T

he International Monetary Fund (IMF) has downgraded its growth forecast for Indonesia this year while warning policymakers in the region that the time has come for '€œalert'€ as the global economy faces a broad-based slowdown of growth and tighter liquidity.

The fund expected Indonesia to grow at a mere 5 percent this year, lower than its previous estimate of 5.2 percent, as the weaker-than-expected global recovery would weigh on the economy, Kalpana Kochhar, an IMF deputy director for Asia and Pacific, said on Thursday.

She argued that Indonesia would be affected by the weak and uneven global economic recovery, as the slowing economies in China and Japan would have '€œsizable spillovers'€ on the rest of the region.

The IMF predicted that economies in the Asia Pacific region would see medium-term slowdowns, with the region'€™s economic growth slowing to 5.5 percent next year, from an estimated 5.6 percent this year.

The fund also predicted that China, Indonesia'€™s largest trading partner, would grow only 6.3 percent next year from a predicted 6.8 percent this year, with both rates being the country'€™s slowest economic expansion since 1990.

'€œBeyond the near-term, potential growth is declining across the region with reasons varying from demographics to slower productivity growth,'€ noted Kochhar.

She also warned policymakers over risks from '€œdisruptive currency movements'€ associated with asynchronous monetary policies in developed economies.

This, in turn, could affect financial stability in Asian countries with high levels of corporate leverage and foreign currency-denominated debts, according to the IMF executive. '€œVulnerabilities are rising, associated with rising domestic and foreign debt,'€ she warned.

'€œWhile still manageable, the margin for policy error is narrowing as global liquidity conditions begin to tighten. Now is the time for alert.'€

Indonesia, the largest economy in Southeast Asia, recorded only 4.7 percent gross domestic product (GDP) growth in the first quarter this year, the slowest in six years and since the global financial crisis.

Economic ministers, in response to the slowdown, have pledged to speed up the realization of government spending to support growth. At the moment, revving up domestic growth drivers such as consumer and government spending would be a rational strategy to reverse the slowdown, said Mari Elka Pangestu, an economist and a former trade minister.

'€œIf we want to push growth in the upcoming quarters, the focus should be on domestic drivers, because our exports are now hindered by weak external demand,'€ said Mari.

However, analysts have also warned that boosting GDP growth faster than Indonesia'€™s true domestic capacity might be a policy misstep, as the strategy could enlarge both the fiscal and current-account deficits, thus further destabilizing the economy.

Last year, Indonesia recorded a US$26.2 billion deficit in the current account, the broadest measurement of trade, with the shortfall equivalent to 3 percent of GDP, among the highest in the region. Boosting government spending could invite a stronger influx of imports swelling the deficit even more, economists say, suggesting Indonesian policymakers should prioritize stability over growth.

In its key policy recommendations, the IMF did not mention growth, but instead suggested Asian policymakers promote gradual fiscal consolidation, while also arguing that a tight-bias policy stance might still be warranted in some Asian countries to address financial stability.

'€œMacroeconomic stability is more important than higher real GDP growth for maintaining Indonesia'€™s [investment grade] rating,'€ Thomas Rookmaaker, a director of sovereigns for Fitch Ratings, wrote in an emailed statement on Thursday.

'€œIndonesia is limited in its ability to stem the country'€™s economic slowdown using fiscal and monetary policy, especially given the potential risks to macro stability,'€ he noted.

'€” Grace D. Amianti contributed to the story