Press Release: Statement at the Conclusion of the 2008 Article IV Consultation Mission to Indonesia

May 29, 2008

Press Release No. 08/124

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

"An IMF mission led by Mr. Milan Zavadjil, Assistant Director in the Asia and Pacific Department, visited Jakarta during May 19-28 to conduct the 2008 Article IV Consultation discussions. 1 The team exchanged views with the government on the economic outlook, impact of rising commodity prices, and the fallout of the global financial turmoil and economic slowdown. Based on these discussions, the team will prepare a staff report, scheduled to be presented to the IMF's Executive Board at the beginning of August.

"Since the last Article IV Consultation a year ago, Indonesia's growth performance has been strong despite a deteriorating global environment. In 2007 the economy recorded its highest growth rate in a decade, of 6.3 percent, and the momentum was sustained during the first quarter of 2008. As a result, poverty and unemployment, while still high, continued to decline. Nevertheless, near-term challenges have arisen from rising commodity prices and a slowdown in global growth.

"With continued timely policy responses to changing economic circumstances, the mission expects Indonesia's economic growth to moderate only slightly in 2008 to 6.1 percent, as the stronger-than-expected momentum from the first quarter offsets the expected near-term impact of the recent fuel price increase. In the mission's view, Indonesia is relatively well-positioned to weather a global slowdown, given its reliance on commodity exports, which are expected to remain strong, and diversified export markets. At the same time, there are downside risks from the external environment, including the possibility of a more severe and prolonged global slowdown.

"As in many other countries, inflationary pressures are a significant challenge in the near term. Headline and core inflation have been accelerating since the beginning of the year, and the recent fuel price increase is expected to raise inflation further by around 2½ percentage points, bringing overall inflation to around 11½ percent by end-2008. To address such pressures, Bank Indonesia has appropriately begun to tighten monetary policy through a recent 25 basis point increase in interest rates, and has signaled its intention to tighten further as needed to bring inflation back on a declining trend. On this basis, and with some moderation of international food and energy prices, the mission expects inflation to decline by end-2009 to around 7½ percent.

"Overall, fiscal policy has been sound, leading to modest deficits and further significant declines in the public debt-to-GDP ratio. Recent trends in non-oil and -gas revenue performance have been more favorable than expected, reflecting strong economic growth and yields from improved tax administration. Meanwhile, spending execution, including on capital projects, improved in 2007 in line with budget projections. However, fuel subsidies have risen sharply in recent months due to the ongoing run-up in international oil prices. If left unchecked, this could crowd out higher priority areas in the social and infrastructure areas, where investments are needed to sustain Indonesia's longer term growth and development objectives. In this regard, the mission supports the government's bold steps announced on May 24 to reduce fuel subsidies while taking measures to protect the most vulnerable low-income families.

"Indonesia's financial sector has displayed resilience in the face of the global credit market turmoil. Financial soundness indicators have improved, with profitability across the banking sector increasing, and non-performing loans continuing to decline amid strong private sector credit growth. Nevertheless, the domestic financial markets have been subjected to volatility in recent months arising from both external and country-specific conditions. Government bond yields have risen steeply since mid-February, as investor sentiment weakened due to the rising fuel subsidies and inflation concerns. Looking ahead, risks remain from higher funding costs and a deterioration in risk appetite. The authorities have taken appropriate actions to contain these risks, and the mission encourages them to continue monitoring vulnerabilities, and to undertake proactive macroeconomic policy management in response to changing conditions."

1 The "Article IV" mission is the regular annual visit by an IMF team to member countries to hold discussions and gather information on economic policies.


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