The rise of China as a global economic superpower has also created challenges of its own, as China’s necessary rebalancing from manufacturing toward services and investment to a consumption-driven economy — critical for both China’s and global growth over the medium term — remains bumpy. As elsewhere, many Asian economies face risks associated with natural disasters and geopolitical and domestic political uncertainty. 

But all is not the doom and gloom, as Asia also has considerable strengths on which policymakers can build. The region remains the major engine of the global economy: It continues to provide nearly two-thirds of global growth. 

In addition, the region has policy buffers such as current account surpluses and high reserve levels and has used macroprudential policies well to help bolster financial stability. It is also likely to benefit from further economic integration and regional and multilateral trade agreements such as the Trans-Pacific Partnership.

Asia’s growth is moderating slightly, in line with the rest of the global economy. According to the most recent International Monetary Fund ( IMF ) World Economic Outlook, activity in the region moderated in the second half of 2015, and is expected to continue decelerating in the near term. GDP growth for the region is forecast at 5.3 percent in both 2016 and 2017, a meager 0.1 percentage points lower than in 2015. 

In addition to weaker global growth and sluggish trade, the moderation in regional growth also reflects the ongoing necessary rebalancing in China. But while external demand is relatively weak, domestic demand, particularly consumption, is expected to remain resilient across most of the region. 

The relative strength of domestic demand is due to generally low unemployment, lower commodity prices ( which is a boom to oil and commodity importers ), economic stimulus in some countries, and ongoing secular trends, including steadily rising disposable income.

The moderation in Asia’s growth masks important differences within the region. In China, GDP growth is expected to continue to moderate to 6.5 percent this year and 6.2 percent in 2017. This reflects ongoing rebalancing and other structural reforms, which are expected to continue to boost consumption and the services sector, while investment and manufacturing remains relatively weak until excess capacity is resolved. 

India, on the other hand, is expected to remain the fastest-growing large economy in the world, with GDP expanding by 7.5 percent in 2016-17, underpinned by strong private consumption and helped by lower oil prices. 

In Japan, GDP growth is projected to remain at 0.5 percent in 2016, slowing to -0.1 percent in 2017 as the widely anticipated consumption tax rate hike ( from 8 to 10 percent ) kicks in, though this forecast does not incorporate likely offsetting measures to support activity. 

In Indonesia, growth is projected to pick up moderately to near 5.0 percent for 2016. Domestic demand would be the main driver of growth, while exports are expected to remain weak reflecting low commodity prices. The recovery will be led by increased investment, especially, public infrastructure investment.

Despite a resilient outlook, downside risks continue to dominate the Asian economic landscape. Global growth could slow by more than expected or financial conditions could tighten suddenly. As many economies in the region have seen debt levels rise rapidly over the last decade, a combination of slower growth and higher borrowing costs could tip some corporates and households over the edge and further constrain growth. 

In addition, regional growth is more dependent on China than ever before, which presents both challenges and opportunities. While rebalancing in China is a price worth paying for in terms of durable and resilient growth over the longer term, the short-term transition is likely to be bumpy and the impact on countries and markets is likely to vary. 

Countries that export goods that support China’s investment and construction ( producers of metals, for example ) would be adversely affected, while others that export consumer goods to China or are destinations for rapidly-growing Chinese tourism could benefit. 

In addition, China’s move to higher value-added production will provide opportunities for other Asian countries, particularly in labor-intensive sectors, such as apparel, footwear, furniture and plastic toys. Already Bangladesh, Cambodia and Vietnam have seen market share gains in these sectors. 

Financial linkages are also growing with regional markets becoming more sensitive to shocks from China after the global financial crisis. Over time, though, as economic rebalancing makes China’s growth model more resilient and sustainable, the region is likely to benefit. 

In Indonesia, the economy has shown resilience to the shifts in the external environment. In fact, economic performance in 2015 was among the best in emerging markets countries. Going forward, however, growth is likely to be more challenging to achieve now that commodity price boom has ended. The authorities are aware of this and are already focusing on a series of measures to protect and even increase growth and inclusion. 

The challenge is to follow through on the reforms that have been launched and undertake further macro-critical reforms to boost productivity and diversify growth away from commodities, while continuing to strengthen the external position and preserve financial stability and fiscal buffers. 

On the fiscal front, the government needs to upgrade the strategy for mobilizing tax revenues to create space for higher social and infrastructure spending, which are key priorities of the authorities. Consideration should be given to taking early actions to increase tax revenues in 2016, including through a moderate increase in excises on fuel, tobacco and vehicles. 

Fiscal policy should be guided by a medium term plan, including an enhanced revenue strategy of risk-based tax administration and broadening the base of the value-added tax and income tax. On monetary policy, the recent policy interest rate cuts are appropriate given benign inflation and stable and external conditions. 

Further, Bank Indonesia will need to continue to carefully analyze inflationary and external pressures before considering additional cuts. Continued exchange rate and bond yield flexibility will remain important buffers, combined with judicious use of international reserves, if needed, to avoid excessive volatility in the exchange rate. 

To unlock Indonesia’s growth potential, the government should further accelerate reforms to modernize the economy, reinvigorate investor confidence and attract foreign direct investment. Continuous efforts should be made to introduce more flexibility to labor markets, strengthen education to support human capital formation, as well as deepen the financial system and make it more inclusive. 

While there are important challenges ahead, we believe that the current policy direction combined with Indonesia’s many strengths, including its young population, natural resources, and geographic location, bode well for the country’s continued economic and social development.

***

The writer is mission chief for Indonesia, Asia Pacific Department, International Monetary Fund.

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