2019 and 2020.
  - Primary balance: 0.0 percent of GDP in 2018; projected -0.1 percent in 2019 and 2020.
  - Gross reserves (end period): 120.7 billion U.S. dollars in 2018; projected 121.9 billion (2019) and 124.7 billion (2020).
  - Total external debt: 376.8 billion U.S. dollars in 2018 (36.9 percent of GDP); projected 415.0 billion (37.7 percent of GDP) in 2019 and 455.2 billion (37.7 percent of GDP) in 2020.

### External sector, reserves, and balance of payments
- Current account and BoP:
  - Current account deficit: 2018 widened to 3 percent of GDP (1.6 percent in 2017), mainly due to lower commodity exports and higher infrastructure-related imports.
  - Q1 2019 current account: narrowed to 2.6 percent of GDP.
  - Overall BoP: deficit of 0.7 percent of GDP in 2018; projected to move back into a small surplus in 2019.
- Reserves:
  - Gross international reserves: declined to US$121 billion in December 2018 (6½ months of imports) from US$130 billion at end-2017; recovered to about US$124.5 billion in March 2019 (118 percent of the IMF’s reserve adequacy metric).
  - End-2018 reserves also reported as US$120.7 billion (12 percent of GDP, about 118 percent of IMF’s reserve adequacy metric, and about 6.4 months of prospective imports).
  - Contingencies and swap lines: about US$92.5 billion.
  - Assessment: current level of reserves (US$124.3 billion at end-April) should provide sufficient buffer against a wide range of possible external shocks.
- Capital flows:
  - Net capital and financial account inflows in 2018: 2.5 percent of GDP; net FDI inflows: 1.4 percent of GDP; net portfolio inflows: 0.9 percent of GDP.
  - Nonresident investors hold about 40 percent of rupiah-denominated government bonds (another figure: 34 percent of the total stock or 6.4 percent of GDP at end-2018) and a third of corporate debt financing.
  - Net portfolio and FDI flows combined fell by 1.6 percent of GDP relative to 2017 during Q2/Q3 2018.

### Inflation and price developments
- Inflation rates:
  - Inflation eased to 2.8 percent (y/y) in April 2019 (close to the lower bound of the target band 3.5±1percent).
  - Headline inflation increased to 3.3 percent (y/y) in May 2019 from 2.8 percent in April 2019.
  - Consumer prices (end period): 2018 3.1 percent; 2019 Proj. 3.1 percent; 2020 Proj. 3.1 percent.
  - Core inflation: stable at 3 percent.
- Drivers: subdued food price increases; electricity and some fuel prices frozen; macroeconomic tightening in 2018.

### Fiscal position, revenues, and public investment
- Fiscal outcomes and indicators:
  - Overall deficit: fell to 1.8 percent of GDP in 2018 (2.5 percent of GDP in 2017).
  - Primary balance: -0.08 percent of GDP in 2018 (official figure); primary balance at zero is noted in places.
  - General government revenue: 2018: 14.1 percent of GDP (table shows 14.9 percent for 2018 in Selected Economic Indicators); projected 14.8 percent (2019) and 14.9 percent (2020).
  - General government expenditure: 2018: 16.6 percent of GDP; projected 16.7 percent in 2019 and 2020.
  - General government debt: 2018 30.1 percent of GDP; 2019 Proj. 30.2; 2020 Proj. 29.9.
  - Outstanding explicit government guarantees at end-2018: 1.2 percent of GDP.
- Revenue performance:
  - Strong revenue growth in 2018: 16 percent, y/y, in both oil/gas revenues and non-oil/gas revenues.
  - Indonesia’s general government revenue-to-GDP ratio is below 15 percent.
- Medium-Term Revenue Strategy (MTRS):
  - Objective: raise revenue by around 5 percent of GDP over five years to finance priority spending on infrastructure, education, health, and social safety nets.
  - Suggested measures: streamline existing taxes, remove VAT exemptions, replace special regimes with a single corporate income tax; over time introduce fuel excises, increase the standard VAT rate, raise property tax rates, and broaden the PIT base.
  - Potential social impact: using revenues from the MTRS to finance priority spending could reduce the Gini coefficient by 0.5 points annually.
- Public investment management:
  - PIMA recommends: enhance focus on capital projects; identify major capital projects in medium-term plans; strengthen multiyear budgeting; improve project preparation and selection; modernize capital portfolio oversight; strengthen capital project management.
- Contingent liabilities:
  - Reliance on SOEs and PPPs increases fiscal risks from contingent liabilities; authorities monitoring risks and strengthening management.

### Monetary, exchange rate, and macroprudential policies
- Bank Indonesia (BI) actions in 2018 and 2019:
  - Raised the policy rate six times in 2018 by 175 basis points cumulatively to 6.00 percent.
  - Allowed the rupiah to depreciate by 6.3 percent against the U.S. dollar in 2018 while intervening to limit volatility.
  - Introduced DNDFs in November 2018; started auctioning securities across the yield curve.
  - Relaxed loan-to-value limits for first-time homebuyers in July 2018; loosened the macroprudential intermediation ratio in March 2019; provided liquidity through monetary operations.
  - Introduced a 7-day reverse repo rate and narrowed the interest rate corridor (August 2016).
  - Gradual introduction of reserve requirement averaging from July 2017; recommendation to extend averaging to all primary reserve requirements.
- Policy stance going forward:
  - With inflation within the target band, scope exists for cautious relaxation of monetary policy stance unless significant capital account pressures reemerge.
  - Inflation expectations around 3.8 percent; associated real policy rate (2.2 percent) is above estimated neutral real rate (2 percent).
  - No room for further relaxation of macroprudential policies; BI should assess effects of recent relaxations and maintain liquidity buffers.
- Exchange rate framework:
  - De jure free floating arrangement since August 14, 1997; de facto floating.
  - Market exchange rate: Rp 14,187 per U.S. dollar as of April 30, 2019.
  - FX intervention should be limited to preventing disorderly market conditions while allowing exchange rate to adjust.
- Monetary operations and market development:
  - Measures to develop money markets: publish IndONIA (transaction-based), issue regulations on negotiable certificate of deposits, commercial papers, and interest rate derivatives.
  - Daily average volume of money market instruments grew about 12.3 percent, y/y.
  - Outstanding interbank repos: about Rp 11.7 trillion; unsecured interbank market daily average volume and outstanding balance were Rp 16.6 trillion and Rp 46.8 trillion respectively (text truncated on further detail).
- Statement by Staff Representative (July 3, 2019):
  - On June 20, BI kept the policy rate unchanged; 7-Day Reverse Repo rate remained at 6.00 percent.
  - BI lowered rupiah bank reserve requirement by 50 bps to 6.0 percent for conventional banks and 4.5 percent for Islamic banks, effective July 1, 2019.
  - BI indicated it would keep an accommodative macroprudential policy stance.

### Financial sector, macrofinancial vulnerabilities, and recommended reforms
- Financial soundness:
  - Capital adequacy ratio (CAR): 22.9 percent (end-2018).
  - Liquid assets to deposits ratio: 19.3 percent.
  - Credit growth: 11.8 percent.
  - NPL ratios: 2.4 percent (gross) and 1.0 percent (net).
- Vulnerabilities:
  - Reliance on portfolio inflows to finance twin deficits leaves Indonesia vulnerable to capital flow reversals.
  - Banks’ high exposure to the corporate sector is a source of risk despite large capital buffers and strong profitability.
  - Systemic macrofinancial risks are contained but external tilt of risks remains.
- Macroprudential and regulatory recommendations:
  - Closely assess macroprudential policies to ensure financial system stability.
  - Strengthen frameworks for financial oversight and crisis management in line with FSAP recommendations: clarify institutional mandates; improve supervision of nonbank financial institutions and financial conglomerates; strengthen legal framework for financial oversight and crisis management; enhance crisis management frameworks; continue strengthening the AML/CFT regime.
  - Extend coverage of the corporate prudential FX regulation to all FX liabilities of systemic corporates.
  - Monitor risks and contingent liabilities from SOEs and PPPs.
  - Next Article IV consultation recommended on a standard 12-month cycle.

### Structural reforms, financial deepening, and digital economy
- Structural reform priorities to boost potential growth:
  - Higher domestic revenue mobilization and implementation of a MTRS.
  - Financial deepening and money market development.
  - Complementary reforms in human capital, infrastructure, labor and product markets.
  - Improving governance and the business environment; easing restrictions to foreign direct investment.
  - Increasing female labor participation.
  - Streamlining labor and product market regulations.
- Financial market development priorities:
  - Identify a reference rate for interest rate swaps and better anchor the short-term end of the yield curve.
  - Stimulate repo and foreign exchange derivatives markets; expand IndONIA tenors.
  - Expand use of GMRA and review tax treatments on repos and financial instruments.
  - Amend bankruptcy law to enable close-out netting.
- Digital economy and e-commerce:
  - Online retail share: increased from less than 1 percent to about 3 percent of total retail sales between 2014 and 2017.
  - Mobile Internet users increased about 21 percent between 2015 and 2017.
  - IMF staff research: firms engaged in online commerce in Asia are at least 30 percent more productive and export at least 50 percent more on average.
  - Constraints: only a quarter of population uses the Internet; about half have access to financial services; logistics infrastructure lags peers (ranked 63rd out of 160 in 2016).
  - Priority actions: expand internet coverage and quality, improve logistics, expand cashless payments, enhance human capital, and encourage SME participation online.

### Debt sustainability, external position assessment, and stress tests
- External debt and public debt:
  - External debt: 2018 level 36.9 percent of GDP (up from 34.7 percent in 2017); projected 37.7 percent in 2019 and 2020; medium-term baseline projected to reach 39.1 percent of GDP in 2024.
  - Total external debt in U.S. dollars: 2018 376.8; 2019 Proj. 415.0; 2020 Proj. 455.2 (all with percent of GDP figures preserved above).
  - Public debt: general government debt declined historically to about 30 percent of GDP; nominal gross public debt: 2018: 29.4 percent (table sequence shows 2019: 30.1; 2020: 30.2; 2024: 29.8/29.5 in sequences).
  - Composition: foreign-currency denominated debt about 40 percent of public debt; nonresidents hold around 60 percent of general government debt; about 19 percent of gross external debt denominated in rupiah.
- DSA projections and stress tests:
  - Baseline: public sector debt expected to stabilize around 30 percent of GDP over medium term; baseline general government deficit to remain at 1.8 percent of GDP.
  - Gross financing needs: peak at 4.5 percent of GDP in 2020 and fall to around 4.2 percent of GDP in 2024.
  - Sensitivity: a one standard deviation widening of the current account deficit would increase external debt to 43 percent of GDP by 2024; a 30 percent exchange rate depreciation in 2018 would raise external debt to 56 percent of GDP in 2020 and thereafter.
  - Severe combined macro-fiscal shock: total government debt would stabilize at around 35 percent of GDP or 232 percent of revenue by 2024; gross financing needs would stay below 5.4 percent of GDP under that scenario.
- External sector assessment:
  - NIIP: -30.5 percent of GDP (end-2018).
  - Staff assessment: "The external position of Indonesia in 2018 was assessed to be moderately weaker than medium-term fundamentals and desirable policies."
  - Staff CA gap for 2018: -1.5 percent of GDP; staff-assessed REER undervaluation of 4 percent (within +/-5 percent uncertainty interval).

### Risks, contingency policies, and recommended policy mix
- Risks (tilted to the downside; mainly external):
  - Rising trade tensions.
  - Sharp tightening of global financial conditions.
  - Weaker-than-expected growth in China.
  - Large swings in commodity prices, especially higher oil prices.
- Contingency policy guidance:
  - Maintain exchange rate flexibility; intervene only to address disorderly market conditions.
  - Tighten policy if above-target inflation or capital inflows dry up; consider targeted liquidity support (repos and FX swaps) for solvent banks if external financing access is temporarily restricted.
  - Use rebound in portfolio and debt-creating inflows to build reserves while maintaining exchange rate flexibility and cautiously easing monetary policy.
  - Clear communication is critical; publish scenario analysis and FXI data with appropriate lags to improve transparency.
- Recommended near-term policy mix:
  - Maintain a neutral fiscal stance while protecting buffers.
  - Allow cautious relaxation of monetary policy stance given inflation within the target band, unless capital account pressures reemerge.
  - Continue financial sector reforms and strengthen macroprudential oversight.

### Selected key statistics (from Staff Report tables)
- Real GDP (percent change): 2014 5.0; 2015 4.9; 2016 5.0; 2017 5.1; 2018 5.2; 2019 Proj. 5.2; 2020 Proj. 5.2.
- Domestic demand (percent change): 2018 6.3; 2019 Proj. 5.4; 2020 Proj. 5.2.
- Private Sector Credit (12-month percent change; end of period): 2018 12.0; 2019 Proj. 12.3; 2020 Proj. 12.4.
- Consumer prices (end period): 2018 3.1 percent; 2019 Proj. 3.1 percent; 2020 Proj. 3.1 percent.
- Current account balance (in percent of GDP): 2018 -3.0; 2019 Proj. -2.9; 2020 Proj. -2.9.
- General government balance (in percent of GDP): 2018 -1.8; 2019 Proj. -1.8; 2020 Proj. -1.8.
- General government debt (percent of GDP): 2018 30.1; 2019 Proj. 30.2; 2020 Proj. 29.9.
- Gross reserves (end period, billions of U.S. dollars): 2018 120.7; 2019 Proj. 121.9; 2020 Proj. 124.7.
- Total external debt (in billions of U.S. dollars / percent of GDP): 2018 376.8 / 36.9; 2019 Proj. 415.0 / 37.7; 2020 Proj. 455.2 / 37.7.
- Oil production (thousands of barrels per day): 2018 800; 2019 Proj. 740; 2020 Proj. 710.
- Nominal GDP (in trillions of rupiah): 2018 14,826; 2019 Proj. 16,047; 2020 Proj. 17,409.
- Trade balance: May 2019 registered a US$200 million surplus (compared to a US$2.3 billion deficit in April 2019).

*Source: Indonesia — Staff Report for the 2019 Article IV Consultation (mission dates: May 1–14, 2019); IMF staff report excerpts and related chapter content provided in the supplied PDF content.*

### 2.98 percent of GDP in 2018 (1.6 percent in 2017), mainly due to lower commodity exports and

### 1idnea2019001 - 2.98 percent of GDP in 2018 (1.6 percent in 2017), mainly due to lower commodity exports and

### Overview and recent performance
- Real GDP growth reached 5.2 percent in 2018, up from 5.1 percent in 2017, supported by robust domestic demand.
- Growth drivers in 2018:
  - Gross fixed investment grew 6.7 percent.
  - Private consumption grew 5.1 percent.
- Output gap estimated at about -0.3 percent of GDP in 2018.
- Growth remained broadly stable at 5.1 percent in 2019:Q1.
- Bank loan growth increased to 12 percent (y/y) in February 2019, from 8 percent in 2017.
- Credit gap reduced to −1.2 percent of GDP in 2018:Q4.
- Residential property prices grew by 3 percent (y/y) in 2018:Q4; commercial property prices have been flat since 2017.

### Outlook and medium-term projections
- Real GDP growth projections:
  - 2019: 5.2 percent
  - 2020: 5.2 percent
  - Medium term: rise to potential of 5.3 percent
- Credit growth projected to remain about 12 percent, underpinned by strong bank balance sheets and continued economic growth.
- Inflation projected to remain within the target band (consumer prices: period average 3.2 percent in 2018; projected 3.1 percent in 2019 and 2020).
- Current account deficit trajectory:
  - 2018: -3.0 percent of GDP (−31.1 billion U.S. dollars)
  - Projected to continue gradual decline to 2.6 percent of GDP over the medium term (table projections: -2.9 percent in 2019 and 2020).
- Fiscal balance projections:
  - General government balance: -1.8 percent of GDP for 2018, projected to remain -1.8 percent of GDP in 2019 and 2020.
  - Primary balance: 0.0 percent of GDP in 2018; projected -0.1 percent in 2019 and 2020.
- General government revenue and expenditure:
  - Revenue 2018: 14.1 percent of GDP (table shows 14.9 percent for 2018 in Selected Economic Indicators); projected 14.8 percent (2019) and 14.9 percent (2020).
  - Expenditure 2018: 16.6 percent of GDP; projected 16.7 percent (2019 and 2020).
- Gross reserves (end period): 120.7 billion U.S. dollars in 2018; projected 121.9 billion (2019) and 124.7 billion (2020).
- Total external debt: 376.8 billion U.S. dollars in 2018 (36.9 percent of GDP); projected 415.0 billion (37.7 percent of GDP) in 2019 and 455.2 billion (37.7 percent of GDP) in 2020.

### Risks to the outlook
- Risks are tilted to the downside and are mainly external:
  - Rising trade tensions.
  - Sharp tightening of global financial conditions.
  - Weaker-than-expected growth in China.
  - Large swings in commodity prices, especially higher oil prices that would translate into higher current account deficit.
- Reliance on portfolio inflows to finance the twin deficits leaves Indonesia vulnerable to capital flow reversals:
  - Nonresident investors hold about 40 percent of rupiah-denominated government bonds and a third of corporate debt financing.

### Executive Directors’ assessment and policy guidance
- Commended authorities’ policy response to strong external headwinds in 2018 that supported positive economic performance.
- Policy priorities and recommendations:
  - Maintain focus on protecting macroeconomic and financial stability, safeguarding buffers, and addressing vulnerabilities.
  - Maintain a neutral fiscal stance while protecting fiscal buffers; support elimination of the primary deficit (achieved in 2018).
  - Implement a medium-term revenue strategy combining well-sequenced and prioritized tax policy and administration reforms to finance priority spending and structural reforms, and lessen reliance on external financing.
  - Closely assess macroprudential policies to ensure financial system stability.
  - With inflation within the target band, allow scope for cautious relaxation of monetary policy stance, unless significant capital account pressures reemerge.
  - Allow the exchange rate to continue moving in line with market forces, with FX intervention limited to preventing disorderly market conditions.
  - Monitor risks and contingent liabilities from state-owned enterprises and public-private partnerships.
  - Continue efforts to strengthen frameworks for financial oversight and crisis management in line with FSAP recommendations, including:
    - Clarifying institutional mandates.
    - Improving supervision of nonbank financial institutions and financial conglomerates.
    - Strengthening the legal framework for financial oversight and crisis management.
    - Enhancing crisis management frameworks.
    - Continued strengthening of the AML/CFT regime.
- Structural reform priorities to boost potential growth:
  - Higher domestic revenue mobilization.
  - Financial deepening.
  - Complementary reforms in human capital, infrastructure, labor and product markets.
  - Improving governance and the business environment.
  - Increasing female labor participation.
  - Easing restrictions to foreign direct investment.
  - Streamlining labor and product market regulations.

### Key statistics (selected figures from the Staff Report tables)
- Real GDP (percent change): 2014 5.0; 2015 4.9; 2016 5.0; 2017 5.1; 2018 5.2; 2019 Proj. 5.2; 2020 Proj. 5.2.
- Domestic demand (percent change): 2018 6.3; 2019 Proj. 5.4; 2020 Proj. 5.2.
- Private Sector Credit (12-month percent change; end of period): 2018 12.0; 2019 Proj. 12.3; 2020 Proj. 12.4.
- Consumer prices (end period): 2018 3.1 percent; 2019 Proj. 3.1 percent; 2020 Proj. 3.1 percent.
- Current account balance (in percent of GDP): 2018 -3.0; 2019 Proj. -2.9; 2020 Proj. -2.9.
- General government balance (in percent of GDP): 2018 -1.8; 2019 Proj. -1.8; 2020 Proj. -1.8.
- General government debt (percent of GDP): 2018 30.1; 2019 Proj. 30.2; 2020 Proj. 29.9.
- Gross reserves (end period, billions of U.S. dollars): 2018 120.7; 2019 Proj. 121.9; 2020 Proj. 124.7.
- Total external debt (in billions of U.S. dollars / percent of GDP): 2018 376.8 / 36.9; 2019 Proj. 415.0 / 37.7; 2020 Proj. 455.2 / 37.7.
- Oil production (thousands of barrels per day): 2018 800; 2019 Proj. 740; 2020 Proj. 710.
- Nominal GDP (in trillions of rupiah): 2018 14,826; 2019 Proj. 16,047; 2020 Proj. 17,409.

*Source: Indonesia — Staff Report for the 2019 Article IV Consultation (mission dates: May 1–14, 2019).*

### 7.      Inflation eased to 2.8 percent (y/y) in

### 7.      Inflation eased to 2.8 percent (y/y) in April 2019

### Inflation and price developments
- Inflation eased to 2.8 percent (y/y) in April 2019, close to the lower bound of the target band (3.5±1percent).
- Drivers: subdued food price increases; electricity and some fuel prices were frozen; macroeconomic policies were tightened in 2018.
- Core inflation is stable at 3 percent.

### External sector, reserves, and balance of payments (2018–early 2019)
- The current account deficit (CAD) widened to 3 percent of GDP in 2018 (1.6 percent in 2017), mainly due to lower commodity exports and higher infrastructure-related imports.
- Tighter global financial conditions during Q2/Q3 2018 led to a sharp decline in net portfolio and FDI flows, which combined fell by 1.6 percent of GDP relative to 2017.
- Overall BoP reached a deficit of 0.7 percent of GDP in 2018, with the current account deficit more than offsetting the financial account surplus.
- Gross international reserves:
  - Declined by 0.9 percent of GDP to US$121 billion (6½ months of imports) in December 2018, from US$130 billion at end-2017.
  - Recovered to about US$124.5 billion in March 2019 (118 percent of the IMF’s reserve adequacy metric).
- Footnote: The decline in net portfolio flows was driven by both equity and bond outflows. Net FDI flows were weakened by divestment of foreign ownership and an increase in outward investment by Indonesian corporations.

### Near-term outlook and projections
- Real GDP growth projected to remain stable at 5.2 percent in 2019 and 2020, led by strong domestic demand.
- Credit growth projected at 12.5 percent in 2019 and 2020 to support economic activity.
- Inflation projected to remain stable at 3.1 percent in 2019, below the mid-point of the target range, as food prices rebound.
- CAD projected to narrow slightly to 2.9 percent of GDP in 2019 due to weaker import growth (slower investment and lagged effects of depreciation).
- Financial account expected to recover with higher net portfolio inflows building on buoyant inflows of 2019:Q1.
- Overall BoP projected to move back into a small surplus in 2019, leading to an accumulation of reserves.

### Medium-term expectations
- Real GDP growth expected to rise to the level of potential (5.3 percent) underpinned by robust domestic demand.
- Inflation projected to remain within the target band.
- CAD expected to continue its gradual decline.
- Fiscal deficit projected to remain constant at 1.8 percent of GDP.
- Credit growth expected to be sustained at about 12 percent, supported by strong bank balance sheets and continued economic growth.
- Three free trade agreements concluded with Australia, Chile, and the European Free Trade Area in 2018 and early 2019 could support exports by providing greater market access.

### Risks to the outlook
- Risks are tilted to the downside. Main external risks:
  - Rising trade tensions.
  - Sharp tightening of global financial conditions.
  - Weaker-than-expected growth in China.
  - Large swings in commodity prices, especially higher oil prices that would translate into higher current account deficits.
- Upside: The start of the President’s second term could lead to intensified reform efforts, boosting confidence, investment, and growth.

### Macrofinancial vulnerabilities and external assessment
- Systemic macrofinancial risks are contained; economy remains vulnerable to capital flow reversals due to a large share of foreign portfolio holdings.
- Banks’ high exposure to the corporate sector is a source of risk despite large capital buffers and strong profitability.
- External position in 2018 assessed as moderately weaker than implied by medium-term fundamentals and desirable policies:
  - Estimate of the CA gap for 2018 is -1.5 percent of GDP, with an REER undervaluation of 4 percent.
  - Short-run divergence between exchange rate and current account assessments reflects lags in CA response to REER depreciation in 2018.
- Exchange rate flexibility, trade-related policy actions (import compression and export promotion), and broadly stable commodity prices are expected to modestly reduce the CAD over the medium term, though risks remain.

### Policy mix under the baseline and recommendations
- Given vulnerabilities, downside risks, and the nearly closed output gap, policies should focus on protecting macroeconomic and financial stability, safeguarding buffers, and addressing vulnerabilities.
- Recommended stance:
  - Maintain a neutral stance on fiscal and macroprudential policies.
  - With inflation within the target band, scope exists for a cautious relaxation of the monetary policy stance unless significant capital account pressures reemerge.
  - Continue financial sector policy reforms to enhance legal and supervisory framework in line with FSAP recommendations.
  - Greater efforts on domestic revenue mobilization and financial deepening, complemented by structural reforms in product and labor markets, are critical to boost growth.

### Contingency policy guidance for severe external pressures
- Maintain exchange rate flexibility; intervene only to address disorderly market conditions.
- Policy tightening considered only if above-target inflation or drying up of capital inflows occurs.
- For short-lived restricted access to external financing: use targeted measures to alleviate funding pressures for solvent banks (e.g., repos and FX swaps).
- Rebound in portfolio and debt-creating inflows: opportunity to build up reserves while maintaining exchange rate flexibility and cautiously ease monetary policy.
- Clear communication of policy rationale is critical.

### Monetary, exchange rate, and macroprudential policy actions in 2018 and 2019
- Bank Indonesia (BI) actions in 2018:
  - Raised the policy rate six times (by 175 basis points cumulatively, to 6 percent) to maintain external financing and reduce pressures on the financial account.
  - Allowed the rupiah to depreciate by 6.3 percent against the U.S. dollar while intervening in FX and government bonds markets to limit volatility.
  - International reserves declined by around US$10 billion, or 7 percent, in 2018.
  - Relaxed loan-to-value limits for first-time homebuyers in July 2018, loosened the macroprudential intermediation ratio in March 2019, and provided liquidity through monetary operations.
- These measures helped manage external pressures without materially compromising bank credit recovery and growth, but may have slowed CAD adjustment and could hamper financial deepening if BI’s strong market presence is sustained.

### Monetary policy stance going forward
- There is room to cautiously loosen the monetary policy stance:
  - Inflation expectations around 3.8 percent; associated real policy rate (2.2 percent) is above estimated neutral real rate (2 percent).
  - Authorities have space to partially and gradually unwind interest rate hikes unless significant capital account pressures reemerge.
  - Need to monitor impact on capital inflows, exchange rate, and bank and corporate balance sheets.
  - No room for further relaxation of macroprudential policies; BI should assess effects of recent relaxations.
  - Maintain liquidity buffers (including reserve requirements).

### Exchange rate regime and monetary operations reform
- Exchange rate flexibility remains critical; FX intervention should address disorderly conditions.
- Monitor financial sector liquidity closely; conduct monetary operations prudently to avoid exacerbating exchange rate volatility.
- BI’s reforms:
  - Introduction of a 7-day reverse repo rate and narrowing of the interest rate corridor (August 2016).
  - Gradual introduction of reserve requirement averaging starting July 2017; recommendation to extend averaging to all primary reserve requirements.
  - Introduction of DNDFs in November 2018 to enhance hedging and start auctioning securities across the yield curve to encourage price discovery.
- Authorities seek a private sector-driven DNDF market and have capped BI’s offers to limit quasi-fiscal costs; documentation requirements for DNDF supply have been reduced but purchases remain subject to an underlying transaction.

### Communication and data transparency
- Clear communication of policy objectives, strategy, toolkit, and conditionality for policy levers should be integral to the framework.
- Scenario analysis around main risks and publication of FXI data with appropriate lags would improve transparency and policy effectiveness.
- Ongoing initiatives to use big data for timely economic monitoring could facilitate prompt policy responses.

### Authorities’ views
- Authorities broadly agreed with the macroeconomic outlook, risks, external sector assessment, and debt sustainability analysis.
- They seek gradual improvement in the outlook through ongoing and planned reforms while narrowing the CAD to around 2½ percent of GDP.
- Authorities view BI’s policy mix during the 2018 selloff as effective in preserving growth and moderate inflation and intend to maintain a similar framework, with flexibility to cautiously reduce the policy rate as allowed by external pressures.
- Authorities reiterated commitment to exchange rate flexibility and indicated consideration of publishing FXI data once financial markets deepen and improve efficiency.

*Source: IMF country report chapter content.*

### 29.      Government revenues in Indonesia

### Government revenues in Indonesia

### Revenue performance and fiscal position
- Overall deficit fell to 1.8 percent of GDP (2.5 percent of GDP in 2017).
- Strong revenue growth in 2018: 16 percent, y/y, in both oil/gas revenues and non-oil/gas revenues.
- Energy subsidies increased 50 percent, y/y, as electricity and some fuel prices were frozen, although this was partially offset by restraints on other expenditures (capital expenditure in particular).
- Indonesia’s general government revenue to GDP ratio is below 15 percent.
- Low fiscal revenues have led to greater reliance on SOEs and PPPs to channel recent increases in infrastructure spending, increasing fiscal risks from contingent liabilities.
- Outstanding explicit government guarantees at the end of 2018 amounted to 1.2 percent of GDP.

### Near-term fiscal stance and policy priorities
- A neutral fiscal stance is recommended in the near term (2019 and 2020) to protect growth, preserve buffers, and create additional space through tax reform.
- Primary balance is at zero, and above the debt stabilizing level of -0.5 percent of GDP.
- Fiscal rules cap the deficit at 3 percent of GDP; projected fiscal deficits of 1.8 percent of GDP imply room to pursue countercyclical fiscal policies if negative shocks materialize.
- Policy priorities include:
  - Protecting growth and macrofinancial stability amid uncertainties around external financing and rising fiscal risks from contingent liabilities.
  - Improving composition and efficiency of spending.
  - Reducing energy subsidies through automatic adjustments of fuel prices.
  - Strengthening means-tested social assistance and public investment.

### Medium-term revenue strategy (MTRS)
- Implementing a MTRS is critical to finance priority spending and avoid measures that erode the tax base.
- The MTRS should aim to raise revenue by around 5 percent of GDP over five years to finance priority spending on infrastructure, education, health, and social safety nets.
- Fund staff analytical work suggests the MTRS could boost growth via significant economy-wide productivity gains and improvements in the business environment.
- Using revenues from the MTRS to finance priority spending could reduce the Gini coefficient by 0.5 points annually, which would reverse over 10 years the net increase in income inequality of the past two decades.
- The MTRS covers both tax policy and tax administration reforms; implementation challenges require careful prioritization and sequencing.
- The government should avoid measures that would weaken revenues, including additional tax incentives.

### Spending efficiency and public investment management
- Authorities’ efforts to improve spending efficiency are welcome.
- The public investment management assessment (PIMA) recommends actions in six priority areas:
  - Enhance focus on capital projects and their visibility.
  - Identify major capital projects in the medium-term development plans.
  - Strengthen multiyear budgeting framework for capital spending.
  - Improve quality of project preparation and selection.
  - Modernize capital portfolio oversight and monitoring.
  - Strengthen capital project management.

### Contingent liabilities and SOE/PPP risks
- Reliance on SOEs and PPPs to channel infrastructure spending increases fiscal risks from contingent liabilities.
- Authorities are monitoring fiscal risks closely and continue to seek more private participation in investment projects.
- Authorities are taking further steps to strengthen management of contingent liabilities from SOEs and PPPs.

### Authorities’ views on fiscal reforms
- Authorities focus on revenue mobilization and improving the quality and efficiency of spending.
- They concur with the importance of implementing a MTRS and indicated tax administration reforms are advancing (risk-based audits, IT development, and use of taxpayer bank data to support audits).
- Authorities agreed on the merits of a broadly neutral fiscal stance in 2019−20 and on improving spending efficiency and quality at all government levels, including:
  - Better targeting energy subsidies.
  - Expanding social assistance.
  - Reviewing the quality of spending in priority sectors.

*Source: IMF staff assessment as presented in the chapter “Government revenues in Indonesia” from the supplied PDF content.*

### 50.      The authorities reiterated that the corporate prudential FX regulation should not be

### The authorities reiterated that the corporate prudential FX regulation should not be

### Assessment of the corporate prudential FX regulation
- The authorities stated the corporate prudential FX regulation should not be seen as a CFM nor a CFM/MPM.
- The regulation aims to ensure macrofinancial stability through the adoption of prudential principles on corporate foreign borrowing.
- Because only few years have passed since the introduction of the regulation, the authorities indicated it would be appropriate to assess the impact of the initial regulation over time before considering further changes.
- IMF assessment: This regulation is assessed as a residency-based capital flow management measure (CFM) and a macroprudential measure under the IMF’s Institutional View and IMF (2017), because it applies only to FX liabilities of corporates with external debt, while it is intended to mitigate a buildup of systemic risks.
- Recommendation in report: The corporate prudential FX regulation should be further improved by extending its coverage to all FX liabilities of systemic corporates.

### 2018 macroeconomic performance (findings)
- Policy flexibility supported positive macroeconomic performance and maintained financial stability in face of tighter global financial conditions and episodes of capital outflows.
- Economic growth stabilized at above 5 percent.
- Inflation eased to around 3 percent.
- A surge in imports and weaker-than-expected export growth contributed to an increase in the current account deficit.
- Indonesia’s external position in 2018 was assessed to be moderately weaker than implied by medium-term fundamentals and desirable policies.

### Economic outlook and vulnerabilities
- Growth and inflation are projected to remain stable.
- The current account is expected to narrow gradually.
- Systemic macrofinancial risks are contained.
- Risks are tilted to the downside and are mainly external.
- The public and corporate sectors heavy reliance on external financing leaves Indonesia vulnerable to capital flow reversals.

### Near-term policy mix (recommendations)
- Monetary policy: Because the current monetary stance is tight and inflation pressures are modest, BI could partially and gradually unwind the interest rate hikes adopted in response to the 2018 EM selloff, unless significant capital account pressures reemerge.
- Exchange rate: BI should continue to allow the exchange rate to move freely in line with market forces, with FX intervention limited to preventing disorderly market conditions.
- Fiscal stance: The largely neutral fiscal stance is appropriate for the near term as it balances the need to build resilience and underpin growth.
- Macroprudential policy: Further relaxation of macroprudential policies appears not warranted, given the current and expected macrofinancial conditions.

### Structural reform priorities and Medium-Term Revenue Strategy (MTRS)
- Policy priority: A reform package that mobilizes revenues to finance development spending (infrastructure, education, health, and social safety nets), and accelerate financial deepening to lessen reliance on volatile capital inflows.
- Complementary reforms: Finance and support essential reforms in labor and product markets, including human capital development, higher female labor force participation, and improvement of the business environment.
- Timing: The start of the President’s second term will provide a unique window of opportunity to implement these critical reforms.
- MTRS recommendations:
  - Early implementation of a MTRS to finance growth-enhancing priority spending and structural reforms is critical.
  - Build on gradual gains from tax administration reforms.
  - Early focus on streamlining existing taxes, including removing VAT exemptions and replacing special regimes with a single corporate income tax.
  - Over time, additional tax reforms should include introducing fuel excises, increasing the standard VAT rate, raising property tax rates, and broadening the PIT base.
  - The MTRS would also help improve the business climate and boost productivity.
  - Sound risk management would help mitigate fiscal risks from contingent liabilities from SOEs’ debt and PPPs.

### Financial deepening and market development
- Financial deepening with appropriate prudential standards would help promote stable financing, including for infrastructure development.
- Recent progress: approval of a blueprint for payment systems and the launch in 2017 of the national payment gateway.
- Priorities include legal upgrades to align the mandates of BI, OJK, and LPS with the new regulatory landscape.
- Money market development priorities:
  - Identify a reference rate for interest rate swaps.
  - Better anchor the short-term end of the yield curve.
  - Stimulate progress in the repo and foreign exchange derivatives markets.
- Technological innovation offers a promising channel for financial inclusion but cyber security in the financial system should be enhanced in parallel.
- Specific recommendation: Extend coverage of the corporate prudential FX regulation to all FX liabilities of systemic corporates.

### Education, labor market, and human capital
- Improving education and easing labor market regulations would support growth and employment.
- Ensure more equitable access to quality education by improving the efficiency of education spending and the quality of education.
- Promote formal employment and reduce the use of short-term contracts by streamlining stringent job protection, while improving vocational training and job placement services.
- Enhance labor productivity and female labor participation by:
  - More open immigration policy for skilled labor.
  - Flexible work arrangements.
  - Affordable childcare.

### Regulatory streamlining and governance
- Streamline regulations targeting areas with largest potential gains: improving governance and reducing state control, antitrust exemptions, and barriers in the network sector.
- Avoid conflicting regulations through greater coordination among ministries and regional governments.
- Rationalize non-tariff measures and FDI restrictions to support linkages with global value chains and competitiveness.
- Improve fiscal governance, the regulatory framework, and the rule of law to help reduce vulnerabilities to corruption.
- Example reform: Improving the insolvency and creditor rights regimes would raise participation in the corporate bond market and financial access for MSMEs.

### Financial oversight and crisis management
- Authorities have made progress in strengthening frameworks for financial oversight and crisis management and resolution in recent years.
- The 2017 FSAP identified areas needing improvement:
  - Clarifying institutional mandates.
  - Improving supervision of nonbank financial institutions and financial conglomerates.
  - Strengthening legal protection of officials involved in financial oversight and crisis management.
  - Enhancing crisis management frameworks, such as the ELA and resolution frameworks.
- Recommendation: The next Article IV consultation should take place on a standard 12-month cycle.

### Boxed findings: Policy framework episodes and money market development (key figures and actions)
- Fiscal rules adopted in 2003: deficit cap at 3 percent of GDP and public debt at 60 percent of GDP.
- Inflation targeting and managed floating exchange rate introduced in 2005.
- Macroeconomic outcomes since 2013:
  - Growth stable at about 5 percent since 2013.
  - Inflation within the target band since 2016.
  - Public debt at about 30 percent of GDP since the global financial crisis.
- Exchange market pressures episodes:
  - Taper Tantrum (TT) (2013: May to December): rupiah depreciated by close to 25 percent; international reserves declined by close to 6 percent.
  - 2018 EM selloff (2018: February to October): rupiah depreciated by around 13 percent; international reserves declined by around 13 percent.
- Monetary policy reaction during both episodes: +175 bps interest rate hikes.
- Output gap: TT +1.5 percent; 2018 -0.3 percent.
- Money market development (2018 actions and outcomes):
  - National Strategy on Financial Market Development (2018−2024) launched.
  - BI issued regulations on negotiable certificate of deposits, commercial papers, and interest rate derivatives.
  - August 2018: BI started publishing transaction-based IndONIA to replace quotation-based overnight JIBOR.
  - Daily average volume of money market instruments grew about 12.3 percent, y/y.
  - Daily average volume and outstanding balance of the unsecured interbank market were Rp 16.6 trillion and Rp 46.8 trillion, about 0.1 and [text truncated in source].

*Source: IMF staff assessment as provided in the content unit.*

### 0.3 percent of GDP, respectively in December 2018.

### 1idnea2019001 - 0.3 percent of GDP, respectively in December 2018.

### Money market structure, constraints, and recent statistics
- Outstanding interbank repos amounted to only about Rp 11.7 trillion.
- The repo amount was even smaller than the unsecured transaction.
- Structural excess liquidity in the banking system constrains money market development; some small non-systemic banks remain vulnerable to liquidity shocks.
- Market segmentation, limited capacity and lack of incentives of smaller banks, and tax constraints on repos also impede market development.
- Excess liquidity reduces banks’ need to engage in interbank market transactions, thereby undermining market development.
- Smaller banks prefer funding needs on the unsecured interbank market because of complexity to maintain collaterals for repo transactions.
- Tax rate discrepancies impede money market development:
  - unequal tax treatment between short-term (20 percent) and long-term financial instrument (15 percent)
  - unequal tax treatment between banks’ repo transactions (non-final tax) and those on non-banks (final tax)

### Policy recommendations to deepen the money market
- Strengthen the short-end of the yield curve:
  - BI should expand the tenor of the IndONIA to longer tenors.
  - MOF should continue to gradually increase the stock of T-bills and keep reducing the overlap between T-bills and BI securities on the same maturities.
- BI should extend averaging to cover all primary reserve requirements to allow banks to improve liquidity management.
- Continue efforts to enhance the use of the global master repurchase agreement (GMRA) to help smaller banks increase participation in interbank repo transactions.
- MOF should review tax treatments on financial instruments and repo transactions.
- Amend the bankruptcy law so that close-out netting can happen to mitigate counterparty credit risk.

### E-commerce in Indonesia: recent trends and potential benefits
- Between 2014 and 2017, the share of online sales in total retail sales increased fourfold, from less than 1 percent to about 3 percent.
- Between 2015 and 2017, the number of mobile Internet users increased by about 21 percent.
- Mobile data are cheap in Indonesia at about half the price of peer ASEAN countries.
- The share of digitally active users in the banked population increased rapidly between 2014 and 2017.
- The average consumer is making nearly 50 percent more transactions via smartphone than three years ago.
- IMF Staff research suggests that firms engaged in online commerce in Asia, including Indonesia, are at least 30 percent more productive and export at least 50 percent more on average.
- A study by McKinsey shows that shopping online helps consumers in non-Java regions save between 11 and 25 percent (Das and others 2018).
- Up to 35 percent of online sales are generated by women, compared to 15 percent for offline retail, implying e-commerce can help promote social equality by lowering the gender gap.

### Constraints to e-commerce expansion
- Only a quarter of the overall population uses the Internet.
- About half of the population has access to financial services.
- Logistics infrastructure lags regional peers, with Indonesia ranking 63rd out of 160 countries globally in 2016, with issues related to both insufficient coverage and inconsistent service quality.
- Gaps in internet quality, logistics, cashless payments penetration, human capital, and SME participation impede a thriving online commerce sector.

### Priority actions to reap the digital dividend
- Expand the quality of internet coverage (including in rural areas) to reduce the digital divide.
- Expand reliable logistics infrastructure for pickups and deliveries.
- Leverage the rise of e-commerce to further expand cashless payments and support lending, especially to smaller enterprises.
- Enhance human capital to meet the demand of talent from the emerging digital sector.
- Encourage SMEs to go online, in particular through online marketplaces; large marketplaces could provide benefits to SMEs including marketing analytics, inventory management, and access to credit.

*Source: IMF staff report excerpts.*

### Box 5. Labor and Product Market Priorities in Indonesia 1/

### Box 5. Labor and Product Market Priorities in Indonesia

### Structural reform objective and illustrative scenario
- Raising potential growth is needed to address Indonesia’s socioeconomic challenges and to reap the demographic dividend.
- Fund research suggests through an illustrative scenario that raising revenue of 3 percent of GDP to expand public spending in infrastructure, education, and health, along with structural reforms to the labor and product markets (e.g., reduction of trade and FDI restrictions and lowering of state control in the economy) would increase potential growth by 1 percentage point over the medium-term.

### Progress on structural reforms (recent years)
- Advanced infrastructure development, including increasing public capital spending by 1 percent of GDP between 2014 and 2017 and creating the Committee for Acceleration of Priority Infrastructure Delivery (KPPIP).
- Efforts to improve the business environment by streamlining regulations: a transparent minimum wage formula was adopted, the land acquisition process was simplified, and the FDI regime was partially liberalized.
- These efforts coincided with a rise in Indonesia’s Doing Business ranking, from the 106th in 2016 to the 73rd in 2019.

### Rationale for further labor and product market reforms
- Indonesia relies on volatile portfolio flows (a main source of vulnerability); shifting the composition of capital flows towards FDI and improving the productivity of investment are important.
- Reforms would remove impediments to growth, lower fiscal support needs, foster market-based incentives and competition, improve governance and efficiency, and help attract private investment, including FDI (for instance, in the energy sector where large investment is needed).

### Product market reform priorities
- Reducing regulatory protection to existing firms and streamlining barriers to investment and trade.
  - Protection to existing firms: ease regulations on state control, antitrust exemptions, and barriers in the network sector (electricity and transport); limit the role of SOEs to strategically relevant and commercially viable areas.
  - Further easing FDI restrictions and streamlining nontariff measures to strengthen links with global value chains and support competitiveness.

### Labor market and education priorities
- Improving education and easing labor market regulations to support productivity and employment.
  - Education:
    - Strengthen the link between compensation and performance in the education sector to improve the efficiency of spending and the quality of education.
    - Redirect savings and additional resources to ensure more equitable access to quality education, especially in rural areas.
    - Improve access to student loans to increase enrollment in higher education.
    - Improve the monitoring framework of local government’s budget spending and schools’ performance.
  - Labor markets:
    - Streamline stringent job protection, including administrative dismissal procedures and severance payments, while improving vocational training, to promote youth employment and reduce the use of short-term contracts.
    - Implement active labor market policies, including job placement services and vocational training, to help labor mobility.
    - Adopt a more open immigration policy for skilled labor and improve the quality of education to lower skill mismatches, especially in professional services.
    - Enhance female labor force participation by providing flexible work arrangements and improving access to childcare.

### Governance and coordination priorities
- Greater coordination to avoid conflicting regulations between the central and local governments.
- Introduce merits and competition factors into fiscal transfers to local governments and provide capacity building to enhance accountability and coordination.

*Indonesia—Staff Report for the 2017 Article IV Consultation provides a comprehensive discussion of structural reforms priorities, including the expected impact on growth.*

### Appendix I. Risk Assessment Matrix 1/

### Appendix I. Risk Assessment Matrix 1/

### Global risks: sources, likelihood, expected impacts, and recommended policy responses
- Rising protectionism and retreat from multilateralism
  - Relative Likelihood: High
  - Expected Impacts: Low-Medium
    - Lower exports that widen the current account deficit
    - Decline in capital inflows putting pressure on the exchange rate and foreign reserves
    - Weakened balance sheets of the public, financial, and corporate sectors
    - Tighter domestic financial conditions, slower domestic credit growth, and higher borrowing costs
  - Recommended Policy Responses:
    - Resist protectionism and deepen regional trade integration
    - Seek new opportunities to enhance position in global value chains
    - Strengthen domestic drivers of growth by enhancing infrastructure and implementing structural reforms

- Sharp tightening of global financial conditions
  - Relative Likelihood: Low (trigger possibilities described), Medium (overall)
  - Expected Impacts: High
    - Higher debt service and refinancing risks; stress on leveraged firms, households, and vulnerable sovereigns
    - Capital account pressures and a broad-based downturn
    - Decline in capital inflows, funding pressures for the current account deficit
    - Constrained bank funding, domestic credit crunch, higher domestic borrowing costs
    - Rising rollover risks for public, financial, and corporate sectors; weaker household balance sheets (including property)
    - Economic growth falls, asset price corrections, and lower confidence
    - Assuming prices are not controlled, the rupiah depreciates and imports decline, reducing the CA deficit
  - Recommended Policy Responses:
    - Maintain exchange rate flexibility and market-determined bond yields
    - Preserve a sound fiscal position while allowing automatic stabilizers to work
    - Tighten monetary policy and support banks facing funding pressures to preserve financial stability and avoid negative feedback loops with capital outflows
    - Closely monitor corporate sector vulnerabilities
    - Maintain vigilance on exchange rate pass-through to inflation
    - Access contingent external financing if needed

- Weaker-than-expected global growth and China slowdown
  - Relative Likelihood: Medium
  - Expected Impacts: High
    - Lower export volume and prices, particularly commodities, widening the current account deficit
    - Pressure on FX reserves and the exchange rate
    - Fiscal balance deterioration from weaker resource revenues and knock-on effects to domestic demand
    - Financial sector exposure to losses from loans to the commodity sector and broader slowdown
    - Decline in corporate profits in commodity-related activities
  - Recommended Policy Responses:
    - Maintain exchange rate flexibility to help reduce the current account deficit and limit FX reserve losses
    - Consider more stringent fiscal measures to contain the budget deficit if EM slowdown is accompanied by protracted financial market volatility that restricts funding
    - Accelerate infrastructure spending and structural reforms to boost productivity and employment in non-resource sectors, and export diversification

- Large swings in energy prices
  - Relative Likelihood: Medium
  - Expected Impacts: Medium
    - Elevated price volatility complicating economic management and adversely affecting investment in the energy sector
    - Potential weakening of production and fiscal position due to lower oil-related revenues
  - Recommended Policy Responses:
    - Implement upfront revenue reforms to raise non-oil revenues
    - Accelerate structural reforms, particularly product market regulations, to boost private investment and productivity

### Domestic risks: sources, likelihood, expected impacts, and recommended policy responses
- Natural disasters (example: large volcano eruption in Bali)
  - Relative Likelihood: Medium
  - Expected Impacts: Low
    - Disruption of economic activity in affected regions and deterioration in business sentiment
    - Slower economic growth leading to a decline in portfolio inflows
    - Higher fiscal expenditure for disaster relief and reconstruction
  - Recommended Policy Responses:
    - Implement revenue enhancing reforms and prioritize expenditure to the affected region
    - If the economy slows significantly, ease monetary policy, provide support to banks, and monitor corporate borrowers at risk

---

### Appendix II. Tariffs Spillovers for Indonesia — findings, channels, regressions, and simulations
- Purpose and context
  - Focus: How changes in tariffs (including those among other countries) can affect economic activity in Indonesia
  - Built on recent work published in the April 2019 World Economic Outlook (WEO)
  - Demonstrates potential effects of a permanent increase in tariffs (e.g., between the United States and China) and benefits from further regional trade liberalization

- GVC participation and vulnerability
  - Indonesia’s exports that cross two borders increased from 28 percent in 1995 to 44 percent in 2011, before declining somewhat since then
  - Forward GVC participation has recently been more than twice the size of backward participation, indicating Indonesia is relatively higher up in global value chains and vulnerable to downstream spillovers
  - Data sources: OECD TiVA database; 2016 vintage extrapolated to 2015 based on 2018 vintage

- Tariff measures and sectoral heterogeneity
  - Four constructed measures capture spillovers:
    - Upstream tariffs: average cumulative tariffs applied to imported intermediate inputs of the sector
    - Downstream tariffs: average cumulative tariffs applied to the sector’s output
    - Domestic protection tariff: average tariff (import-weighted) imposed on imports that compete with the domestic sector’s output
    - Diversion tariff: weighted average tariff that partner countries impose on all other suppliers except the country-sector in question
  - Indonesia shows comparatively lower upstream and downstream tariffs due to moderate reliance on imported intermediate inputs and comparatively lower tariffs on Indonesian imports and exports
  - Large sectoral heterogeneity:
    - Cost of intermediate inputs for the local machinery industry is almost three times the manufacturing average
    - Textile sector is most affected by tariffs imposed either directly or indirectly on their output

- Regression evidence
  - Methodology: Sectoral panel regression with country-time and country-industry fixed effects
  - Results:
    - Upstream and downstream tariffs are generally negative and significant for value added, employment, labor productivity and total factor productivity
    - Diversion tariff is positive and significant for output and employment
  - Note: The rich set of fixed effects captures partial equilibrium effects and may amplify country-level effects by absorbing attenuating reactions from exchange rates, interest rates, or wages

- Simulation results (two scenarios)
  - Scenario 1: Reciprocal tariff hike between China and the United States
    - Focusing only on trade channels, Indonesia could potentially benefit from a contained tariff war between the United States and China due to trade diversion more than offsetting negative value-chain spillovers
    - Net positive effects partly due to Indonesia’s relatively moderate ties to China’s export industry
    - Sectoral outcomes:
      - Likely net positive for textile, paper and electrical sectors (which compete more directly with Chinese exports)
      - Net negative for sectors where Indonesia is higher up in long value chains: basic metals, motor vehicles and transport equipment
    - Caveat: Exchange rate and interest rate reactions, and broader general equilibrium effects, could make tariff wars more disruptive than the pure trade-channel illustration

  - Scenario 2: Significant reduction in tariffs among ASEAN countries (example: halving tariffs on regional imports)
    - Trade diversion effects are much less relevant when ASEAN countries cut tariffs among themselves
    - Net effects of tariff reduction are positive for all countries involved, including Indonesia, as costs of intermediate inputs fall and international demand for their output increases
    - Domestic protection has a negligible impact in estimations for value added
    - Policy note: Trade liberalization can create disruptions with winners and losers; accompanying policies should facilitate adjustments to ensure gains are widely and fairly shared

- Methodological and data notes
  - Cumulative tariffs constructed from the 2016 vintage of the OECD inter-country input-output tables (ICIO), covering 31 sectors (Isic 3) and 63 countries
  - Domestic protection and diversion tariff averages based on simple trade weights from OECD TiVA database
  - Lao P.D.R. and Myanmar not included in simulations due to data limitations
  - General equilibrium model simulations indicate attenuating effects may be large; empirical simulations illustrate relative rather than absolute magnitudes

---

### Appendix III. Debt Sustainability Analysis — external and public debt assessment and stress test results
- Key summary statement
  - Indonesia’s external and public debt remain moderate and sustainable, but monitoring is needed for potentially weaker-than-expected revenue, contingent liabilities from SOEs and PPPs, and reliance on foreign investors which could create susceptibility to capital flow reversals

- External debt
  - 2018 level: 36.9 percent of GDP (up from 34.7 percent in 2017), reflecting an increase in external debt of the nonbank private sector
  - General government external debt: stable, including internationally issued bonds, holdings of domestic bonds by nonresidents, and SOEs’ external loans and debt securities
  - Projection: external debt projected to increase to 37.7 percent of GDP at end-2019, driven mainly by an increase in government borrowing
  - Medium-term baseline: external debt would reach 39.1 percent of GDP in 2024 reflecting needs to finance the current account and fiscal deficits; public and private external debt expected to increase but total external debt likely to remain contained at under 40 percent of GDP
  - Sensitivity:
    - A one standard deviation widening of the current account deficit would increase external debt to 43 percent of GDP by 2024
    - A 30 percent exchange rate depreciation in 2018 would raise external debt to 56 percent of GDP in 2020 and thereafter

- Public debt
  - Historical context: General government debt declined from 87 percent of GDP in 2000 to 30.1 percent in 2018, underpinned by fiscal rules since 2003
    - Fiscal rules: cap general government deficit at 3 percent of GDP and debt at 60 percent of GDP
  - Composition: foreign-currency denominated debt about 40 percent of public debt; nonresidents hold around 60 percent of general government debt
  - Projections:
    - Public sector debt expected to stabilize at around 30 percent of GDP over the medium term
    - Baseline scenario: general government deficit to remain at 1.8 percent of GDP over the medium term and a primary deficit at around 0.1−0.3 percent of GDP
    - Debt path: decline from 30.2 percent of GDP in 2019 to 29.5 percent of GDP in 2024, supported by a negative interest rate-growth differential of -0.8 percent over the medium term
    - Gross financing needs: peak at 4.5 percent of GDP in 2020 and gradually fall to around 4.2 percent of GDP in 2024
  - Stress test results:
    - Under the most severe scenario with a combined macro-fiscal shock, total government debt would stabilize at around 35 percent of GDP or 232 percent of revenue by 2024
    - Gross financing needs would stay below 5.4 percent of GDP under that scenario
  - Risks to monitor: potentially weaker-than-expected revenue, expanding balance sheets of SOEs, and PPPs

*International Monetary Fund — Appendix I. Risk Assessment Matrix 1/; Appendices II and III from the IMF staff report content provided.*

### 7. The authorities agreed with the external and public debt sustainability analysis.

### 7. The authorities agreed with the external and public debt sustainability analysis.

### External Debt Sustainability — Baseline and Projection Highlights
- Baseline: External debt (in percent of GDP)
  - 2014: 32.9
  - 2015: 36.1
  - 2016: 34.3
  - 2017: 34.7
  - 2018: 36.9
  - 2019: 37.7
  - 2020: 37.7
  - 2021: 38.2
  - 2022: 38.6
  - 2023: 38.8
  - 2024: 39.1
- Change in external debt (percent of GDP)
  - 2014: 3.9
  - 2015: 3.2
  - 2016: -1.8
  - 2017: 0.4
  - 2018: 2.1
  - 2019: 0.8
  - 2020: 0.1
  - 2021: 0.4
  - 2022: 0.4
  - 2023: 0.2
  - 2024: 0.2
- Identified external debt-creating flows (4+8+9) (percent of GDP)
  - 2014: 1.5
  - 2015: 1.6
  - 2016: -2.8
  - 2017: -2.8
  - 2018: 1.5
  - 2019: 0.0
  - 2020: -0.3
  - 2021: -0.6
  - 2022: -0.7
  - 2023: -0.8
  - 2024: -0.8
- Components (selected)
  - Current account deficit, excluding interest payments (percent of GDP): 2014: 2.4; 2015: 1.1; 2016: 0.9; 2017: 0.6; 2018: 1.9; 2019: 1.8; 2020: 1.6; 2021: 1.5; 2022: 1.4; 2023: 1.3; 2024: 1.3
  - Net nondebt creating capital inflows (negative) (percent of GDP): 2014: -2.0; 2015: -1.1; 2016: -1.9; 2017: -1.6; 2018: -1.0; 2019: -1.2; 2020: -1.4; 2021: -1.4; 2022: -1.5; 2023: -1.5; 2024: -1.6
  - Automatic debt dynamics 1/ (percent of GDP): 2014: 1.2; 2015: 1.5; 2016: -1.8; 2017: -1.9; 2018: 0.6; 2019: -0.6; 2020: -0.5; 2021: -0.6; 2022: -0.6; 2023: -0.6; 2024: -0.6
  - Contribution from nominal interest rate (percent of GDP): 2014: 0.7; 2015: 0.9; 2016: 0.9; 2017: 0.9; 2018: 1.1; 2019: 1.2; 2020: 1.2; 2021: 1.3; 2022: 1.3; 2023: 1.3; 2024: 1.3
  - Contribution from real GDP growth (percent of GDP): 2014: -1.5; 2015: -1.7; 2016: -1.7; 2017: -1.6; 2018: -1.8; 2019: -1.8; 2020: -1.8; 2021: -1.8; 2022: -1.9; 2023: -1.9; 2024: -1.9
- External debt-to-exports ratio (in percent)
  - 2014: 147.5
  - 2015: 181.3
  - 2016: 190.7
  - 2017: 181.5
  - 2018: 180.6
  - 2019: 194.3
  - 2020: 194.4
  - 2021: 197.6
  - 2022: 197.9
  - 2023: 200.2
  - 2024: 201.1
- Gross external financing need (in billions of U.S. dollars)
  - 2014: 83.8
  - 2015: 76.8
  - 2016: 72.5
  - 2017: 70.9
  - 2018: 85.9
  - 2019: 91.9
  - 2020: 100.7
  - 2021: 108.2
  - 2022: 117.2
  - 2023: 126.4
  - 2024: 136.6
- Gross external financing need (in percent of GDP)
  - 2014: 9.4
  - 2015: 8.9
  - 2016: 7.8
  - 2017: 7.0
  - 2018: 8.4
  - 2019: 8.3
  - 2020: 8.3
  - 2021: 8.3
  - 2022: 8.4
  - 2023: 8.5
  - 2024: 8.5

### Key Macroeconomic Assumptions Underlying Baseline (selected)
- Real GDP growth (in percent): historical sequence includes 5.0, 4.9, 5.0, 5.1, 5.2, 5.4; projections: 2019: 5.2; 2020: 5.2; 2021: 5.2; 2022: 5.3; 2023: 5.3; 2024: 5.3
- GDP deflator in U.S. dollars (change in percent): 2014: -7.4; 2015: -7.9; 2016: 3.1; 2017: 3.7; 2018: -4.8; 2019: 1.1; projections include 9.7, 2.6, 4.1, 2.5, 1.8, 1.8 (as listed)
- Nominal external interest rate (in percent): 2014: 2.4; 2015: 2.6; 2016: 2.8; 2017: 3.0; 2018: 3.2; 2019: 2.7; projections include 0.3 (standard deviation), then 3.4, 3.6, 3.6, 3.6, 3.6
- Growth of exports (U.S. dollar terms, in percent): 2014: -3.0; 2015: -13.8; 2016: -2.1; 2017: 15.7; 2018: 7.4; 2019: 4.0; projections include 14.9, 2.3, 9.6, 7.4, 8.2, 6.5, 7.3
- Growth of imports (U.S. dollar terms, in percent): 2014: -4.5; 2015: -17.8; 2016: -3.9; 2017: 14.5; 2018: 18.3; 2019: 5.6; projections include 18.5, 4.9, 7.9, 6.5, 6.4, 5.5, 7.2
- Current account balance, excluding interest payments (percent of GDP): 2014: -2.4; 2015: -1.1; 2016: -0.9; 2017: -0.6; 2018: -1.9; 2019: -0.7; projections: 2020: -1.8; 2021: -1.6; 2022: -1.5; 2023: -1.4; 2024: -1.3
- Net nondebt creating capital inflows (percent of GDP): historical and projections show positive inflows (e.g., 2014: 2.0; 2015: 1.1; 2016: 1.9; 2017: 1.6; 2018: 1.0; 2019: 1.4; projections include 0.5, 1.2, 1.4, 1.4, 1.5, 1.5, 1.6)

### Public Sector Debt Sustainability — Baseline and Indicators
- Nominal gross public debt (in percent of GDP)
  - 2017: 25.8
  - 2018: 29.4
  - 2019: 30.1
  - 2020: 30.2
  - 2021: 29.9
  - 2022: 29.9
  - 2023: 29.9
  - 2024: 29.8
  - (Additional projection point: 29.5 appears in sequence)
- Public gross financing needs (in percent of GDP)
  - 2017: 3.5
  - 2018: 4.7
  - 2019: 4.0
  - 2020: 4.3
  - 2021: 4.5
  - 2022: 4.3
  - 2023: 4.4
  - 2024: 4.3
- Real GDP growth (in percent) shown in the public DSA
  - 2017: 5.7
  - 2018: 5.1
  - 2019: 5.2
  - 2020: 5.2
  - 2021: 5.2
  - 2022: 5.2
  - 2023: 5.3
  - 2024: 5.3
- Inflation (GDP deflator, in percent)
  - 2017: 6.5
  - 2018: 4.3
  - 2019: 3.2
  - 2020: 3.1
  - 2021: 3.1
  - 2022: 3.1
  - 2023: 3.0
  - 2024: 3.0
- Effective interest rate (in percent) (defined as interest payments divided by debt stock at end previous year)
  - 2017: 5.8
  - 2018: 6.2
  - 2019: 6.5
  - 2020: 6.2
  - 2021: 6.1
  - 2022: 6.0
  - 2023: 5.9
  - 2024: 5.7
- Change in gross public sector debt (cumulative, percent of GDP)
  - 2017: -0.5
  - 2018: 1.4
  - 2019: 0.7
  - 2020: 0.1
  - 2021: -0.3
  - 2022: 0.0
  - 2023: -0.1
  - 2024: -0.1
  - Cumulative to 2024: -0.5
- Identified debt-creating flows (percent of GDP)
  - 2017: -0.7
  - 2018: 0.6
  - 2019: 0.6
  - 2020: -0.1
  - 2021: -0.2
  - 2022: -0.2
  - 2023: -0.2
  - 2024: -0.2
  - Cumulative to 2024: -1.1
- Primary deficit (percent of GDP)
  - 2017: 0.3
  - 2018: 0.9
  - 2019: 0.0
  - 2020: 0.1
  - 2021: 0.1
  - 2022: 0.2
  - 2023: 0.2
  - 2024: 0.3
  - Cumulative to 2024: 1.1
- Primary (noninterest) revenue and grants (percent of GDP)
  - 2017: 16.4
  - 2018: 14.1
  - 2019: 14.9
  - 2020: 14.8
  - 2021: 14.8
  - 2022: 14.9
  - 2023: 14.9
  - 2024: 14.9
  - Cumulative to 2024: 89.5
- Primary (noninterest) expenditure (percent of GDP)
  - 2017: 16.6
  - 2018: 15.0
  - 2019: 14.9
  - 2020: 14.9
  - 2021: 15.0
  - 2022: 15.1
  - 2023: 15.1
  - 2024: 15.2
  - Cumulative to 2024: 90.7

### Public DSA — Stress Tests and Scenario Outcomes (selected)
- Stress test scenarios shown: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Shock.
- Example scenario values (2019–2024) for selected shocks:
  - Baseline real GDP growth (percent): 2019: 5.2; 2020: 5.2; 2021: 5.2; 2022: 5.3; 2023: 5.3; 2024: 5.3
  - Primary Balance Shock — Primary balance (percent of GDP): 2019: -0.1; 2020: -0.4; 2021: -0.5; 2022: -0.2; 2023: -0.3; 2024: -0.3
    - Effective interest rate (percent): 2019: 6.2; 2020: 6.1; 2021: 6.1; 2022: 5.9; 2023: 5.7; 2024: 5.6
  - Real GDP Growth Shock — Real GDP growth (percent): 2019: 5.2; 2020: 4.6; 2021: 4.6; 2022: 5.3; 2023: 5.3; 2024: 5.3
    - Primary balance (percent of GDP): 2019: -0.1; 2020: -0.2; 2021: -0.4; 2022: -0.2; 2023: -0.3; 2024: -0.3
  - Real Interest Rate Shock — Effective interest rate (percent): 2019: 6.2; 2020: 6.1; 2021: 6.4; 2022: 6.5; 2023: 6.5; 2024: 6.6
  - Real Exchange Rate Shock — Inflation (percent): example shows 2019: 3.1; 2020: 11.9 (noted as shock); subsequent years: 3.1, 3.1, 3.0, 3.0
  - Combined Shock — Real GDP growth and other variables combine (example): 2019 real GDP growth: 5.2; 2020: 4.6; 2021: 4.6; primary balance and effective interest rate adjust accordingly (see scenario table)

### Public DSA — Risk Assessment and Indicators
- Key indicators (2018) and thresholds (as presented)
  - EMBIG (bp): 191 (displayed in heat map context)
  - External Financing Requirement (percent of GDP) benchmarks: 5 and 15
  - Public Debt Held by Non-Residents: 59 percent (noted in the heat map context)
  - Public Debt in Foreign Currency (percent of total): 12 percent (noted)
  - Annual Change in Short-Term Public Debt (percent of GDP) example: -0.8 percent
- The DSA includes percentile fan charts and stress-test heat maps illustrating distributional outcomes and vulnerability assessments under alternative shocks.

### External Sector Assessment — Position, Current Account, and Policy Implications
- End-2018 NIIP and external positions (percent of GDP)
  - NIIP: -30.5
  - Gross Assets: 33.3
  - Reserve Assets: 11.6
  - Gross Liabilities: 63.8
  - Debt Liabilities (gross external debt): 36.2
- Additional external debt composition notes
  - About 19 percent of gross external debt was denominated in rupiah.
  - 87 percent of gross external debt was maturing after one year.
  - About one-third of the government’s external debt was denominated in rupiah.
  - Nonresident holdings of rupiah denominated government bonds were 34 percent of the total stock (or 6.4 percent of GDP) at end-2018.
- Assessment summary (verbatim)
  - "The level and composition of the NIIP and gross external debt indicate that Indonesia’s external position is sustainable and subject to limited roll-over risk, but nonresident holdings of rupiah denominated government bonds, at 34 percent of the total stock (or 6.4 percent of GDP) at end 2018, combined with shallow domestic financial markets, make Indonesia susceptible to global financial volatility, higher U.S. interest rates, and stronger U.S. dollar. Staff projections for the current account suggest that the NIIP position as a percent of GDP will be stable over the medium term."
- Overall Assessment (verbatim)
  - "The external position of Indonesia in 2018 was assessed to be moderately weaker than medium-term fundamentals and desirable policies. Exchange rate flexibility and trade-related policy actions (import compression and export promotion) together with broadly stable (projected) commodity prices are expected to modestly reduce the current account deficit over the medium term. External financing appears sustainable, although the large share of foreign portfolio holdings makes the economy vulnerable to a sharp tightening of global financial conditions."
- Potential policy responses (verbatim)
  - "Improving Indonesia’s external position requires boosting competitiveness through higher infrastructure and social spending, while maintaining fiscal sustainability through the mobilization of revenues. In addition, structural policies are necessary to bolster global value chain participation, ease FDI and non-tariff trade restrictions, as well as strengthen labor markets and worker skills (e.g. streamlining stringent job protection, and improving job placement services, vocational training, and overall education). Flexibility of the exchange rate and market-determined bond yields should continue to support external stability."
- Current Account (CA) assessment and numbers
  - 2018 current account deficit: 3 percent of GDP (from background text)
  - 2017 current account deficit: 1.6 percent of GDP
  - Projection for 2019: CA deficit projected to narrow slightly to 2.9 percent in 2019
  - Staff estimates and gaps (verbatim figures)
    - Actual CA: -3.0
    - Cycl. Adj. CA: -3.2
    - EBA CA Norm: -0.8
    - EBA CA Gap: -2.4
    - Staff Adj.: -0.9
    - Staff CA Gap: -1.5
  - Assessment (verbatim)
    - "Staff estimates a CA gap of -1.5 percent for 2018, consistent with an estimated cyclically adjusted CA balance of -3.2 percent of GDP and a staff-assessed norm of -1.7 percent of GDP. 1/ Taking into account uncertainties in the estimation of the norm, the CA gap for 2018 is in the range of -3 percent to 0 percent of GDP. 2/ The offsetting impact of domestic policy gaps suggests that addressing excess imbalances will require reforms to improve labor markets and competitiveness. The lagged effects of the weaker rupiah should help improve the CA deficit in the near term."

*Source: IMF staff analysis as presented in the IMF chapter "7. The authorities agreed with the external and public debt sustainability analysis."*

### 6.1 percent relative to the average of 2017 due to a depreciation of the nominal exchange rate by 8.5 percent from tight

### 1idnea2019001 - 6.1 percent relative to the average of 2017 due to a depreciation of the nominal exchange rate by 8.5 percent from tight

### REER, current account, and external competitiveness
- Estimates through 2019 Q1 show that the REER has appreciated by 3.1 percent relative to the 2018 average.
- 2018 assessments:
  - EBA index and level REER models indicate an REER gap of about -3.2 percent to -14.8 percent for 2018, with the change driven by the depreciation of the REER.
  - CA gap estimate: -1.5 percent of GDP with standard elasticities and uncertainty ranges (+/-5 percent), which would indicate the REER is overvalued in the range of [3,13] percent.
  - Taking into account the depreciation in 2018, staff assesses the REER gap to be in the -9 to 1 percent range.
- Technical adjustments and uncertainty:
  - An adjustor of -0.9 percentage point is applied to the model-estimated CA norm (-0.8 percent of GDP) due to Indonesia being an outlier on adult mortality rates.
  - A range of +/-1.5 percent is added to reflect normal uncertainty in the EBA-regression estimates (the standard error of the EBA norm is 1.5 percent).
  - Staff assessed REER undervaluation of 4 percent is within the (+/-5 percent) interval described as broadly in line with fundamentals.

### Capital and financial accounts: flows and policy measures
- Background on 2018 flows:
  - Net capital and financial account inflows: 2.5 percent of GDP.
  - Net FDI inflows: 1.4 percent of GDP.
  - Net portfolio inflows: 0.9 percent of GDP.
  - Net other investment inflows: 0.2 percent of GDP.
- Assessment:
  - Net and gross financial flows have been relatively steady since the global financial crisis despite some short periods of volatility.
  - Contained current account deficit and strengthened policy frameworks, including exchange rate flexibility since mid-2013, have helped reduce capital flow volatility.
  - Policy priorities to sustain capital inflows in the medium term:
    - Strengthen the fiscal position.
    - Keep inflation in check.
    - Ease supply bottlenecks.

### FX intervention and reserves level
- Policy framework:
  - Since mid-2013, Indonesia has had a more flexible exchange rate policy framework; the rupiah has had a de jure free floating arrangement since August 14, 1997, and the de facto arrangement is floating.
  - Market exchange rate: Rp 14,187 per U.S. dollar as of April 30, 2019.
- Reserve levels and adequacy:
  - At end-2018, reserves were US$120.7 billion (equal to 12 percent of GDP, about 118 percent of IMF’s reserve adequacy metric, and about 6.4 months of prospective imports of goods and services), compared with US$130.2 billion at end-2017.
  - The loss in international reserves mainly reflects FX intervention in response to disorderly market conditions triggered by tightening global financial conditions.
  - Contingencies and swap lines amount to about US$92.5 billion.
  - Assessment as of end-April: current level of reserves (US$124.3 billion at end-April) should provide sufficient buffer against a wide range of possible external shocks, with predetermined drains manageable.
- Policy guidance:
  - FX intervention, while broadly appropriate last year, should continue to aim primarily at preventing disorderly market conditions, while allowing the exchange rate to adjust to external shocks.

### Technical background notes (selected)
- Note 1: Adjustor of -0.9 percentage point applied to model-estimated CA norm (-0.8 percent of GDP) for demographic outlier status.
- Note 2: Range of +/-1.5 percent added to reflect EBA-regression uncertainty (standard error of the EBA norm is 1.5 percent).
- Note 3: Staff-assessed REER undervaluation of 4 percent falls within the (+/-5 percent) interval described as broadly in line with fundamentals.

### Fund relations, financial arrangements, and key institutional data
- Membership Status: Joined February 21, 1967; Article VIII.
- Quota and SDRs:
  - Quota: 4,648.40 SDR Millions (100.00 percent of Quota).
  - Fund holdings of currency: 3,860.21 SDR Millions (83.04 percent).
  - Reserve tranche position in Fund: 788.27 SDR Millions (16.96 percent).
  - Net cumulative allocation (SDR Department): 1,980.44 SDR Millions (100.00 percent).
  - Holdings (SDR Department): 1,116.13 SDR Millions (56.36 percent).
- Outstanding Purchases and Loans: None.
- Past financial arrangements (selected approvals and amounts in SDR Millions):
  - EFF 02/04/00–12/31/03: Amount Approved 3,638.00; Amount Drawn 3,638.00.
  - EFF 08/25/98–02/03/00: Amount Approved 5,383.10; Amount Drawn 3,797.70.
  - Stand by 11/05/97–08/25/98: Amount Approved 8,338.24; Amount Drawn 3,669.12.
- Projected Payments to Fund (SDR millions; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 2019: 7.32; 2020: 9.89; 2021: 9.88; 2022: 9.88; 2023: 9.88.
  - Total: 2019: 7.32; 2020: 9.89; 2021: 9.88; 2022: 9.88; 2023: 9.88.
- Exchange arrangements and obligations:
  - Indonesia maintains an exchange system free of restrictions on payments and transfers for current international transactions.

### Statistical issues and data adequacy for surveillance (selected)
- General: Data provision is broadly adequate for surveillance with shortcomings in fiscal and external sector statistics.
- National accounts:
  - BPS disseminates annual and quarterly GDP by activity and expenditure at current prices and in volume terms at 2010 prices.
  - QGDP estimates are based on a limited set of indirect indicators.
  - Provisional sectoral accounts data for 2010–2014 expected to be finalized by end of 2019; next TA mission on Sectoral Accounts in August 2019.
- Price statistics:
  - PPI index and weight reference period: 2010; new PPI covering agriculture, mining and quarrying, and manufacturing released in October 2013; PPI published quarterly.
  - CPI index and weight reference period: 2012; new CPI expected from the August 2019 index after STA TA assistance using the 2018 household expenditure survey.
- Government finance statistics:
  - Indonesia reports annual general government data (including balance sheet data) covering 2008 onwards.
  - Aggregated monthly central government budget data available with a one-month lag.
  - Quarterly general government GFS (operations statement) available 6 months after the end of the reference quarter.
- Monetary and financial statistics and FSIs:
  - BI compiles monetary statistics using SRFs; OFC survey expanded since January 2015 to include finance companies, insurance companies, pension funds, PT Pegadaian, and Eximbank.
  - BI reports all (12) core and 12 encouraged FSIs for deposit takers, and other encouraged FSIs across sectors; FSIs published quarterly on the Fund’s FSI website.
- External sector statistics:
  - Trade data improved; free trade zones and bonded warehouses captured in BOP goods data.
  - DI compilation needs substantial improvement; current method uses loan disbursements to companies with foreign equity and a fixed ratio to estimate equity inflows.
  - Errors and omissions in BOP have been large and predominantly negative.
  - IIP data compiled and published annually and quarterly; external debt statistics improved with EDIS and initiatives to publish monthly indicators.

### Data transparency table highlights (as of May 10, 2019)
- Exchange rates: Date of latest observation 5/10/19; Date received 5/10/19; Frequency D; Frequency of reporting D; Frequency of publication D.
- International reserve assets and reserve liabilities: Date of latest observation 4/19; Date received 5/19; Frequency M; Frequency of reporting M; Frequency of publication M.
- Reserve/base money: Date of latest observation 4/19; Date received 5/19; Frequency W/M; Frequency of reporting W/M; Frequency of publication W/M.
- Broad money: Date of latest observation 3/19; Date received 5/19; Frequency M; Frequency of reporting M; Frequency of publication M.
- Consumer price index: Date of latest observation 4/19; Date received 5/19; Frequency M; Frequency of reporting M; Frequency of publication M.
- External current account balance: Date of latest observation Q1/19; Date received 5/19; Frequency Q; Frequency of reporting Q; Frequency of publication Q.

### Statement by the Staff Representative (July 3, 2019)
- Monetary policy and macroprudential measures:
  - On June 20, Bank Indonesia kept the policy rate unchanged, reduced bank reserve requirements, and indicated it would keep an accommodative macroprudential policy stance.
  - The 7-Day Reverse Repo rate remains at 6.00 percent.
  - BI lowered rupiah bank reserve requirement by 50 bps, to 6.0 percent for conventional banks and 4.5 percent for Islamic banks, effective from July 1, 2019.
  - BI indicated it would keep the accommodative macroprudential policy stance to support bank lending and, in coordination with the Government, continue to pursue payment system and financial deepening reforms to support growth.
- Inflation outlook:
  - Headline inflation increased to 3.3 percent (y/y) in May 2019, from 2.8 percent in April 2019, due mainly to higher food prices.
  - Core inflation remained broadly stable at 3.1 percent (y/y).
  - Food price inflation is expected to moderate after the Ramadhan period, while headline inflation is expected to converge to the forecasted 3.1 percent by end-2019.

*Prepared By Asia and Pacific Department — June 12, 2019.*

### 3.      The trade balance improved in May 2019, registering a US$200 million surplus,

### 1idnea2019001 - 3.      The trade balance improved in May 2019, registering a US$200 million surplus,

### Recent Economic Development and Outlook
- Trade balance: May 2019 registered a US$200 million surplus, compared to a deficit of US$2.3 billion in April 2019.
- 2018 growth: Economic growth gradually improved to 5.2% in 2018.
- Authorities' 2019 growth projection: within the range of 5.0-5.4%.
- Medium-term growth projection by authorities: 5.5-6.1%.
- Inflation outlook for 2019: forecasted to be below the midpoint of the 3.5%±1% target corridor.
- Current account trajectory: expected to narrow due to measures to curb imports and promote exports.
- Authorities’ view: outlook buoyant and slightly higher than staff’s estimates, supported by structural reforms and improved productivity.

### Fiscal and Structural Reform
- 2018 fiscal outcomes:
  - Primary balance: -0.08% of GDP (smaller than target of -0.6%).
  - Budget deficit: 1.8% of GDP (smaller than target of 2.2%).
  - Official debt level: 29.8% of GDP (legal threshold 60% of GDP).
- 2019 fiscal targets:
  - Primary balance target: -0.12% of GDP.
  - Budget deficit target: 1.84% of GDP.
- Fiscal stance: authorities agreed on merits of a broadly neutral fiscal stance to preserve fiscal sustainability while supporting growth.
- Revenue mobilization priorities:
  - Comprehensive tax reform focused on improving tax administration, streamlining tax structures, broadening the tax base, and increasing compliance.
  - Review of income tax (PPh) and value-added tax (PPN) law and tax exemptions.
  - Use of integrated and up-to-date data, international tax treaty optimization, and effectiveness of Automatic Exchange of Information implementation.
- Expenditure priorities:
  - Improve quality of public spending, refocus on infrastructure, ensure efficiency, implement better-targeted subsidies, and more effective social protection programs.
  - Continue energy subsidy reform with gradual implementation complemented by targeted measures for vulnerable groups.
- Structural reforms: expand infrastructure investment, improve business climate, promote financial market deepening, and maintain market confidence.
- Credit rating note: S&P upgraded Indonesia’s rating to BBB from BBB- with a stable outlook in May 2019; sovereign ratings from S&P, Moody’s, and Fitch are one notch above minimum investment grade level.

### Monetary and Exchange Rate Policy
- 2018 monetary action: Bank Indonesia (BI) raised the policy rate by 175 bps in a preemptive, front-loading, ahead-of-the-curve approach.
- Policy instrument mix: monetary policy rate, exchange rate flexibility, and foreign exchange intervention.
- BI stance: cautious consideration of room for accommodative monetary policy while ensuring inflation remains on target; mindful of global financial market dynamics and external stability.
- Exchange rate policy: allow exchange rate flexibility to serve as a shock absorber; FX intervention limited to curbing excessive volatility.
- FX Intervention (FXI) data publication: BI views publication requires prerequisite conditions (deep, efficient, market-driven FX market); BI will reconsider publication once preconditions are fulfilled.
- Liquidity operations and tools used in 2018:
  - Increased auction frequency of government securities reverse repo (RR-SBN).
  - Reactivated BI Certificate (SBI) auctions.
  - Conducted forex swap auctions.
  - Increased the portion of average statutory reserve requirement.
- Reserve requirement (RR) averaging: implemented to give banks more flexibility, reduce interbank market volatility, and strengthen monetary policy transmission; authorities will consider staff advice on expanding coverage of averaging.

### External Sector
- 2018 external performance:
  - Current account deficit for 2018: 2.98% of GDP (widened to 3.6% of GDP in Q4 2018).
  - Q1 2019 current account deficit: narrowed to 2.6% of GDP.
  - BoP: returned to surplus in Q4 2018 and Q1 2019.
  - Reserve assets: adequate to cover imports and service government external debt, well above the international reserve adequacy standard of three months of imports.
- Authorities’ view on CA norm: estimated CA norm from EBA model considered too low; encourage staff to incorporate country-specific factors such as substantial infrastructure investment needs and structural reforms.
- External debt: remained sustainable, including private debt; corporate sector external debt regulation (KPPK) aimed at prudential principles on corporate foreign borrowings.
- 2019 projection:
  - Current account deficit projected at about 2.5–3.0 % of GDP in 2019 and expected to decline further in the medium-term.
  - Capital and financial account surplus projected to improve, bolstered by higher inflows of FDI, improvements in the business climate, and a solid domestic economy outlook.
- Policy coordination: close coordination between BI and the Government to curb excessive imports and promote exports.

### Macroprudential and Financial Sector Policy
- Macroprudential objective: safeguard financial system stability and mitigate systemic risk; calibrate to support balanced credit growth if financial cycle below long-term trend.
- Current stance: accommodative macroprudential policy helped boost bank lending growth; authorities see room to maintain current accommodative policy while remaining vigilant.
- Banking sector indicators at end-2018:
  - Capital adequacy ratio (CAR): 22.9%.
  - Liquid assets to deposits ratio: 19.3%.
  - Credit growth: 11.8%.
  - NPL ratios: 2.4% (gross) and 1.0% (net) — both within the 5% sound territory.
- Non-bank financing improvement: total issuance (IPOs and rights issues), corporate bonds, medium-term notes and NCDs recorded at IDR168.1 trillion (gross), indicating improved corporate financing from domestic sources.
- Digital economy and payment system:
  - Authorities outlined a vision of Indonesia’s Payment System (IPS) 2025 and initiated a new payment system blueprint aligned with Bali Fintech Agenda.

### Financial Market Deepening (FMD)
- 2018 FMD policy focus: improve efficiency of money and forex markets to promote long-term economic financing.
- BI market measures introduced:
  - Domestic non-deliverable forward (DNDF) transactions.
  - Development of market for call spread options (CSOs).
  - Establishment of Indonesia Overnight Index Average (IndONIA) as a benchmark rate and reference for Overnight Index Swap (OIS).
  - Strengthening of the Jakarta Interbank Offered Rate (JIBOR).
- Innovative financing schemes for infrastructure: PPP, project bonds, infrastructure funds, asset and earning backed securities, blended finance.
- Green finance: release of the first Green Sukuk bond at the beginning of the year following launch of SDG One Blended Finance roadmap.
- Institutional coordination:
  - BI, MoF, and OJK established the Coordination Forum on Development Financing by means of Financial Market (FK-PPK).
  - Mandate to formulate the National Financial Market Development and Deepening Strategy (SN-PPPK) as a comprehensive, measurable single policy framework.
  - Legal upgrades being worked on to align and strengthen mandates of BI, OJK, and Indonesia Deposit Insurance Corporation (LPS).

### Conclusion
- Overall assessment: Indonesia’s economy continues to perform well, underpinned by sound macroeconomic policy preserving macroeconomic stability while promoting higher potential growth.
- Policy mix: central bank policies, fiscal policy, and structural reforms brought into synergy to maintain stability and support growth.
- Fiscal aim: preserve fiscal sustainability while providing room to promote economic growth.
- Authorities’ commitment: maintain economic stability and step up structural reforms to achieve strong, sustainable, balanced and inclusive economic growth.

*Source: Statement by Alisara Mahasandana, Executive Director for Indonesia, and colleagues, July 3, 2019.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1idnea2019001.pdf_