## 1. Managing Market Pressures ## Source details **Canonical URL:** [1. Managing Market Pressures](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1574.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1574.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1574.pdf.json) --- ### Background and context and policy actions - Since mid 2013, authorities strengthened policy and reserve buffers amid commodity headwinds and EME volatility. - Key policy measures since mid 2013: - Tightened monetary and macroprudential policies. - Increased exchange rate and bond yield flexibility. - Financial market deepening measures to improve FX and money market functionality and encourage prudent hedging by corporates (including SOEs). - Held the fiscal deficit in check through energy subsidy reforms and timed external bond issuances (including US$4 billion in FX bonds on January 9, 2015, equally split between 10- and 30-year bonds). - Outcomes: - Anchor on inflation expectations and reduced external pressures. - Rebuilding of reserves (US$111.9 billion at end-2014). - Equity prices rebounded in early 2014; bond yields stabilized after Q4 2014 volatility. - Large exchange rate movements absorbed pressure and limited reserve losses. ### Remaining vulnerabilities and near-term policy stance - Vulnerabilities: - Current account deficit sizable (about 3.0 percent of GDP in 2014). - Financial markets relatively shallow; large share of rupiah bonds held by nonresidents (nonresident holdings at end October 2014: 5.3 percent of GDP). - Corporates with foreign currency-denominated debt equal to 22 percent of GDP at end-September 2014. - Near-term expectation and policy advice: - Capital inflows expected to slow in 2015 but remain supportive; FDI from Japan and ASEAN supportive. - Policy emphasis in line with IMF advice for large EMs: monetary policy tightness and exchange rate flexibility; use reserves cautiously to smooth excessive volatility. ### Boxed measures and market developments - Financial market development steps: - Mini Master Repo Agreement launched end-2013. - JISDOR established mid-2013. - Onshore hedging instruments and regulations to encourage hedging by SOEs (BI regulations in September 2014; corporate private external borrowing rules effective 2015). - Deposit rate caps (OJK, October 2014) to limit deposit competition: - Capped at no more than the maximum guaranteed rate (currently 7.75 percent) for deposits up to Rp 2 billion. - Caps for large deposits: 200 bps above BI rate for Buku 4 banks; 225 bps above BI rate for Buku 3 banks. --- ### 2. Recent developments, outlook, and risks ### Macroeconomic performance and near-term outlook - Real GDP growth: - 2014: 5.1 percent (from 5.7 percent in 2013). - 2015 staff projection: 5.2 percent; staff table projects Real GDP 2016: 5.5 percent. - Growth projected to rise to 6 percent by 2018 under baseline with reforms. - Inflation and monetary stance: - Headline inflation moved above BI’s target band towards end-2014 after fuel hikes. - Headline inflation February 2015: 6.3 percent (y/y); core inflation around 5 percent. - BI policy rates after February 18, 2015 cut: benchmark 7.5 percent; deposit facility 5.5 percent; lending facility 8.0 percent. - Staff: maintain relatively tight stance until inflation and external pressures ease; continue exchange rate flexibility. - Current account, reserves, and BOP: - CA deficit 2014: about 3.0 percent of GDP (US$26 billion). - Q4 2014 CA: US$6.2 billion (2.9 percent of GDP). - Overall BOP surplus 2014: US$15.2 billion. - Reserves end-2014: US$111.9 billion (7 months of imports; 160 percent of IMF reserve metric). - Reserves projected: 2015 proj. 119.9; 2016 proj. 125.5 (billions of U.S. dollars). ### Risks and contingencies - Downside risks mainly external; key risks include: - Sharp slowdown in trading partner growth and commodity price drops. - Unexpected surges in global financial market volatility raising BOP and bank funding pressures. - High dependence on foreign investors in rupiah government bonds and corporate FX exposure. - Distress at small/mid-sized banks and corporates amplified by incomplete crisis management and inadequate hedging. - Contingent financing available totals US$76 billion (inclusive of Chiang Mai Initiative Multilateralization and bilateral swap arrangements). - Policy responses in adverse BOP shock: tighter aggregate demand management, exchange rate flexibility, cautious use of reserves. --- ### 3. External position and debt sustainability ### External position assessment and CA/REER - Staff assessment: external position "moderately weaker than implied by medium-term fundamentals and desirable policies." - CA gap estimates: - Staff: "0 percent to -2 percent of GDP." - EBA CA: "-1.9 percent of GDP" (cyclically adjusted CA ‒2.3 percent of GDP; norm ‒0.4 percent of GDP). - Staff norm: "‒1.5 percent of GDP (±1 percent of GDP)" -> CA gap about -1 percent of GDP (±1 percent). - REER: - EBA REER estimates: undervaluation of "about 8 percent" at end-2014. - Staff assesses REER "overvalued by 0−10 percent" (staff’s assessment using CA gap imply REER overvalued by around 5 percent (± 5 percent)). ### External debt and NIIP - NIIP and external debt levels: - NIIP end-September 2014: about ­49 percent of GDP (from -44 percent at end-2013). - Gross external liabilities: about 76 percent of GDP (up from 67 percent at end-2013). - Gross external debt expected about 35 percent of GDP at end-2014; short-term debt around 6 percent of GDP. - External debt in US$: total external debt 2014: 297.5 (billions of U.S. dollars); 2015 proj. 316.7; 2016 proj. 333.4. - Sensitivity: - One standard deviation deterioration in CA would raise external debt-to-GDP to 37 percent by 2019. - A 30 percent depreciation would raise external debt-to-GDP to about 50 percent in 2015, then to about 45 percent by 2019. ### Public debt sustainability - General government debt trends: - Declined from 95 percent in 2000 to 24 percent in 2012. - Public sector debt projected to decline slightly to 25½ percent of GDP by 2019 under baseline. - Gross funding needs expected to fall to less than 4 percent of GDP over the medium term. - Risks: expanding SOE balance sheets (Pertamina and PLN combined liabilities 9.4 percent of GDP at end-2013). --- ### 4. Fiscal policy: reforms, projections, and recommendations ### Fiscal developments and projections - Fuel subsidy reforms (effective January 1, 2015): - Gasoline subsidies effectively discontinued. - Fixed per-liter subsidy of "Rp 1,000 per liter (US$0.08)" for diesel adopted. - Retail fuel prices to be adjusted twice a month. - Fiscal balances and targets: - 2014 central government balance: -2.3 percent of GDP. - Revised 2015 budget central government deficit target: "1.9 percent" of GDP (parliament approved revised 2015 budget target 1.9 percent of GDP). - Staff-supported stance: target deficit "around 2.0 percent of GDP". - Staff near-term baseline: overall fiscal deficit likely around "2.4 percent of GDP". - Fiscal effects of subsidy reforms and oil prices: - Fuel subsidy bill projected to decrease by "about 1¾ percentage points (ppts) of GDP in 2015". - Electricity subsidy bill cut by "around ½ ppts of GDP". - Energy subsidy bill expected to decrease to "6 percent of total expenditure in 2015 from 19 percent in 2014". - Offset: loss in oil and gas revenues of "more than 1½ ppts of GDP" in 2015 under current baseline. - Extreme scenario (world crude US$30 per barrel in 2015): fiscal deficit increase by "0.4 ppts of GDP"; further oil and gas revenue losses "0.6 ppts of GDP"; partially offset by additional subsidy savings and revenue sharing reductions totaling "around 0.2 ppts of GDP". ### Policy recommendations - Near-term: - Upfront revenue measures and capital spending targets consistent with absorptive capacity. - Full transparency in fuel price adjustments. - Phased approach to SOE recapitalization. - Moderate increase in fuel excises "equivalent to around 0.3 percent of GDP" and additional measures (higher taxes on tobacco and luxury goods). - Medium-term: - Tax reforms to broaden base, streamline exemptions (notably VAT), enhance risk-based tax administration. - Consider rationalizing corporate tax rates, strengthening property tax, and raising VAT rate and select excises. - Assume phase out of energy subsidies by "end 2017" in baseline. - Cautions: - Monitor fiscal risks from expanded SOE balance sheets and new external SOE borrowing; monitor Pertamina closely. --- ### 5. Monetary policy, liquidity, and financial stability ### Monetary operations and stance - BI actions: - After November 2014 fuel hike, BI raised benchmark and lending facility rates by 25 bps and 50 bps to 7.75 percent and 8.00 percent, respectively (deposit facility left unchanged). - On February 18, 2015 BI cut benchmark and deposit facility rates by 25 bps to 7.5 percent and 5.5 percent, respectively; lending facility remained at 8.0 percent. - Staff recommendations: - Maintain exchange rate and bond yield flexibility; limit FX intervention to smoothing volatility. - Remove deposit rate caps to improve policy signaling. - Move to reserve requirement averaging; ease stigma tied to accessing BI lending facility. - Market deepening: build a benchmark yield curve; develop a global MRA for repo market; make legacy government securities on BI’s balance sheet marketable. ### Liquidity, banking system, and macroprudential policy - Money and credit: - Broad money growth and private credit growth slowed to around 12 percent and 12½ percent (y/y) in December 2014. - Real interest rates rose moderately. - Banking system resilience and stress observations: - CAR maintained at 19.36 percent; NPLs 2.2 percent; credit growth decelerated to 11.6 percent (authorities’ figures). - About three-quarters of banks have sufficient high-quality liquid assets to withstand sizable deposit outflows concurrent with full withdrawal of short-term wholesale funding. - Total liquidity gap of banks facing shortages (end-June 2014): Rp 13.5 trillion (0.3 percent of total funding). - Banking sector could face a foreign currency funding shortage up to US$25 billion in an extreme system-wide shock. - Stress scenario: capital adequacy ratio would fall by 4 percentage points to 15 percent at end-2015 under extreme stresses; around a quarter of banks would breach the 8 percent minimum with capital shortfalls of Rp 57.0 trillion (0.6 percent of GDP). - Corporate vulnerabilities: - Corporate debt reached 34 percent of GDP at end-September 2014 (up from 23 percent end-2010); about 45 percent of the increase financed by external borrowings. - Corporate external debt US$118 billion (around 15 percent of GDP) at end-September 2014. - Profitability: return on assets fell slightly to 14.7 percent in first three quarters of 2014. - Share of companies with income insufficient to cover interest rose to 21 percent in 2013; share of debt of these companies jumped to 30 percent. - About half of corporate debt denominated in foreign currency; majority of non-SOE FX debt linked to FDI or FX cash flows, but FX risk remains. - Supervisory and resolution framework: - OJK assumed banking supervision in January 2014; BI retained macroprudential responsibilities. - Gaps remain: no fully developed bank resolution and emergency liquidity assistance regime; FSSN law under revision for resubmission to Parliament in 2015. - Staff urges strengthening resolution tools for Deposit Insurance Corporation (LPS) and comprehensive legal reforms; apply LCR to all banks. --- ### 6. Structural reforms, infrastructure, and medium-term priorities ### Infrastructure needs and targets - Logistics and electricity: - Logistics costs around 24 percent of GDP (Thailand 20 percent; China 18 percent; Malaysia 13 percent). - Electricity production per capita only "20‒60 percent" of peers; electrification ratio 82 percent (peers near 100 percent). - Government targets: logistics costs to "19 percent of GDP" and electrification ratio to "97 percent by 2019". - Investment needs: - Infrastructure financing needs during "2015−2019" estimated at "Rp 5,000 trillion, or on average 8−9 percent of GDP a year"; about half possibly financed off-budget via SOE borrowing and PPPs. - Implementation constraints: land acquisition, weak implementation capacity, poor inter-agency coordination; execution of capital spending around "85 percent". ### Structural reform priorities and labor market - Key reform areas: - Diversify and grow export base (processed agricultural products, manufacturing); streamline business licensing and investment approvals; emphasize ports and maritime development. - Labor market: align wage settlements with productivity; move away from annual minimum wage negotiations; develop manpower strategy, increase vocational training, consider easing entry for foreign skilled labor. - Financial market development: lengthen banks’ funding profiles, develop securitized products, deepen capital markets, grow domestic institutional investors while remaining open to foreign participation. - Energy policy: comprehensive energy policy to incentivize upstream/downstream investment; improve governance; expand renewables. ### Medium-term projections and risks - Growth projected to reach 6 percent by 2018 assuming structural reforms, higher factor productivity, and capital stock increases. - Current account deficit projected to narrow to "2½ percent of GDP" in the medium term accounting for investment-related imports and subdued commodity prices. - Reserves expected to remain above six months of imports under baseline. - Medium-term risks: less supportive global financial conditions, weaker trading-partner growth, and slower/narrower reforms. --- ### 7. Data, Fund relations, and international cooperation ### Data adequacy and statistical updates - BPS rebased GDP in February 2015 from base year 2000 to 2010: - Nominal GDP in 2010 increased by around Rp 400 trillion or 6.5 percent. - Real GDP growth rates revised downward on average by around 0.1 percentage points during 2009‒14. - General assessment: macro statistics broadly adequate for surveillance; areas for improvement include FDI compilation, government finance statistics, quarterly financial flows, and nonfinancial/nonbank coverage. - Indonesia subscriber to SDDS since September 1996. ### Fund relations and multilateral cooperation - Fund data (as of January 31, 2015): - Membership joined February 21, 1967; Article VIII. - Quota 2,079.30 SDR Millions (100.00 percent of Quota). - Fund holdings of currency 1,933.80 SDR Millions (93.00 percent of Quota). - Strong IMF–World Bank cooperation across budget reforms, tax policy, asset-liability management, crisis preparedness, financial sector reform, statistics, and macroeconomic surveillance. - ADB relations: - ADB loans to Indonesia since 1969: US$30 billion. - ADB approved US$554.4 million in loans in 2014. - Cumulative lending by sector and totals provided. --- *IMF staff report excerpt: 1. Managing Market Pressures and related sections from _cr1574* ### 1. Managing Market Pressures __________________________________________________________________ 6 ### 1. Managing Market Pressures ### Background and Context - Since mid 2013, Indonesia took significant steps to strengthen policy and reserve buffers amid headwinds for major commodity exporters and episodes of heightened market volatility in emerging market economies (EMEs). - Enhanced policy credibility and global push factors supported external inflows over the past 18 months; equity prices rebounded in the first half of 2014, government bond yields stabilized, reserves increased, and the rupiah remained relatively stable against the U.S. dollar. - The commodity down-cycle has: - Weakened the current account, - Dampened new investment, - Resulted in a growth slowdown. - Corporate cash flows have been constrained, contributing to: - Slower bank deposit growth, - Funding pressures, - Decelerated credit growth (partly due to monetary and macroprudential tightening), - Slower household credit demand, affecting private consumption and property prices. - Private external borrowing increased as firms took advantage of lower borrowing costs abroad. - The 2014 Article IV consultation emphasized raising potential growth while preserving macro-financial stability and strengthening the external position. - The new administration (post-October 2014) aims to ease supply bottlenecks and has: - Removed most fuel subsidies to free up budget space for growth-critical spending, - Committed to macroeconomic and financial stability during the transition from commodity-supported to competitiveness-driven growth. ### Managing Market Pressures (Box 1): Policy Actions and Effects - Policy measures since the mid 2013 taper tantrum: - Tightened monetary and macroprudential policies, - Increased exchange rate and bond yield flexibility, - Initiated financial market deepening measures to improve FX and money market functionality and encourage prudent hedging by corporates (including SOEs), - Held the fiscal deficit in check through energy subsidy reforms and timed external bond issuances. - Outcomes and observations: - Anchor on inflation expectations and reduced external pressures, - Rebuilding of reserves, - Indonesia weathered several 2014 bouts of market volatility relatively well (notably during the Argentine debt default episode of January 2014), - Throughout much of 2014 capital inflows were supportive despite some outflows in Q4 2014, - Large movements in the exchange rate helped absorb pressure and limit reserve losses, - Bond yields fell moderately since the beginning of the year following heightened Q4 2014 volatility; equity prices rebounded on foreign buying. - Remaining vulnerabilities: - Current account deficit remains sizable, - Financial markets are relatively shallow, - Large share of rupiah bonds held by nonresidents poses potential rollover risks, - Risks of further surges in global financial market volatility remain. - Near-term expectation: - Capital inflows to Indonesia expected to slow in 2015 but remain supportive, - FDI from Japan and ASEAN expected to stay supportive, - Policy settings align with IMF advice for large EMs facing balance of payments pressures—emphasizing monetary policy tightness and exchange rate flexibility. - Notable policy action: - On January 9, 2015, the government issued US$4 billion in FX bonds (equally split between 10- and 30-year bonds), representing more than half of its targeted foreign currency issuance in 2015. ### Recent Developments, Outlook, and Risks - Macroeconomic performance: - Real GDP growth moderated to 5.1 percent in 2014 from 5.7 percent in 2013—its slowest pace in five years. - Domestic demand growth broadly unchanged; net exports contribution significantly weaker in 2014 due to slowing EME growth (notably China) and the raw mineral ore export ban. - Current account deficit likely narrowed moderately in 2014 owing to REER depreciation (about 7 percent since mid 2013) and lower oil prices on imports. - Headline inflation moved above BI’s target band towards end 2014 following administered fuel price hikes in November. - Vulnerability indicators improved modestly in 2014, except financial ones, which weakened slightly. - Near-term outlook (2015): - Real GDP growth projected to tick up to 5.2 percent in 2015; output gap effectively closed based on staff’s latest estimates of potential growth. - Net exports likely remain constrained by weak external demand, notwithstanding one-off factors expected to boost oil and mineral exports. - Private consumption growth expected to slow due mainly to reduced commodity incomes. - Total investment growth should rise moderately, mainly from higher public infrastructure spending; private investment expected to remain subdued because of funding constraints. - Barring a pick up in public investment, real GDP growth could be lower in 2015. - Funding pressures could intensify if capital inflows are lower than envisaged and/or budgetary pressures affect system-wide liquidity. - Headline inflation expected to decline in 2015 due to reductions in retail gasoline and diesel prices under the new fuel price regime and pass-through of earlier price increase; inflation expected to return to BI’s target band (4.0±1 percent) by year end, supported by a relatively tight monetary stance. - Current account deficit projected to narrow slightly in 2015, mainly due to reduced net oil imports, partly offset by lower nonfuel commodity prices and weak external demand. - Balance of payments recorded a sizeable surplus in 2014 on strong capital inflows; a smaller surplus expected in 2015 as global financial conditions shift. - Reserves at end 2014 were US$111.9 billion, equivalent to 7 months of prospective imports of goods and services or 160 percent of the IMF’s reserve metric for a floating currency. - Risks and contingencies: - Downside risks mainly external and could exacerbate banking system and corporate sector strains. - Significant risks include: - Sharp slowdown in trading partner growth reducing external demand and commodity prices, - Unexpected surges in global financial market volatility increasing BOP and bank funding pressures, - High dependence on foreign investors in the rupiah government bonds market heightening vulnerabilities, - Persistent U.S. dollar strength placing strain on corporations with foreign currency-denominated debt at 22 percent of GDP at end September 2014, - Distress at small or mid-sized banks and among corporates amplified by an incomplete crisis management framework and inadequate hedging of foreign currency debt. - Policy responses in an adverse BOP shock: tighter aggregate demand management, continued exchange rate flexibility, and cautious use of reserves to smooth excessive volatility. - Contingent financing available totals US$76 billion, inclusive of the Chiang Mai Initiative Multilateralization and bilateral swap arrangements. ### Rebased Gross Domestic Product (Box 2) - Statistics Indonesia (BPS) rebased GDP in February 2015 from base year 2000 to 2010 to reflect economic structure changes (notably IT and transportation) and new products. - Production side classification expanded to 17 sectors from 9 sectors. - Under the rebased series: - Nominal GDP in 2010 increased by around Rp 400 trillion or 6.5 percent. - Real GDP growth rates were revised downward on average by around 0.1 percentage points during 2009‒14. - The increase in nominal GDP reflects implementation of the System of National Accounts 2008 and changes in volumes and prices. - The increase in nominal GDP is modest compared to recent upward rebasings elsewhere (examples provided in source text). ### Medium-Term Outlook - Baseline aligns with authorities’ announced policy intentions and assumes: - Use of expanded fiscal space, - Implementation of structural reforms to close infrastructure and skills gaps and raise private investment. - Projections: - Growth projected to rise to 6 percent by 2018, factoring in positive reform momentum and expected increases in factor productivity and capital stock. - Current account deficit would narrow to 2½ percent of GDP in the medium term, accounting for increased investment-related imports and a subdued commodity price outlook. - Gross FDI expected to continue to grow while portfolio inflows remain supportive; reserves expected to remain above six months of imports. - Risks to the medium-term outlook are moderately to the downside, including less supportive global financial conditions, more muted growth in major trading partners, and slower or narrower reforms than envisaged. ### Authorities’ Views - Authorities generally agreed with staff on 2014 macroeconomic prospects but were more optimistic on the 2015 growth outlook, expecting a faster rise in public investment. - Views were broadly aligned on the inflation forecast and the external outlook. - Authorities concurred on the assessment of major risks and appropriate policy responses, noting that since the mid 2013 taper tantrum the economy had weathered several mini-episodes of EME turbulence comparatively well. *IMF staff report excerpt: 1. Managing Market Pressures* ### 9. External position and debt sustainability. Indonesia’s external position is assessed as ### _cr1574 - 9. External position and debt sustainability. Indonesia’s external position is assessed as ### External position assessment - Staff assess Indonesia’s external position as "moderately weaker than implied by medium-term fundamentals and desirable policies," in line with the 2014 Pilot ESR. - Staff estimate the current account gap as "0‒2 percent of GDP weaker" and the REER "0−10 percent overvalued for 2014." - The Debt Sustainability Analysis (Appendix III) shows external and public debt are sustainable over the medium term. - External debt remains at a moderate level, with recent rises largely owing to private external borrowing and exchange rate depreciation. ### Current account (CA) and REER details - Staff assesses the CA gap to be "0 percent to -2 percent of GDP," similar to EBA CA estimates. - Latest EBA CA estimates imply a gap of "-1.9 percent of GDP," based on a cyclically adjusted CA balance of "‒2.3 percent of GDP" and a norm of "-0.4 percent of GDP." - Staff believes a norm of "‒1.5 percent of GDP (±1 percent of GDP)" better reflects investment needs. - EBA ES estimates suggest the CA is "about 1 percent of GDP above the level needed to stabilize Indonesia’s net international investment position (NIIP) over the medium term." - EBA REER estimates suggest an undervaluation at end 2014 of "about 8 percent," but staff assesses the REER to be "overvalued by 0−10 percent." ### CA trajectory and capital flows - The 2014 CA deficit is expected to be "about 3.0 percent of GDP" (compared to "3.3 percent of GDP in 2013"). - Manufacturing exports rising and falling oil prices helped offset declines in other commodity exports. - For most of 2014, capital inflows—mainly FDI and investment in government bonds—were above trend, but slowed later in the year and "could further dissipate with a large shock." - Bank Indonesia reserves built up by "US$13 billion in 2014 to US$112 billion at year end" (described as "160 percent of the IMF’s reserve metric for a floating currency and 7 months of imports"). - The reserve level is assessed as "sufficient to absorb most shocks, with predetermined drains also manageable." ### NIIP and external debt stock and structure - At end September 2014, Indonesia’s NIIP was "about ­49 percent of GDP," compared to "-44 percent of GDP at end 2013." - Gross external liabilities were "about 76 percent of GDP," up from "67 percent of GDP at end 2013." - Gross external debt is expected to be "about 35 percent" at end 2014, with short-term debt "around 6 percent of GDP." - Debt and debt service ratios projected to be somewhat higher in the near term; increases in FDI and equity inflows are expected to reduce the share of debt financing over the medium term. ### Fiscal implications and policy recommendations (summarized) - Fiscal rule: limits general government deficit to "3 percent of GDP" (historically implies central government deficit cap of "2½ percent of GDP"). - Budgetary pressures driven by rising energy subsidies and weak revenue collections; under-investment in infrastructure noted. - New administration aims to increase infrastructure spending; fiscal strategy centers on fuel subsidy and revenue reforms and using more multilateral loans and SOE borrowing. - Fuel subsidy reforms (effective January 1, 2015): gasoline subsidies effectively discontinued; fixed per-liter subsidy of "Rp 1,000 per liter (US$0.08)" for diesel adopted; retail fuel prices to be adjusted twice a month. - Fuel subsidy bill projected to decrease by "about 1¾ percentage points (ppts) of GDP in 2015"; electricity subsidy bill cut by "around ½ ppts of GDP"; energy subsidy bill expected to decrease to "6 percent of total expenditure in 2015 from 19 percent in 2014." - Offsetting loss: under the current baseline, savings partially offset by a loss in oil and gas revenues of "more than 1½ ppts of GDP" in 2015. - Extreme scenario: with world crude oil price of "US$30 per barrel in 2015," the fiscal deficit would increase by "0.4 ppts of GDP"; further losses in oil and gas revenues would amount to "0.6 ppts of GDP," partially offset by additional subsidy savings and revenue sharing reductions totaling "around 0.2 ppts of GDP." - Revised 2015 budget proposal targets a central government deficit of "1.9 percent" (against "2.2 percent of GDP in the original budget" and preliminary outturn of "2.3 percent of GDP in 2014"). - Staff-supported stance on 2015 budget: target deficit "around 2.0 percent of GDP"; recommended upfront revenue measures, capital spending targets consistent with absorptive capacity, full transparency in fuel price adjustments, and a phased approach to SOE recapitalization. - Staff near-term baseline: overall fiscal deficit likely around "2.4 percent of GDP"; recommended a moderate increase in fuel excises "equivalent to around 0.3 percent of GDP" and additional measures such as higher taxes on tobacco and luxury goods. - Medium-term advice: pursue tax reforms to broaden base, streamline exemptions (notably VAT), enhance risk-based tax administration; consider rationalizing corporate tax rates, strengthening property tax regime, and raising VAT rate and select excises; assume phase out of energy subsidies by "end 2017" in the baseline. - Staff caution on fiscal risks from expanded SOE balance sheets and new external borrowing by SOEs; monitor impact of lower oil prices on Pertamina closely. ### Infrastructure and structural priorities - Indonesia’s logistics costs are "around 24 percent of GDP," compared to Thailand ("20 percent"), China ("18 percent"), and Malaysia ("13 percent"). - Electricity production per capita is "only 20‒60 percent of its peers"; electrification ratio is "82 percent" (peers close to 100 percent). - Infrastructure investment averaged "3−4 percent of GDP a year" over the past decade, versus "more than 7 percent in the mid 1990s." - Government aims to reduce logistics costs to "19 percent of GDP" and improve electrification ratio to "97 percent by 2019." - Infrastructure financing needs during "2015−2019" estimated at "Rp 5,000 trillion, or on average 8−9 percent of GDP a year," with about half possibly financed off-budget via SOE borrowing and PPPs. - Implementation constraints: complex land acquisition, weak implementation capacity, poor inter-agency coordination; execution of capital spending at around "85 percent." ### Monetary policy and financial stability - Bank Indonesia maintains a relatively tight monetary stance to anchor inflation expectations and manage external pressures. - Broad money and private credit growth have slowed; real interest rates have risen moderately. - Banks hold sizable excess reserves; interbank money market development needed to improve monetary transmission. - Funding pressures arose as credit growth outpaced deposit growth through first half of 2014; changes in guidance on loan-to-deposit ratios (LDRs) and government front-loading of rupiah bond issuances intensified competition for term deposits. - Conditions began to ease in the second half of 2014 due to seasonal factors and lower credit growth. *Source: IMF staff report excerpt (Section 9 and related boxes) provided in the content unit.* ### 16. Policy developments. Following the November 2014 fuel price hike, BI promptly raised its ### 16. Policy developments ### Monetary policy actions and money market development - Following the November 2014 fuel price hike, Bank Indonesia (BI) raised its benchmark and lending facility rates by 25 bps and 50 bps, respectively, to 7.75 percent and 8.00 percent, while leaving its deposit facility rate unchanged to discourage a further increase in excess reserves held by banks. - To mitigate adverse effects of banks’ competition for deposits, the Financial Services Agency (OJK) imposed interest rate caps on deposits at larger banks in October 2014. Deposit rates on all bank deposits up to Rp 2 billion were capped at no more than the maximum guaranteed rate of the deposit insurance agency (currently 7.75 percent). Deposit rates for large deposits (above Rp 2 billion) were capped at: - 200 bps above the current BI rate for the largest banks (Buku 4 banks—core capital above Rp 30 trillion). - 225 bps above the current BI rate for medium to large banks (Buku 3 banks—core capital between Rp 5 trillion and Rp 30 trillion). - Progress in deepening the interbank money market: - A mini Master Repo Agreement (MRA) was launched at end 2013 for collateralized transactions. - The Jakarta Interbank Spot Dollar Rate (JISDOR) established a viable reference rate following its launch in mid 2013. - Use of onshore hedging instruments has increased. ### Staff position: monetary policy, market operations, and liquidity - Monetary policy stance and exchange rate management: - Staff broadly agreed with BI’s current monetary stance, which provides scope for future adjustments as inflation and external pressures ease. - Under the new fuel pricing regime, inflation volatility could rise, reinforcing the importance of maintaining strong policy credibility within BI’s inflation targeting framework. - Staff noted the need for continued exchange rate and bond yield flexibility as the primary response against external shocks, with BI limiting intervention in the FX market to smoothing volatility and ensuring orderly market conditions. - Authorities were urged to remove the deposit rate caps to improve the signaling effects of monetary policy and strengthen policy transmission. - Monetary operations and market deepening: - Staff recommended moving to reserve requirement averaging. - Staff recommended easing supervisory stigma tied to accessing BI’s lending facility. - Staff recommended conducting rupiah and FX market operations consistent with reducing excess reserves. - Progress on making legacy government securities on BI’s balance sheet marketable would help. - Staff suggested market deepening focus on building a benchmark yield curve and welcomed efforts to develop a global MRA for the repo market. - Liquidity management: - Staff recommended relaxing recent guidance (including supervisory) on LDRs to alleviate funding pressures. - BI plans to include non-deposit long-term market funding in the LDR calculation might temporarily ease funding pressures. - Staff suggested adopting prudential tools such as a liquidity coverage ratio (LCR) to better manage liquidity risk. - A more evenly paced issuance of rupiah government bonds in 2015, along with moderate government borrowing, would help banks better manage funding needs. *Source: IMF staff report excerpt.* ### Authorities’ views on policy developments - Authorities broadly agreed with staff’s assessment of recent developments. - Bank Indonesia reiterated it will maintain its current monetary policy stance in the near term. - Authorities view macro prudential policy adjustments as playing a balancing role in supporting credit growth while maintaining financial stability. - On deposit rate caps, OJK noted they are intended to be temporary measures aimed at curbing excessive deposit competition and expected the caps to become less binding over time given slower credit growth and easing funding pressures. - Authorities consider progress on financial market development key to managing liquidity stresses: - The collateralized mini-MRA achieved some success, but the uncollateralized money market continues to be hampered by counterparty risks. - Guidance on LDRs and related ratios is viewed as transitory as financial markets deepen. ### Financial and corporate sector issues — recent performance - Banking system: - Banks remain generally sound on a system-wide basis, though NPLs have begun to rise from low levels as growth slows; new NPLs are mainly from corporate loans. - Capital buffers are currently adequate to handle recent deterioration in credit quality. - Some small and mid-sized banks are more susceptible to liquidity risks due to more volatile funding structures. - Corporate sector: - Performance remains strong against EME peers, but vulnerabilities arise from weakening debt-servicing capacity, inadequate hedging of foreign currency debt, and declining profitability of commodity-related firms. ### Box 6 — Banking system soundness (key findings and stress observations) - System-wide assessment: - Banks are well capitalized and highly profitable, benefiting from wide net interest margins. - NPLs edged up in the first half of 2014 but remained at a low level. - Smaller banks are less profitable and more exposed to liquidity risk due to dependence on short-dated term deposits. - Liquidity buffers: - About three-quarters of banks have sufficient high-quality liquid assets (cash, securities, placements at BI) to withstand a sizable deposit outflow concurrently with a complete withdrawal of short-term wholesale funding. - Based on end-June 2014 data, the total liquidity gap of banks facing liquidity shortages was estimated at Rp 13.5 trillion (0.3 percent of total funding). - The banking sector could face a foreign currency funding shortage of up to US$25 billion in the event of an extreme system-wide shock to foreign currency liabilities. - Capital buffers and stress scenario: - The system-wide capital adequacy ratio would fall by 4 percentage points to 15 percent at end 2015 under an extreme stress scenario that reclassifies restructured, special-mention, and problem loans as loss loans, increases government bond yields by 500 bps, and includes other stress-related factors. - Under this scenario, around a quarter of banks would likely breach the minimum capital requirement (8 percent), with capital shortfalls amounting to Rp 57.0 trillion (0.6 percent of GDP). - Even after these losses, the banking sector as a whole would remain adequately capitalized, able to withstand a further increase in the NPL ratio by 9.2 percentage points from the current level. ### Box 7 — Corporate sector vulnerabilities (key findings) - Profitability and debt-servicing: - Return on assets fell slightly to 14.7 percent in the first three quarters of 2014. - The share of companies with income insufficient to cover interest expenses increased to 21 percent in 2013; the share of debt of these companies jumped to 30 percent. - Corporate debt and external borrowing: - Corporate debt reached 34 percent of GDP as of end September 2014 (latest figures available), up from 23 percent at end 2010. - About 45 percent of the increase in corporate debt was financed by borrowings from abroad. - Corporate external debt was US$118 billion (around 15 percent of GDP) at end September 2014—up by US$66 billion since end 2010; about 60 percent of this increase was either FDI-related or incurred by state-owned enterprises (SOEs). - About US$10 billion of bond and syndicated loans maturing in 2015 pose refinancing risk. - Concentrated leverage and insolvency: - Aggregate debt-to-assets ratio of listed companies (weighted by companies’ outstanding debt) increased substantially to a level near its peak in 2009. - The share of listed companies with negative equity has risen sharply. - Foreign exchange exposure: - About half of corporate debt is denominated in foreign currency. - Around 70 percent of non-SOE foreign currency debt is estimated to have been incurred by companies with FDI-related funding and/or with FX cash flows, but some companies remain subject to FX risk. - A large rupiah depreciation could significantly undermine balance sheets of companies with inadequate hedging; most hedging in place may knock out at specific exchange rate levels. - Overall resilience: - The banking sector remains resilient given strong capital buffers, but some mid-sized and regional banks could face significant credit losses tied to resources-related activities. ### Supervisory and financial stability framework developments - In January 2014, OJK took control over banking supervision and regulation from BI, after earlier assuming oversight of NBFIs and capital markets from Bapepam-LK. - BI retained macro prudential responsibilities; development of a policy framework is supported by MCM TA. - Banks began to implement Basel III capital standards in early 2014, with larger banks expected to adopt the LCR requirement in 2016. - Gaps remain in the financial stability architecture: no fully developed regime for bank resolution and emergency liquidity assistance and lack of harmonized arrangements for crisis management. - The draft Financial System Safety Net (FSSN) law is being revised for resubmission to Parliament in 2015; in the interim, support to troubled banks would rely on presidential decrees. - The AML/CFT framework under OJK requires strengthening to comply with FATF recommendations. ### Staff position: supervision, macroprudential oversight, and resolution - Banking and corporate soundness: - Continued vigilance needed to ensure adequate liquidity buffers and contain corporate vulnerabilities. - Staff view that the LCR requirement should be applied to all banks to contain liquidity risks. - New regulations issued in December 2014 on hedging offshore foreign currency borrowing should help manage risks. - Financial supervision: - OJK needs to improve capacity for risk-based supervision (e.g., stress testing). - Staff urged closer collaboration among supervisors for consolidated/group-wide supervision and enhanced oversight of NBFIs and capital markets. - Macro prudential oversight and coordination: - Macro prudential framework needs effective inter-agency arrangements for information sharing, joint surveillance (stress testing, on-site exams), and policy formulation/implementation. - Staff welcomed delineation of responsibilities through Standard Operating Procedures as a basis for BI–OJK coordination. - BI plans to strengthen capacity to conduct systemic risk assessments. - Financial stability architecture: - Staff noted the need to set out clear principles for exercising special powers under a systemic event and to define responsibilities of relevant authorities. - Emphasized comprehensive reforms, including simultaneous amendment of all relevant financial sector laws to ensure a consistent legal framework. - Staff urged strengthening the banking resolution regime, giving the Deposit Insurance Corporation (LPS) a full range of tools to resolve banks in a timely, cost-effective manner. - AML/CFT: - To avoid FATF sanctions, staff urged action to address key deficiencies in the legal framework and procedures for identifying and freezing terrorist assets. ### Authorities’ views on supervision and stability - Authorities broadly agreed with staff’s assessments and recommendations. - Bank Indonesia assesses the banking system to be generally sound; NPLs have ticked up but remain near historically low levels. - On corporate vulnerabilities, unhedged private external borrowing is a concern and is being addressed by newly introduced regulations. - Authorities prioritize strengthening the financial stability architecture; the FSSN law is a parliamentary priority. ### Structural reform priorities — jobs, growth, sustainability - Main objectives: - Stimulate job creation, raise potential growth, and strengthen the external position. - Upfront actions would signal commitment to investors and support the government’s growth target of 7 percent by 2017. - Key reform areas: - Growing the export base: - Focus on more processed agricultural products and manufactured goods. - Streamline business licensing and investment approvals. - Greater emphasis on ports and maritime development. - Staff noted need for trade policy more oriented toward export promotion and less focused on import restrictions; start of ASEAN Economic Community at end 2015 provides an opportunity. - Ensuring a supportive labor market: - Align wage settlements with productivity increases to manage costs and improve competitiveness. - Move away from annual negotiations of minimum wages to reduce uncertainty and possibly spur hiring. - Develop a manpower strategy to close skilled labor gaps, identify additional resources for education and training, and consider easing entry by foreign skilled labor. - Developing financial markets: - Lengthen banks’ funding profiles, develop securitized products, deepen small, illiquid capital markets, and grow the domestic institutional investor base while keeping the financial sector open to foreign participation. - A national task force on financial deepening is being set up and a master plan on sector development is being formulated. - Providing a comprehensive energy policy: - Establish an energy policy to incentivize upstream and downstream investment in oil and gas. - Lower world prices necessitate greater efficiencies and better governance in the sector. - More intensive use of renewable energy could spur investment, facilitate external adjustment, and balance environmental challenges from greater domestic coal usage. *Source: IMF staff report excerpt.* ### 24. Authorities’ views. The authorities broadly recognize the importance of export promotion ### _cr1574 - 24. Authorities’ views. The authorities broadly recognize the importance of export promotion ### Authorities’ views - Recognize export promotion as a vital part of Indonesia’s new growth strategy and to facilitate external adjustment. - Support envisaged reforms to streamline export and import licensing. - Exploring ways of linking wage settlement to labor productivity. - Plan to devote more public resources to vocational and technical training to support higher quality job creation. - Prioritize better governance in the energy sector; measures already taken to strengthen the energy regulator SKK Migas to cut the cost of energy production and formulate a more transparent regulatory framework in support of investment. ### Staff appraisal — macroeconomic management and outlook - Sound macroeconomic management and exchange rate flexibility have bolstered policy credibility and external resiliency in Indonesia over the past 18 months. - In the face of Fed tapering and falling commodity prices, policy and reserve buffers have been strengthened through a clearer policy framework and better policy coordination. - Markets responded favorably, with large portfolio inflows in 2014, supported by global push factors. - Financial and corporate sector health shows signs of strain as growth slows, funding conditions tighten, and external pressures remain elevated. - Near-term outlook: - Led by a pickup in public investment, growth should reach around 5¼ percent this year. - Credit expansion will likely remain moderate as funding conditions stay relatively tight. - Inflation is expected to return within BI’s target band by year end, given the current monetary stance and anticipated fuel price declines. - The current account deficit should narrow slightly, with a lower oil import bill offsetting pressures arising from nonoil commodity exports. - Reserves expected to remain adequate. ### Risks and recommended policy responses - Downside risks mainly from external sources that could feed into banking and corporate sectors. - Policy recommendations: - Continued exchange rate flexibility coupled with tighter demand management to mitigate external shocks; modest use of reserves possibly smoothing volatility. - Accelerate structural reforms to yield a more diversified export base and deeper financial markets. - Stronger prudential measures to contain risks in the financial sector, backed by strengthened frameworks for risk assessment and crisis management protocols. ### Medium-term challenges and fiscal policy - Main challenge: chart a course to higher, more inclusive growth while preserving macro-financial stability and strengthening the external position. - New administration’s reform strategy aims to raise potential growth by easing supply bottlenecks; success hinges on reducing skills and infrastructure gaps. - Decisive actions taken to remove most fuel subsidies to free up budget space for growth-critical spending. - External position is moderately weaker than implied by medium-term fundamentals and desired policies, but current policies are well geared towards strengthening it. - Debt levels remain sustainable and resilient to standard shocks. - Fiscal policy guidance: - Sound fiscal policy is a key anchor to growth and stability objectives. - Budgetary pressures could re-emerge without new revenue measures to support infrastructure spending. - Over the medium term, broader reforms are needed to boost nonoil tax revenues to sustain increases in development expenditure and maintain a strong fiscal position. - Moderate deficit reduction would enhance resilience to shocks. - Use of state-owned enterprises to raise funds for infrastructure should be pursued judiciously to ensure consistency with sound debt management and external sustainability. ### Monetary policy, financial sector, and corporate vulnerabilities - Monetary policy tightening since mid 2013 and a more flexible exchange rate policy have been instrumental in reducing imbalances and helping rebuild reserves. - Current monetary stance aided a credit growth deceleration, consistent with policy objectives. - Maintaining a relatively tight stance appears appropriate until inflation and external pressures firmly ease. - Further progress in monetary operations and deepening money markets expected to improve monetary transmission. - Stronger policy coordination and improved market functionality would help ease funding pressures. - Financial/corporate sector assessment: - Financial and corporate sector vulnerabilities appear manageable but require close watch given the growth slowdown. - Banking system remains generally sound, but system stability needs effective macroprudential framework and a robust crisis management framework, supported by joint surveillance and policy coordination among financial authorities and a new Financial System Safety Net law. - Corporate sector vulnerabilities warrant careful monitoring; steps are being taken to regulate external borrowing. - Key legal deficiencies in the AML/CFT framework should be addressed in a timely manner. ### Structural reforms and growth prospects - Structural reforms to ease supply bottlenecks and improve the investment climate could buttress growth prospects and strengthen the external position. - Upfront actions on trade and investment regime, labor market issues and human resource development, and energy policy would signal a constructive approach to investors. - Reforms could boost potential growth, create more jobs for Indonesia’s youthful population, and help contain macroeconomic imbalances with a view to moving quickly to higher income status and reducing inequality. ### Institutional recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. *Source: IMF staff appraisal and authorities’ views as presented in the provided content unit.* ### 2.5 percent of GDP, better than the 3.5 percent needed to stabilize the NIIP. The level and composition of the NIIP and ### _cr1574 - 2.5 percent of GDP, better than the 3.5 percent needed to stabilize the NIIP. The level and composition of the NIIP and ### Overall assessment - Indonesia’s external position in 2014 is moderately weaker than implied by medium-term fundamentals and desirable policies. - Policy actions since mid 2013 (monetary policy tightening, exchange rate and bond yield flexibility, and fuel subsidy reforms) should help improve the external position. - External financing appears sustainable, but could be affected by domestic or external shocks. - Non-resident holdings of rupiah debt could be affected by global volatility, which at end October 2014 stood at 5.3 percent of GDP. ### Potential policy responses - Monetary policy should continue to focus on containing inflation within Bank Indonesia’s target band and facilitating external adjustment. - Fiscal policy can support monetary policy in bringing external adjustment and help contain vulnerability to funding pressures by aiming for a small primary deficit over the medium term, led by reforms aimed at increasing the tax take. - Continued flexibility of the exchange rate and use of market-determined interest rates would help facilitate adjustment and absorb shocks. - Easing trade and investment restrictions, expanding public infrastructure, deepening financial markets, and improving labor markets would promote growth and competitiveness over the medium term. ### Current account - Background: - CA deficit projected at 3.0 percent of GDP in 2014, compared to 3.3 percent of GDP in 2013. - CA deficit projected to fall to 2.8 percent of GDP in 2015, aided by depreciation of the REER since mid-2013, continued support from manufactured exports, and expected continuation of relatively tight monetary policy. - Assessment: - EBA CA results suggest a gap of -1.9 percent of GDP for 2014 (based on a cyclically adjusted CA balance of ‒2.3 percent of GDP and a norm of -0.4 percent of GDP). - Staff believes a norm of ‒1.5 percent of GDP (±1 percent of GDP) more accurately reflects Indonesia’s significant investment needs. - This suggests a CA gap of about -1 percent of GDP (±1 percent of GDP), reflecting domestic policy gaps in social spending and capital account controls, and external policy gaps (particularly fiscal deficits) in partner countries. ### Real exchange rate (REER) - Background: - After sizable depreciation in the second half of 2013, the REER appreciated at end 2014 reflecting a temporary increase in inflation related to fuel price increases. - Assessment: - EBA REER results suggest an undervaluation of about 8 percent at end 2014, compared with undervaluation of 2 percent for 2013. - Using the CA gap estimate of -1 percent of GDP (± 1 percent of GDP) and standard elasticities, staff’s assessment is that the REER is overvalued by around 5 percent (± 5 percent). - Over the medium term, lagged effects of the weaker rupiah should help lower the CA deficit, but with commodities making up nearly half of Indonesia’s exports, the impact of a weaker rupiah on the CA deficit could be largely offset by falling world commodity prices and/or Indonesia export volumes. - Recommendation: continued exchange rate flexibility and broad-based structural reforms to absorb external shocks and strengthen competitiveness. ### Capital and financial accounts: flows and policy measures - Background: - Gross external financing requirement expected to be 9.6 percent of GDP for 2014, with amortization at 6.7 percent of GDP. - Net inward FDI and new borrowing projected at 2.5 percent and 9.4 percent of GDP, respectively, with a reserves increase accounting for the rest. - On capital controls, Indonesia ranks as more restrictive than other countries in the sample. - Assessment: - Net and gross financial flows appear sustainable, but could dissipate or reverse in the event of large domestic or external shocks. - Continued strong policies focused on strengthening the fiscal position, keeping inflation in check, and easing supply bottlenecks would help sustain capital inflows in the medium term. ### FX intervention and reserves level - Background: - Since mid 2013, Indonesia has had a more flexible exchange rate policy framework; floating regime better facilitates adjustments. - As of end 2014, reserves stood at US$111.9 billion (equal to 160 percent of IMF’s reserve adequacy metric—assuming a floating exchange rate—and 7 months of imports of goods and services). - Government contingencies and swap lines equivalent to around US$76 billion. - Assessment: - Continued external imbalances or volatile capital flows could cause reserves to decline significantly. - Current levels of reserves should be sufficient to absorb such shocks. - Intervention should aim primarily at smoothing volatility, while allowing the exchange rate to adjust to external shocks. ### External debt sustainability - Recent developments: - External debt-to-GDP ratio has been rising; external debt was 30½ at end 2013 (up from 26¾ percent at end 2011) and is expected to have reached 35 percent at end 2014. - Main reasons: rise in private external borrowing (including by SOEs) and depreciation of the exchange rate. - Medium-term projections and risks: - Under the baseline, debt rises slightly to 36 percent of GDP at end 2015 before declining to 32 percent by end 2019, linked to a gradual narrowing of the current account deficit and increase in FDI and equity inflows. - Public external debt may increase above the baseline if the government increases reliance on external financing for infrastructure projects. - Growth in private external debt is expected to slow as global financial conditions tighten. - Real growth projected to average about 5½ percent over the medium term and 6 percent in the longer run. - Sensitivity: - External sustainability is robust to interest rate and GDP shocks, but more sensitive to current account and exchange rate shocks. - A one standard deviation deterioration in the current account would raise the external debt-to-GDP ratio to 37 percent by 2019. - A 30 percent depreciation would raise the external debt-to-GDP ratio to about 50 percent in 2015, followed by a small decline to 45 percent of GDP by 2019. ### Public debt sustainability - Recent developments: - General government debt declined from 95 percent in 2000 to 24 percent in 2012 due to a prudent fiscal stance and a fiscal rule capping the general government deficit at 3 percent of GDP a year. - Exchange rate depreciation has increased the debt ratio moderately since 2012. - Foreign currency–denominated debt has fallen to less than half of total public sector debt. - Share of foreign ownership of rupiah-denominated government bonds rose from about 20 percent in 2009 to 38 percent as of end 2014. - Baseline projections: - Public sector debt expected to remain stable; debt-to-GDP ratio expected to decline slightly to 25½ percent of GDP by 2019, underpinned by moderate fiscal consolidation. - Debt dynamics supported by a negative interest rate–growth differential at more than 5 percent. - Gross funding needs expected to decrease gradually and be less than 4 percent of GDP over the medium term. - Stress tests and risks: - Public debt is sustainable and robust to macroeconomic shocks in standard stress tests. - Debt ratio rises only marginally in an alternative scenario where the primary deficit is maintained at the current level of 0.9 percent of GDP. - Fiscal risks arise from expanding balance sheets of key state corporations; Pertamina and PLN had combined total liabilities equivalent to 9.4 percent of GDP at end 2013. - Lower world oil prices will affect Pertamina’s revenue from upstream activities. ### Appendix IV — Response to recent IMF policy advice (selected) - Fund recommendation: - Further tighten monetary policy if projected inflation remains outside the target band. - Authorities’ response: - Bank Indonesia (BI) preemptively raised its benchmark and lending rates in November 2014 by 25 and 50 bps, respectively, to 7.75 and (text ends here in source). *Source: IMF staff report content provided in the supplied PDF extract.* ### 8.00 percent to help anchor inflation expectations. The action was taken ### _cr1574 - 8.00 percent to help anchor inflation expectations. The action was taken ### Monetary Policy and Market Development - BI raised the policy rate to 8.00 percent to help anchor inflation expectations; the action was taken immediately after administered fuel price hikes, which pushed headline inflation above the target band. - Policy communications have been clear. - Recommendations and actions: - Ensure BI’s inflation targeting framework is supported by a strengthened monetary transmission mechanism and deeper money markets by narrowing the interest corridor and using OMO more aggressively to guide short-term rates back to the middle of the corridor. - Introduction of tradable OMO instruments and ongoing IMF technical assistance (TA) to develop secured lending among banks are expected to deepen market activity and make the banking system more resilient to liquidity shocks. - A mini-Master Repo Agreement among banks has been in place since January 2014. - Continue to limit foreign exchange (FX) market intervention to smoothing volatility and encourage state-owned enterprises (SOEs) to meet FX needs in the interbank market. - The exchange rate has been allowed to move to reflect market conditions. - Foreign exchange sales have been scaled back to SOEs. - New regulations were introduced by BI in September 2014 to encourage prudent hedging by SOEs of their FX exposures, followed by regulations effective 2015 on corporate private external borrowing. ### Fiscal Policy - Recommendation: - Keep the overall deficit capped at 2 percent of GDP in 2013, to bolster credibility and reduce vulnerability to funding pressures. - Actual outcome: - In 2013, the fiscal deficit was 2.3 percent of GDP, in line with the revised budget but higher than recommended. Tax revenue shortfalls were partially offset by lower-than-budgeted current spending. - Recommendation: - Pursue moderate fiscal consolidation in 2014 and over the medium term, limiting the deficit to 1½ percent of GDP in 2014 to help contain external pressures and funding needs, and anchor medium term consolidation by rationalizing the energy subsidy regime and mobilizing tax revenues to bring the primary deficit into balance. - Actual outcome and reforms: - In 2014, the fiscal deficit was 2.3 percent—slightly lower than targeted in the revised budget, but still higher than staff recommended mainly due to underperformance of non-oil and gas revenues and a larger-than-envisaged energy subsidy bill. - Subsidized fuel consumption was capped for the year. - Energy subsidy reforms implemented: - Electricity tariffs increased for large industrial users in July 2014. - Administered fuel prices raised by an average of 33 percent in November 2014. - Fuel pricing reform undertaken in January 2015. - Recommendation: - Strengthen cash and debt management by shortening the maturity profile of primary auctions of government debt, consolidating line ministry accounts in banks, and replacing nonmarketable government securities on BI’s balance sheet. - Treasury bill issuances have been larger in primary auctions in 2014 than in the previous year. ### Financial and Corporate Sector - Recommendations: - Monitor closely banks’ and corporates’ financial soundness and risk management practices, while continuing to manage carefully the move of bank supervision to OJK (the financial services agency). - The transfer of banking supervision to OJK occurred smoothly, with work ongoing to improve the supervisory framework. - Bank Indonesia is developing tools to ensure systemic stability and improve corporate monitoring. - Fill gaps in existing crisis management protocols, in the absence of passage of the Financial System Safety Net (FSSN) law, and revise relevant financial legislation to ensure legal consistency. - A review of the draft FSSN law is underway to fill in gaps in the financial stability architecture. - Establish a well functioning macro prudential framework, with BI taking the lead role in systemic risk monitoring and OJK driving implementation of all prudential tools. - Bank Indonesia issued its macro prudential regulation in July 2014, but clarification of micro and macro prudential responsibilities is needed. - Bank Indonesia is strengthening its capacity for systemic risk monitoring, supported by IMF TA. ### Fund Relations (as of January 31, 2015) - Membership Status: Joined February 21, 1967; Article VIII. - General Resources Account: - Quota 2,079.30 SDR Millions 100.00 percent of Quota - Fund holdings of currency 1,933.80 SDR Millions 93.00 percent of Quota - Reserve position in Fund 145.50 SDR Millions 7.00 percent of Quota - SDR Department: - Net cumulative allocation 1,980.44 SDR Millions 100.00 percent of Allocation - Holdings 1,761.11 SDR Millions 88.93 percent of Allocation - Outstanding Purchases and Loans: None - Financial Arrangements (historical approvals and drawings listed in source). - Projected Payments to Fund (SDR millions; based on existing use of resources and present holdings of SDRs): - Charges/Interest 0.12 (each year) for 2015, 2016, 2017, 2018, 2019 - Total 0.12 (each year) for 2015, 2016, 2017, 2018, 2019 - Exchange Arrangements: - The rupiah has had a de jure free floating exchange arrangement since August 14, 1997, and the current de facto arrangement is floating. - The market exchange rate was Rp 12,739 per U.S. dollar as of January 31, 2015. - Indonesia has accepted the obligations of Article VIII, Sections 2, 3, and 4, and maintains an exchange system free of restrictions on payments and transfers for current international transactions. - Article IV Consultation: - The last Article IV consultation report (IMF Country Report No. 13/362) was discussed by the Executive Board on November 15, 2013. - Resident Representative: - Mr. Benedict Bingham has been the Senior Resident Representative since September 2012. ### World Bank—IMF Collaboration - The working relationship between the IMF and the World Bank in Indonesia is very strong, with joint working programs and frequent coordination. - Key joint program areas: - Budget Reforms: - World Bank support via GFMRAP, trust funds, and DPLs focused on treasury operations, medium-term expenditure framework implementation, performance budgeting, and budget oversight improvements. - IMF TA complemented work on subsidy reform and social safety nets. - Taxation Issues: - IMF and World Bank prioritize broadening the revenue base and increasing revenues. - Fund mission on tax policy and administration in September 2014. - Bank provides TA to DG Tax and support for tax administration reform. - Asset-Liability Management: - Joint efforts to improve asset-liability management at the Treasury and Debt Management Office and at Bank Indonesia. - Crisis Preparedness: - Bank supported analysis via the 2010 FSAP and crisis simulation exercises; IMF supported legal framework review and surveillance dialogue. - Financial Sector: - World Bank supports nonbank financial sector reforms; IMF focuses on banking regulation and supervision and placed a resident advisor at OJK in January 2015. - IMF TA on money and FX market development, monetary operations, transmission mechanism, and macro prudential policy framework. - A joint World Bank-IMF FSAP completed in 2010 with some recommendations followed through. - Statistics: - World Bank STATCAP-CERDAS program launched in 2011 for capacity building. - IMF focused recent training and TA on government finance statistics, monetary and financial statistics, and sectoral balance sheets. - Macroeconomics: - IMF leads on macroeconomic surveillance, Debt Sustainability Analysis updates, and macro/financial linkages. - World Bank assists Ministry of Finance‘s Fiscal Policy Office on macroeconomic monitoring and forecasting. - Indonesia: Joint Managerial Action Plan, 2014−15: - Mutual information sharing, coordination on follow-up FSAP starting in 2015 (timing tentative: Late 2016), and a schedule of IMF and Bank planned products and missions (listed in source). ### Relations with the Asian Development Bank (As of December 2014) - ADB loans to Indonesia have totaled US$30 billion since 1969. - The ADB approved a total of US$554.4 million in loans to Indonesia in 2014. - Sectors with largest shares in cumulative lending (cumulative lending data as of December 2014): - Public sector management 19.1 percent - Energy 14.5 percent - Agriculture and natural resources 13.6 percent - Finance 13.6 percent - Between 1969 and 2014, the ADB provided Technical Assistance (TA) grants to Indonesia amounting to US$430 million. - The ADB is preparing a new Country Partnership Strategy (CPS) 2015−2019 aligned with the government’s medium-term development plan for 2015−2019. ### ADB Loan Approvals and Cumulative Lending (selected figures) - Table 1. Sovereign and Nonsovereign Loan Approvals and Disbursements to Indonesia (In millions of U.S. dollars): - Loan approvals by year (2007–2014 (October)): 1,187.1; 1,085.0; 2,184.2; 785.0; 580.0; 1,232.8; 1,013.9; 554.4 - Loan disbursements by year (2007–2014 (October)): 1,136.3; 949.6; 739.3; 1,079.8; 631.9; 862.5; 588.1; 84.0 - Table 2. Cumulative Lending to Indonesia (As of December 2014) — Loans, Amount (US$ millions), Percent: - Agriculture and natural resources: 100 loans, 4,092.52 US$ millions, 13.62 percent - Education: 33 loans, 2,297.35 US$ millions, 7.65 percent - Energy: 35 loans, 4,354.55 US$ millions, 14.50 percent - Finance: 23 loans, 4,086.10 US$ millions, 13.60 percent - Health and social protection: 13 loans, 1,068.30 US$ millions, 3.56 percent - Industry and trade: 12 loans, 645.70 US$ millions, 2.15 percent - Public sector management: 22 loans, 5,724.97 US$ millions, 19.06 percent - Transport and information and communications technology: 36 loans, 3,593.86 US$ millions, 11.96 percent - Water supply and other municipal: 35 loans, 2,183.84 US$ millions, 7.27 percent - Multisector: 21 loans, 1,993.22 US$ millions, 6.64 percent - Total: 330 loans, 30,040.41 US$ millions, 100.00 percent ### Statistical Issues and Data Adequacy for Surveillance - General assessment: Indonesia’s macroeconomic statistics are broadly adequate to conduct effective surveillance. - National accounts: - BPS disseminates annual and quarterly GDP (QGDP) by activity and expenditure components at current prices and in volume terms regularly. - The base year of GDP was revised to 2010 recently. - Revised GDP estimates resulted in an upward revision of 6.5 percent in nominal GDP for the year 2010, out of which 2.4 percent was attributed to the 2008 SNA implementation. - QGDP estimates are based on a limited set of indirect indicators; some sectors strongly seasonal with seasonally adjusted data prepared but not published. - BPS and BI expect to finalize annual nonfinancial accounts, financial flows, and stocks for the year 2010 during 2015, and quarterly financial flows and stocks starting from Q1:2015 in 2017. - Price statistics: - Price statistics are broadly adequate for surveillance. - In October 2013, BPS released the new industrial Producer Price Index (PPI) with 2010 as the base period and has published the PPI index quarterly. - A TA mission in October 2014 advised BPS on PPI development in line with Producer Price Index Manual (PPI Manual), 2004. - Government finance statistics: - Available government finance data suffer weaknesses in classification, coverage, and timeliness. - Central government budget data available with a one-month lag; subnational data available only with a lag of two years and varying quality. - MOF committed to keeping fiscal statistics requirements at the forefront of fiscal reforms. - IMF staff short-term recommendations: - (i) establishment of a register of all extrabudgetary units; and (ii) inclusion of economic codes consistent with GFSM 2001 in the chart of accounts. - Medium-term priorities: - (i) establishment of reporting arrangements for timely preliminary local government statistics; and (ii) development of a GFSM 2001 operating statement, statements of sources and uses of cash, and partial balance sheets to be published on the MOF’s website. - A system has been set up to allow automatic conversion of budget files to GFSM 2001 data; these data are yet to be published on the MOF’s website. - MOF efforts assisted by STA. - Monetary and financial statistics (MFS) and financial soundness indicators (FSIs): - BI compiles good quality monetary statistics on a timely basis using Standardized Report Forms (SRFs). - In October 2014, an STA mission supported BI in expanding OFC survey coverage to include insurance companies, pension funds, PT Pegadaian, and Eximbank. - BI compiles and reports STA 11 core and 12 encouraged FSIs for deposit takers, two encouraged FSIs for OFCs, and three encouraged FSIs for the real estate sector, published on the Fund’s FSI website. - BI began reporting these FSIs quarterly starting with Q4:2011 data. - STA recommended exploring compilation of FSIs for nonfinancial corporations and households. - Balance of payments (BOP): - Trade data have improved; free trade zones and bonded warehouses captured in goods data. - Methodological basis for FDI compilation needs substantial improvement; inflows currently calculated based on loan disbursements with a fixed ratio to estimate equity inflows. - Annual and quarterly IIP data compiled and published, but underlying data weak in areas, notably for FDI. - External debt statistics improved with EDIS (2002) and initiative to publish monthly indicators. - Reconciliation by BI made IIP and external debt data fully consistent, though improvements still needed for private corporate sector components. - Data Standards and Quality: - Subscriber to SDDS since September 1996, observing most SDDS requirements. - Uses SDDS flexibility options for timeliness and periodicity of labor market categories and for general government operations. - Data ROSC completed in 2005. ### Common Indicators Required for Surveillance (As of January 31, 2015) — Selected entries - Exchange rates: Date of Latest Observation 1/30/15; Date Received 1/30/15; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D. - International reserve assets and reserve liabilities of the monetary authorities: Date of Latest Observation 1/15; Date Received 2/15; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Reserve/base money: Date of Latest Observation 12/14; Date Received 1/15; Frequency W/M; Frequency of Reporting W/M; Frequency of Publication W/M. - Broad money: Date of Latest Observation 11/14; Date Received 1/15; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Consumer price index: Date of Latest Observation 1/15; Date Received 2/15; Frequency M; Frequency of Reporting M; Frequency of Publication M. - Revenue, expenditure, balance and composition of financing — central government: Date of Latest Observation 12/14; Date Received 1/15; Frequency M; Frequency of Reporting Mid-year; Frequency of Publication LNO, LNO, LO, LNO (as per table). - External current account balance: Date of Latest Observation 9/14; Date Received 12/14; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q. - GDP/GNP: Date of Latest Observation 12/14; Date Received 2/15; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q. - Gross external debt: Date of Latest Observation 9/14; Date Received 12/14; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q. - International investment position: Date of Latest Observation 9/14; Date Received 12/14; Frequency Q; Frequency of Reporting Q; Frequency of Publication Q. ### Statement by IMF Staff Representative - Date: March 9, 2015. - Note: The information below has become available following the issuance of the staff report. It does not alter the thrust of the staff appraisal. *Prepared by Asia and Pacific Department; information in this summary is drawn from the IMF staff report informational annex as provided.* ### 1. Recent data releases are broadly consistent with staff’s view on the near-term ### Recent data releases are broadly consistent with staff’s view on the near-term ### Near-term macroeconomic outlook and recent data - The current account deficit for 2014 was about US$26 billion. It narrowed in Q4 2014 to US$6.2 billion (2.9 percent of GDP), largely attributable to a smaller oil import bill. - The overall BOP surplus in 2014 was US$15.2 billion, slightly larger than expected, with non-portfolio capital inflows the main factor. - Trade surplus rose to US$0.7 billion in January 2015 from US$0.2 billion in December 2014, with oil and gas imports further shrinking. - Headline inflation declined to 6.3 percent (y/y) in February 2015; core inflation remained around 5 percent. - Bank Indonesia’s February consumer survey index showed price expectations continuing to fall. ### Fiscal developments and budgetary outlook - Parliament approved a revised 2015 budget in mid February with an overall deficit target of 1.9 percent of GDP, consistent with the government’s initial proposal. - The budget relies on an ambitious increase in non-oil and gas revenues, expected mainly from administrative measures, to achieve the deficit target and boost capital spending. - The budget provides for a recapitalization of state-owned enterprises equal to 0.4 percent of GDP within the financing items. - IMF/Staff view: Decisive fiscal actions on fuel subsidy reforms opened space to increase social and infrastructure spending, but lower oil and gas revenues may constrain resources in the near term. - Policy recommendation (IMF Directors): Maintain a prudent fiscal stance, use expanded fiscal space to increase growth-critical social and capital spending, raise non-oil tax revenues (including by strengthening tax administration), and closely monitor risks from state-owned enterprises and public-private partnerships. ### Monetary policy, exchange rate, and liquidity - Bank Indonesia cut its benchmark and deposit facility rates by 25 bps to 7.5 percent and 5.5 percent, respectively, effective February 18, 2015; the lending facility rate remained at 8.0 percent. - Rationale: improvement in inflation performance and the current account. - BI’s February decision (authorities’ view): Lower expected oil prices, benign domestic food price developments, and manageable domestic demand imply downside risks to expected inflation; inflation is expected to fall to the lower end of the 4+1 percent target range in 2015 and 2016. - Authorities’ stance: continue flexible exchange rate as shock absorber and facilitator of external adjustment; efforts to strengthen monetary transmission and deepen financial markets (amending hedging regulations, introducing Islamic Foreign Currency Term-Deposit). - IMF/Directors view: Current monetary stance broadly appropriate to anchor inflation expectations and support external adjustment; continued exchange rate and bond yield flexibility recommended. Support efforts to deepen money markets to improve liquidity management and strengthen monetary transmission. ### Financial markets and external financing - Since BI’s rate cut, the 10-year bond yield declined by about 30 basis points while the rupiah weakened slightly against the U.S. dollar. Portfolio inflows continue to be supportive. - Broad money and private credit growth slowed in December 2014 to around 12 percent and 12½ percent (y/y), respectively. - BOP and reserves: foreign reserves expected to rise moderately; overall BOP and external resiliency strengthened via clearer policy framework and better policy coordination. - IMF/Directors recommended: deepen market activity, enhance macro and micro prudential oversight, strengthen risk assessment capacity, put in place effective crisis management framework (including enactment of the Financial System Safety Net Law), consider removal of interest caps on deposits, and strengthen corporate sector resilience (including managing rising external debt). - Authorities’ view: BOP recorded a surplus of US$15.2 billion in 2014; current account deficit narrowed to US$26.2 billion (2.95 percent of GDP) from US$29.1 billion (3.18 percent of GDP) in 2013. Financial and capital account recorded a surplus of US$43.6 billion in 2014, including increased FDI across multiple sectors. ### Growth, inflation, and medium-term priorities - IMF staff projection: growth around 5¼ percent in 2015 (staff table: Real GDP 2015 Proj. 5.2 percent, 2016 Proj. 5.5 percent). - Authorities’ projection: growth in 2015 of 5.4 -5.8 percent (authorities expect higher growth than staff). - Inflation: CPI end-period 2015 projected at 4.5 percent (staff table), period average 2015 projected at 6.8 percent. Authorities reported CPI inflation at 8.36 percent in December 2014; core inflation at 4.93 percent (December 2014); CPI fell to 6.3 percent (y/y) in February 2015. - IMF/Directors recommendations on structural policies: address supply bottlenecks, deepen financial markets, streamline investment approvals, improve trade and investment regime, address labor market issues (align wage settlements with productivity), foster human capital development (particularly education), and broaden the export base to stimulate job creation and raise potential growth. - Fiscal strategy recommended by IMF: moderate fiscal consolidation underpinned by a broad tax revenue strategy and prudent borrowing to generate resources for growth-critical spending while maintaining debt sustainability. ### Key statistics (selected figures from the report) - Current account deficit 2014: about US$26 billion; Q4 2014 current account US$6.2 billion (2.9 percent of GDP). - Overall BOP surplus 2014: US$15.2 billion. - Trade surplus January 2015: US$0.7 billion (December 2014: US$0.2 billion). - Headline inflation February 2015: 6.3 percent (y/y); core inflation about 5 percent. - BI policy rates (after February 18, 2015 cut): benchmark 7.5 percent; deposit facility 5.5 percent; lending facility 8.0 percent. - Broad money growth (Dec 2014): around 12 percent (y/y). - Private credit growth (Dec 2014): around 12½ percent (y/y). - IMF staff headline projections (table): Real GDP 2015 5.2 percent; Real GDP 2016 5.5 percent. - Prices (end period): Consumer prices 2014 8.4 percent; 2015 proj. 4.5 percent; 2016 proj. 4.8 percent. - Central government revenue 2014: 15.2 percent of GDP; expenditure 17.5 percent of GDP; energy subsidies 2014 3.4 percent of GDP. - Central government balance 2014: -2.3 percent of GDP; 2015 proj. -2.4 percent of GDP. - Gross reserves (end period): 2014 111.9 (billions of U.S. dollars); 2015 proj. 119.9; 2016 proj. 125.5. - Total external debt 2014: 297.5 (billions of U.S. dollars); 2015 proj. 316.7; 2016 proj. 333.4. - Rupiah per U.S. dollar (end period): 2014 12,435. *Source: _cr1574 - 1. Recent data releases are broadly consistent with staff’s view on the near-term* ### 12. As acknowledged by staff, the government's fiscal rule has provided a solid ### 12. As acknowledged by staff, the government's fiscal rule has provided a solid ### Fiscal policy: stance, targets, and measures - The authorities adopt prudent fiscal policy by maintaining the deficit below 2.5 percent and managing public debt at a low level. - In 2014: - Fiscal deficit was targeted at 2.4 percent of GDP. - Public debt was successfully retained below 30 percent of GDP. - Initiatives to maintain a strong fiscal position: - Enhancing revenue through continuous tax reforms. - Improving the quality of spending; the recent fuel price adjustment was the main policy measure to cut spending. - Energy subsidy reforms provide fiscal space to anticipate undesirable impacts from global economic development and to invest in infrastructure projects. - Social mitigation for fuel price adjustment: - A compensation program using a cashless smart cards system covering education, cost of living, and health insurance and medical benefit was launched to protect low-income and vulnerable people. - Forward-looking fiscal objectives and measures: - Fiscal policy will focus on improving budget structure to buttress real sector activities and reduce poverty while maintaining macroeconomic stability and boosting potential growth in the medium term. - Fiscal incentives will be provided for industries that produce intermediate goods and re-invest their dividends. - Measures to strengthen reinsurance and the local shipping industry will be enforced. - Authorities expect the fiscal deficit to be around 1.91 percent of GDP in 2015. - Revenue mobilization priorities in response to declining oil prices: - Substantially increase tax revenue to offset lower non-tax revenue. - Revamp tax administration. - Increase compliance of individual taxpayers. - Strengthen enforcement and reduce tax distortion in strategic sectors. - Broaden tax base. - Optimize custom and excise policies. - Enhance the VAT system. - Expenditure-side priorities: - Increase capital expenditure to improve competitiveness and production capacity. - Reallocate budget to productive spending to generate employment and alleviate poverty. - Additional budget allocation to village funds to induce productive activity in remote areas and promote more inclusive growth. - Capital injection to SOEs to support infrastructure development. ### Financial sector: resilience, risks, and policy actions - 2014 financial sector assessment: - Banking system is well capitalized and liquid. - Capital Adequacy Ratio (CAR) is maintained at 19.36 percent. - Non Performing Loans (NPLs) were retained at 2.2 percent. - Credit growth decelerated to 11.6 percent. - Stress tests conducted by the authorities demonstrate strong resilience of the banking sector to severe shocks. - Funding and liquidity dynamics: - Staff concern: possibility of renewed funding pressures if deposit growth lags credit growth. - Authorities' view: concern unlikely to materialize; heightened funding pressures in early 2014 were owing to segmented market and seasonal factor due to government fiscal contraction, while banking liquidity remained sufficient. - Liquidity improved in the second half of 2014, in line with fiscal expansion and improvement in deposit growth; low credit demand also lessened funding pressures. - Macroprudential and structural measures: - Continued use of macro-prudential policy to maintain financial stability. - Measures to enhance funding resources for banks, promote financial market deepening, and extend loans to productive sectors. - Strengthen financial sector regulation and supervision by: - Developing integrated risk based supervision. - Increasing banks' capital to meet Basel III standard. - Adjusting capital requirements and product enrichment for the insurance industry. - Encouraging more firms to accumulate funds through the capital market. - Corporate sector external debt regulation: - Regulation issued to promote prudent external debt management for non-bank corporations to mitigate currency risk, liquidity risk, and over-leverage risk. - Bank Indonesia requires non-bank corporations holding external debt to fulfill three requirements: a minimum hedging ratio, a minimum forex liquidity ratio, and a minimum credit rating. - The minimum hedging ratio is intended to expand the hedging market. - Banking sector cushioned by sufficient capital buffers. - Crisis management framework: - Work on finalizing the Financial Sector Safety Net (FSSN) Law is in progress and is a top priority of the new government to be completed this year. ### Structural reforms and productivity-enhancing measures - Authorities' commitment: - Strong commitment to structural reforms to improve productivity, explore new sources of growth, develop financial markets, and undertake a comprehensive energy policy. - Fuels subsidy reforms at the end of 2014 demonstrated swift action on structural reforms. - Reform objectives: - Address supply bottlenecks. - Diversify the economy from the commodity sector. - Raise potential growth. - Infrastructure and investment planning: - New government set up an infrastructure investment plan for 2015-2019 covering sectors such as transportation, energy, clean water, and telecommunications. - Business climate and institutional reforms: - Implement One Stop Service to streamline approval processes and improve public service quality and governance. - Step up implementation of the Land Acquisition Law. - Increase productivity by providing incentives for research and development activity. - Strengthen labor policy. - Develop agriculture and fishery sectors to support food security and generate employment. - AML/CFT compliance: - Continuous improvements in AML/CFT compliance acknowledged by the FATF in its February 2015 public statement. ### Conclusion and outlook - Summary assessment: - Amidst global uncertainty, Indonesia aims to transform into a better, more sound, and sustainable economy. - Authorities recognize challenges ahead and will closely monitor domestic and global developments to maintain consistent and bold policy measures. - Authorities reiterate commitment to remain vigilant and stand ready to take proactive measures to ensure macroeconomic and financial stability. - Engagement with Fund: - Authorities welcome staff advice to help Indonesia advance beyond its current stage and look forward to continued constructive engagement with the Fund. *Source: _cr1574 - 12. As acknowledged by staff, the government's fiscal rule has provided a solid* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1574.pdf_