Prudent Fiscal Management; IMF Positive about Indonesian Economy

Results of the study tour will be presented to the IMF’s Executive Board in February 2015. However, Cowen already made a number of remarks about the team’s findings. “Prudent macroeconomic management [by the government and central bank] has improved credibility of the local economy as well as external resilience. Over the past 18 months the country’s foreign exchange reserves have improved markedly,” he said last week in Jakarta.

Indonesia’s economic performance has been experiencing a slowdown in recent years, primarily due to external factors (such as low commodity prices). In 2011 the economy still grew at a solid pace of 6.5 percent year-on-year (y/y). Ever since, however, growth has slowed. In the third quarter of 2014, growth moderated to 5.01 percent (y/y), the slowest growth pace in five years. Although this development is a matter of concern (from the perspective of job creation and poverty reduction), it is also the result of prudent fiscal policies conducted by the government and central bank. Both authorities prefer financial stability over higher economic growth. For example, the government hiked prices of subsidized fuels twice in the past 16 months in a move to combat the wide current account deficit (which jeopardizes foreign confidence in the economy) and to free up funds for social and economic development (despite seriously weakening the people’s purchasing power on the short term). Such structural reforms are needed to foster higher economic growth in the future (President Joko Widodo has set the ambitious target to post a +7 percentage point GDP growth rate by the end of his term in 2019). The central bank (Bank Indonesia) responded by raising its key interest rate (BI rate) gradually from 5.75 percent in June 2013 to 7.75 percent in November 2014, as well as targeting for slower credit growth, thus limiting economic expansion.

Indonesia's Quarterly GDP Growth 2009–2014 (annual % change):

Year	Quarter I	Quarter II	Quarter III	Quarter IV
2014	5.22	5.12	5.01
2013	6.03	5.89	5.62	5.78
2012	6.29	6.36	6.16	6.11
2011	6.45	6.52	6.49	6.50
2010	5.99	6.29	5.81	6.81
2009	4.60	4.37	4.31	4.58

^{Source: Statistics Indonesia (BPS)}

Gross Domestic Product of Indonesia 2006-2013:

	2006	2007	2008	2009	2010	2011	2012	2013
GDP (in billion USD)	285.9	364.6	432.1	510.2	539.4	706.6	846.8	878.0
GDP (annual percent change)	5.5	6.3	6.1	4.6	6.1	6.5	6.2	5.8
GDP per Capita (in USD)	1,643	1,923	2,244	2,345	2,984	3,467	3,546	3,468

^{Sources: World Bank, International Monetary Fund (IMF) and Statistics Indonesia (BPS)}

Bank Indonesia's BI Rate:

Cowen added that structural reforms are needed to deepen the country’s financial markets and to close the infrastructure gap (referring to the country’s lack of quality and quantity of infrastructure thus resulting in high logistics costs and weak competitiveness of Indonesian businesses). For the middle-term Cowen estimates that Indonesia’s GDP growth will be about 6 percent (y/y) as the global economic environment is not conducive yet. Global economic growth remains sluggish implying that commodity prices continue to face downward pressures (Indonesia is an important crude palm oil, rubber and coal exporter). Meanwhile, monetary tightening in the USA is most likely to cause capital outflows from emerging markets including Indonesia. In 2015, Cowen expects the economy of Indonesia to grow 5.1 percent (y/y), similar to this year’s expected performance, as he detects an improvement in (public) investments as well as improved manufacturing exports. Meanwhile, inflationary pressures (inflation may accelerate to over 7 percent y/y by the year-end after the November subsidized fuel price hike) are of a temporary nature and estimated to ease to the range of 3 to 5 percent (y/y) in 2015.

Inflation in Indonesia:

Month	Monthly Growth           2013	Monthly Growth           2014
January	1.03%	1.07%
February	0.75%	0.26%
March	0.63%	0.08%
April	-0.10%	-0.02%
May	-0.03%	0.16%
June	1.03%	0.43%
July	3.29%	0.93%
August	1.12%	0.47%
September	-0.35%	0.27%
October	0.09%	0.47%
November	0.12%	1.50%
December	0.55%
Total	8.38%	5.75%

^{Source: Statistics Indonesia (BPS)}

Indonesia’s wide current account deficit is expected to ease to 2.75 percent of GDP in 2015. This deficit, which indicates that the country is dependent on foreign funding, is a thorn in the eye of investors and therefore makes the country highly vulnerable to capital outflows in times of global shocks (for example the looming higher US interest rates in 2015). After hitting a record high of 4.4 percent of GDP in the second quarter of 2013, the current account deficit has improved but quite slowly. At the end of 2014, the deficit is expected to be about 3 percent of GDP (improving from 3.3 percent of GDP last year). In 2015 it will improve due to an expected improvement in the country’s manufacturing exports as well as limited oil imports after the subsidized fuel price hike.

Indonesia Current Account Balance (% of GDP):

Macroeconomic Indicators of Indonesia:

	2009	2010	2011	2012	2013	2014	2015
• Gross Domestic Product   (annual percent change)	4.6	6.1	6.5	6.2	5.8	5.1¹	5.1¹
• Consumer Price Index   (annual percent change)	4.8	5.1	5.4	4.3	8.4	8.0¹	4.0¹
• Public Debt   (percent of GDP)	28.6	27.4	26.6	27.3	28.7
• Exchange Rate   (IDR/USD)	10,389	9,074	8,773	9,419	11,563	11,800¹	11,800¹
• Current Account Balance   (percent of GDP)		0.7	0.2	-2.8	-3.3	-2.9¹	-2.4¹
• Population   (in millions)		241	244	247	250	253¹	255¹
• Poverty   (percent of population)	14.2	13.3	12.5	11.7	11.5	11.3
• Unemployment   (percent of work force)	7.9	7.1	6.6	6.1	6.3	5.9
• Foreign Exchange Reserves   (in billion USD)	66.1	96.2	110.1	112.8	99.4	111.1²

^{¹ indicates a forecast
² at end-November 2014
Sources: World Bank, Statistics Indonesia, Bank Indonesia and International Monetary Fund (IMF)}

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