IMF Survey : Indonesia—Moving in a New Direction

IMF News, March 19, 2015

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Sound macroeconomic management and exchange rate flexibility over the past 18 months have bolstered Indonesia’s policy credibility and its resiliency to shocks.
The country’s macroeconomic fundamentals and reserve buffers have been strengthened through a clearer policy framework and better policy coordination.
The 2014 Article IV consultation concluded in March and found Indonesia in transition to a new growth model.

Growth is expected to reach around 5¼ percent this year, led by an expected pickup in public investment.
Inflation should return to within Bank Indonesia’s target band of 3–5 percent by end 2015, given the current monetary stance and lower fuel prices.
The current account deficit should narrow slightly, with a smaller oil import bill offsetting lower nonoil commodity exports.
Foreign reserves should remain adequate.

Primary risks emanate from outside the country: a deeper‑than‑expected slowdown in emerging market trading partners and surges in global financial market volatility.
These external shocks could exacerbate potential vulnerabilities in the banking and corporate sectors.
Slower or narrower reforms than envisaged in the report’s baseline might affect the pace of growth.

Policymakers seek to hasten the economy’s move from commodity‑supported to more competitiveness‑driven growth amid the commodity down‑cycle.
Over the past five years, the contribution of the commodity sector to GDP has declined by around five percentage points.
Manufacturing exports have emerged as a bright spot, supported by foreign direct investment and the rupiah’s adjustment.
Under focused reforms, more infrastructure investment, and a stable macroeconomic setting, growth is expected to rise to 6 percent by 2018.
The government targets ramping up infrastructure investment to 8-9 percent of GDP a year through the end of the decade.

Sound fiscal policy as a key anchor to growth and stability objectives:
- Despite recent energy subsidy reforms, budgetary pressures could re‑emerge without new revenue measures, given declining oil and gas revenues.
- Larger nonoil tax revenues would help sustain increases in development expenditure and maintain a strong fiscal position, with moderate deficit reduction enhancing resilience to shocks.
Prudent debt management to underpin the government’s strategy for ramping up infrastructure investment:
- Financing support is expected from both domestic and external borrowing, with some off budget; these will need to be managed closely to avoid undue fiscal risks.
Monetary policy and market functioning:
- A relatively tight monetary stance has kept inflation in check and bolstered external inflows.
- Exchange rate and bond yield flexibility have helped manage episodes of heightened volatility since mid–2013.
- Further progress in improving monetary operations and deepening money markets is expected to improve monetary transmission.
Financial and corporate sector monitoring:
- Financial and corporate sector vulnerabilities appear manageable but require close watch given the growth slowdown.
- The banking system remains generally sound, supported by stronger frameworks for macroprudential policy and crisis management.
- The corporate sector warrants careful monitoring, supported by recent actions to contain risks tied to external borrowing.

Priority reform areas:
- Easing longstanding supply bottlenecks through infrastructure investment and regulatory reform.
- Stable trade and investment regime to attract and retain investors.
- Human resource development and labor market flexibility.
- Financial market deepening.
Expected outcomes:
- Boost potential growth and create more jobs for Indonesia’s youthful population.
- Help contain macroeconomic imbalances, move quickly to higher‑income status, and reduce inequality.
Early decisive action: removal of most fuel subsidies soon after the new government took office in October 2014 to free up budget space for social and infrastructure spending.

IMF Survey : Indonesia—Moving in a New Direction — March 19, 2015.