Indonesian Domestic Demand Likely to Sustain Robust Growth

Indonesia in strong position to weather global uncertainty

Growth projected at 6 percent this year, and 6.3 percent in 2013

Sustaining growth will require further reforms

“Corporate and financial sector balance sheets are healthy, and the sharp reduction in the public sector debt burden has provided the authorities with room to respond with further stimulus if needed,” says the IMF’s mission chief for Indonesia, Sanjaya Panth.

Growth eases

In their annual health check of the country’s economy, also known as the Article IV report, the IMF’s economists said Indonesia’s growth is expected to ease to 6 percent in 2012 from 6.5 percent in 2011, with weaker external conditions likely to be offset by moderate fiscal stimulus.

The country’s growth rate is then projected to recover to 6.3 percent next year and, with the right policies, is expected to rise further over the medium term, provided global economic conditions remain broadly favorable.

But the report predicts that strong domestic demand, underpinned by robust credit growth, will likely push inflation to 5 percent by year end, and the current account is expected to shift to deficit this year due to weak global demand.

Over the medium term, it is likely to remain in deficit because of high levels of capital goods imports financed by foreign direct investment.

“The projected current account deficit is not due to any fundamental weakness in the Indonesian economy, but is to be expected given the authorities’ welcome plans to boost investment over the medium term, and to strengthen social protection schemes,” said Panth.

Risk perceptions remain elevated

But Panth also warned that risk perceptions remain elevated, contributing to a decline in international reserves in the past year, and underscoring the importance of addressing policy uncertainties.

“To a large extent, global factors lie behind recent weaknesses but domestic policies have also played their part,” he said.

Easier monetary conditions may have contributed to inflation momentum, say the IMF economists, who urged Bank Indonesia to continue to move back to a more neutral policy stance by steering money market rates toward to their announced policy rate.

They welcomed the recent introduction of stricter prudential controls, such as tighter limits on car and mortgage lending as steps to safeguard financial stability, but said they could not substitute for traditional monetary policy tools in addressing macroeconomic risks.

...