Strong Domestic Demand Cushions Indonesia from Global Uncertainty

Robust economic outlook, with worries about inflation

Infrastructure investment would promote medium-term growth

IMF advises vigilance over capital flows

In an interview with IMF Survey online, to coincide with the publication of the country’s Article IV report, the IMF’s mission chief, Thomas Rumbaugh looks at the prospects for this large Asian economy.

IMF Survey online: what are the economic prospects for Indonesia?

Rumbaugh: The outlook is very robust. In the near term we expect Indonesia to continue to grow above 6 percent both in 2011 and in 2012. We say this despite the global volatility we see because the domestic foundation of economic growth in Indonesia is so strong. We see strong credit growth, and despite lower growth in the rest of the world, we think that Indonesia is still going to grow at a strong rate.

In fact, the outlook is so robust in 2012 that we're a little bit worried about inflation picking up and we think that's something the authorities are going to need to watch closely.

Over the medium term we see Indonesia continuing to grow and develop. In fact, they have the potential to raise their growth rate even more over the medium term, but to do that they have to invest more in infrastructure. Improvements need to be made to highways, ports, and other areas across the country, and in some of the more remote regions. If they do that, we think the growth rate can be even higher than 6 percent. Perhaps even above 7 percent.

IMF Survey online: You have mentioned the threat of inflation; can you elaborate on that risk?

Rumbaugh: Recent developments in inflation have been relatively benign, especially after adjusting for swings in food and gold prices. However, we believe that there are still inflation risks for 2012 and the period ahead.

Domestic demand conditions are still quite robust—GDP growth is strong, as are production indicators. Credit growth is high and, in addition, the Indonesian government has committed to reduce expensive energy subsidies. Electricity tariffs are likely to be increased next year, and fuel prices are expected to rise at some point. When this happens, policies will need to be adjusted to ensure those price adjustments do not spill over into overall inflation.

IMF Survey online: Many countries in Asia have been in receipt of large capital inflows. What’s been the impact of such inflows on Indonesia?

Rumbaugh: Capital flows have been volatile to Indonesia as they have been to all...