IMF Survey : Indonesia Navigates Safely Through Uncertain Times

IMF News, March 15, 2016

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Indonesia is described as "one of the best performing emerging market economies" with potential to "take its economic success to the next level by more investment, particularly in infrastructure, and finding new sources of economic growth."
The IMF's annual assessment highlights macroeconomic stability, recent reforms (notably fuel subsidy reform), and the need for continued structural reforms to sustain and raise growth.

2015 macroeconomic outcomes:
- Growth: "4.8 percent in 2015"
- Inflation: "fell to within the central bank’s target range (3-5 percent)"
- Current account: "narrowed"
2016 projection:
- Growth forecast: "pick up moderately to around 5 percent"
- Recovery drivers: "increased investment, especially, public sector spending on transport and energy"
Medium-term fundamentals cited as favorable due to: "a young population, low public debt, large domestic markets, natural resource endowment, and a participatory and stable political system."

Global shifts affecting Indonesia: "lower growth and rebalancing in China, sluggish commodity prices, and the beginning of monetary policy normalization in the United States."
Three main transmission channels: "commodity prices, trade, and capital flows."
Specific impacts and developments:
- Government revenues, "in particular oil revenues, have dropped significantly."
- "Foreign direct investment and portfolio inflows have slowed," though "inflows to Indonesia so far in 2016 have been more favorable than to regional peers."
- "From low levels, foreign currency denominated borrowing by firms has increased rapidly in the past few years."
- Corporate performance: "weakened somewhat" and "banks’ non-performing loans have begun to creep up."
Resilience factors: "flexible exchange rate and government bond yields, and ample international reserves" helped adjustment; Indonesia "is certainly better able to handle this kind of turbulence than in the past."

Short-term and medium-term priorities:
- Fiscal: "increase revenues to create space for infrastructure and other priority spending such as well-targeted social programs."
- Monetary/financial: "maintain flexible exchange rates and market-determined government bond yields"; enact the "Financial System Safety Net law" quickly.
- Structural: "diversify its economy from the heavy reliance on commodities—to manufacturing, agriculture, and services," improve "infrastructure and structural reforms to improve competitiveness and the productivity of investment."
Business climate measures:
- Continue and expand "the series of policy packages issued since August 2015" aimed at "strengthening the business climate and addressing the burden of multiple layers of regulations."
- Build on "recent changes to the foreign direct investment regime" that "in the aggregate, led to a partial liberalization."
- Support President Jokowi’s initiatives including "the implementation of the revamped Land Acquisition Law and a one-stop services shop."
Lessons from fuel subsidy reform:
- Factors for success: "well-targeted social protection measures, a good communication strategy, good timing, and bold political leadership."
- Social protection example: "cash transfers."
- Timing: reforms implemented "at a time of falling oil prices"; government "cut gasoline and diesel prices by around 22 and 15 percent, respectively, in January 2015."

Government target and financing:
- Infrastructure target: "around US$ 480 billion (around 50 percent of GDP) during 2015–19"
- Financing sources: "both the public and private sectors"
Progress noted:
- "accelerating government capital spending in 2015" and enhanced institutional framework via "a coordinating body (KPPIP) to focus on top priority projects."
Implementation requirements and risks:
- Revenue mobilization: "mobilize additional revenue to create fiscal space for capital spending, including with an increase in excise taxes on fuel, tobacco, and vehicles."
- Complementary actions: "improvement in public investment management, and the strengthening governance at state-owned enterprises and capacity at local governments."
- Capacity and fiscal risks: "pace of implementation needs to take into account capacity constraints, including those of local governments, and should carefully consider fiscal risk and the economic impact of increasing the public debt too quickly, including on interest rates and the current account deficit."
- Structural reforms in the business environment "would greatly complement these efforts."

IMF Survey : Indonesia Navigates Safely Through Uncertain Times — March 15, 2016.