IMF Survey: Indonesia's Choice of Policy Mix Critical to Ongoing Growth

IMF News, July 28, 2009

Source details

Canonical URL: IMF Survey: Indonesia's Choice of Policy Mix Critical to Ongoing Growth

Publication: IMF Survey online, July 28, 2009.
Consultations with the Indonesian authorities ended on June 5th.
The IMF assesses that "the economic outlook for 2009 remains positive," but warns that "another round of global risk aversion could adversely affect external liquidity, demand, and growth prospects for Indonesia."
After India and China, Indonesia is the third fastest growing economy in the Group of Twenty (G20).
The $512 billion economy expanded 4.4 percent in the first quarter from a year earlier.
The IMF revised its 2009 forecast for the country to 3-4 percent from 2.5 percent.

Domestic demand makes up about two-thirds of the economy and has helped Indonesia skirt recession.
The government announced a fiscal stimulus package of about 1.4 percent of GDP earlier in the year.
Tax cuts mandated by the stimulus program have been implemented, but there have been delays in capital spending plans.
The IMF warns that delays in capital spending could blunt the program’s effectiveness: "Timely and efficient implementation of the spending program, especially on infrastructure, would be critical to sustaining the economic recovery."
Given low levels of public debt, the Fund suggests it would be appropriate to maintain some of the stimulus into 2010.
The IMF notes "The fiscal space is available to invest in infrastructure areas, such as transportation and water systems, and for strengthening the social safety net; without jeopardizing debt sustainability," said Thomas Rumbaugh, head of the Indonesian team for the IMF.

The report recommends a cautious monetary stance despite supporting some fiscal stimulus.
Inflationary pressures remain low and year-to-date credit growth has been flat.
The IMF believes there is now enough monetary stimulus in the system and warns of the dangers of overstimulating the economy and introducing inflationary pressures.
The Indonesian Rupiah has been one of the strongest performers among Asian currencies this year.
The IMF states that exchange rate flexibility "remains an important shock absorber" and that "The current level of the real effective exchange rate is broadly in line with fundamentals."

Indonesia entered the crisis with stronger fundamentals than many neighbors due to wide-ranging post-1997-98 reforms.
Reforms included a rapid reduction in public and external debt, strengthening of corporate and banking sector balance sheets, and reducing bank vulnerabilities through higher capitalization and better supervision.
The rebound is also attributed to quick policy responses by the government and Bank Indonesia and to recent presidential elections that analysts say testify to Indonesia’s maturity as a thriving democracy.
Thomas Rumbaugh: "The dividends from Indonesia’s reforms to date are clear in terms of its macroeconomic and financial stability, as well as solid economic growth."
The IMF urges advancing the reform momentum to continue Indonesia’s development as one of the leading economies in Asia and the world.

Source: IMF Survey: Indonesia's Choice of Policy Mix Critical to Ongoing Growth (IMF Survey online, July 28, 2009).