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IMF still upbeat on RI despite lower growth forecast
The International Monetary Fund (IMF) has cut Indonesiaâs 2015 economic growth forecast but maintains optimism over reforms that could unlock growth potential against the backdrop of sluggish global economic conditions
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The International Monetary Fund (IMF) has cut Indonesia's 2015 economic growth forecast but maintains optimism over reforms that could unlock growth potential against the backdrop of sluggish global economic conditions.
Southeast Asia's largest economy is expected to grow by 5.1 percent next year compared with the previous forecast of 5.5 percent and the government's 5.8 percent target, as domestic consumption and investment ' which made up over three quarter of the country's economy ' are expected to grow at slower rates than previously expected, said IMF Asia-Pacific department advisor David Cowen.
'On the other hand, we're more positive on public investment next year,' Cowen told a group of journalists on Thursday after a two-week mission in the country meeting a wide range of stakeholders from government and central bank officials to business groups and the civil society. 'The new government seems to be bringing some reform priorities that will be important in raising potential growth in Indonesia.'
The Indonesian economy slowed to 5 percent in the third quarter this year, a level unseen since 2009 as fixed investments, which account for a third of the country's economy, grew at the slowest pace since the global financial crisis, while exports contracted compared to a year earlier against the backdrop of weak improvement in the world's largest economies that include China, Japan and Europe.
'Financial conditions in Indonesia have tightened in the second half of the year. There we've seen slowing credit growth, slower revenue growth among major corporates and rising borrowing costs and signs that while the overall banking system remains very healthy, banks themselves have to be more aggressive in terms of raising funding,' Cowen said.
In agreement with the IMF's analysis, Morgan Stanley's Asia-Pacific research team wrote in their latest report dated Dec. 18 that tight financial conditions have affected domestic demand and corporate spending. 'The overall growth trend in Indonesia has weakened further in November due to a combination of sluggish domestic demand growth and softer external demand growth after some improvement in the previous two months,' the report reads.
Bank Indonesia (BI) last month raised the benchmark interest rate by 25 basis points to 7.75 percent to stem inflationary pressures from a government's policy that raises the price of subsidized fuel, against the backdrop of banks already struggling to meet their lending target this year and competing to grab consumers' funds as an impact of the central bank's 175 basis points rate hike last year ' the most aggressive tightening cycle in almost eight years.
'BI's policy stance is rightly pointed on maintaining stability. Indonesia with its current account deficit will need to ensure that inflows of both FDI [foreign direct investment] and portfolio continue to remain supportive. And in our view the current policy stance is well calibrated toward maintaining positive market sentiments and investor confidence,' he added.
Most recently, the rupiah, which is included in the world's 'fragile five' currencies by Morgan Stanley for those most volatile to external risks, earlier this week touched the lowest level since the 1998 Asian financial crisis of nearly Rp 13,000 against the dollar as the US' strengthening economy and currency have made investors dump emerging market currencies, including Indonesia's, in search for safer investments.
'We've seen developments in recent days. There's been some bond and equity outflows since the beginning of the month but from our perspective that's not indicative at the moment of any serious distress here in Indonesia,' Cowen of the IMF said.
Maybank's analysts' research on Indonesia also predicted that narrower current account deficit and greater investment flows in the future could prevent the rupiah from depreciating further.
'Improving domestic growth prospects [...], the expected BI rate hike of 25 basis points [in the second half of next year] to smooth the volatilities in the rupiah and the economic recovery in the US is likely to be positive to the rupiah, but should only partially mitigate the upswing in the rupiah against the US dollar,' they wrote.
Indonesia's current account ' which is an indicator of an economy's health that combines net exports earnings and other revenues and transfers from abroad ' broke the 3 percent barrier last year, making it a major worry among investors that sold off assets during the time, putting pressure on the rupiah.
'We believe there's still room to bring down the current account deficit,' IMF's Cowen said, predicting a lower deficit of between 2 to 2.5 percent next year. 'For the current account [the recent drop in] oil is a positive story,' he added.
However for the fiscal account, according to him, there needs to be some replacement revenue for oil and gas revenues if oil prices continue to slide. The government is assuming US$105 per barrel in the state budget for the nation's oil benchmark Indonesia Crude Price (ICP) whereas the World Bank said the price might average $85 a barrel next year as global benchmark oil prices have recently shrank to below $65 per barrel.
'There needs to be some fiscal measures in the 2015 budget to maintain sound fiscal position,' Cowen said. 'Now is the time to be envisioning, and from our discussions with BI and the government we're confident that they will take the necessary measures to manage or to continue managing these external pressures well and change policies as necessary to bolster confidence and aim for resiliency in the economy.'
During the two-day heavy selling pressure of Indonesia's bonds and equity earlier this week, officials calmed the market by announcing in a press briefing that they have prepared measures to defend the rupiah and boost the country's overall economy.
The measures include a possibility for the government to buy back bonds to stabilize the falling market ' after BI intervened to buy Rp 1.7 trillion (US$135.36 million) in assets using its forex reserves earlier this week, Another includes the nation's recently launched online investment permit system that streamlines all licensing procedures to the Investment Coordinating Board (BKPM).
It is expected to ease and lure direct investments, as the government will be opening up a lot of infrastructure projects to bolster growth here including the plan to generate 35,000 megawatt power plants. It has also raised subsidized fuel prices to give fiscal room in the state budget for more productive spending.
