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IMF cuts Indonesian GDP growth outlook

The International Monetary Fund has become the latest global institution to slash Indonesia’s economic growth projection amid thickening gloom surrounding world trade that is expected to spill over into the domestic economy

Marchio Irfan Gorbiano and Adrian Wail Akhlas (The Jakarta Post)
Jakarta
Wed, October 16, 2019

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IMF cuts Indonesian GDP growth outlook

The International Monetary Fund has become the latest global institution to slash Indonesia’s economic growth projection amid thickening gloom surrounding world trade that is expected to spill over into the domestic economy.

In its October 2019 World Economic Outlook published on Tuesday, the Washington, DC-based institution expects the country’s gross domestic product (GDP) to expand just 5 percent this year — down 0.2 percentage points from its April projection — and 5.1 percent in 2020, down 0.1 percentage points from the earlier forecast.

Global growth in 2019 is seen at 3 percent, the lowest level since 2009 and down 0.3 percentage points from the April 2019 World Economic Outlook. While global growth is projected to pick up to 3.4 percent in 2020, that would still be 0.2 percentage points less than predicted in the April assessment.

“The momentum in manufacturing activity, in particular, has weakened substantially, to levels not seen since the global financial crisis,” the IMF report says.

“Rising trade and geopolitical tensions have increased uncertainty about the future of the global trading system and international cooperation more generally, taking a toll on business confidence, investment decisions, and global trade.”

The IMF has drastically cut the world trade volume growth projection to 1.1 percent this year from 3.4 percent forecast in April.

Indonesia’s economy expanded 5.05 percent year-on-year (yoy) in the second quarter, the lowest rate in two years, as exports weakened and household spending cooled down.

Trade data published by Statistics Indonesia (BPS) on Tuesday revealed that exports dropped 5.74 percent yoy in September to US$14.1 billion, marking an 11th consecutive month of yoy declines. Imports, meanwhile, were down 2.41 percent yoy in September at $14.2 billion, resulting in a trade deficit of $160 million.

The IMF’s downward revision comes just a week after the World Bank also slashed its 2019 GDP growth projection for Indonesia to 5 percent, which would be the slowest annual economic growth since 2016, according to the October 2019 edition of the World Bank’s East Asia and Pacific Economic Update published on Thursday.

The lower growth projection reflected weaker global demand and heightened uncertainty around ongoing United States-China trade tensions that had led to a decline in exports and investment growth, the report said.

“[The latest export value] is relatively resilient and a good figure amid the escalating trade tensions. This is a new normal for Indonesia this year,” said Bahana Sekuritas economist Satria Sambijantoro on Tuesday.

UOB Indonesia head of economic research Enrico Tanuwidjaja said Indonesia was still relatively isolated from the global trade system, and therefore worsening global trade conditions should not affect the country as much as more export-reliant economies.

He called on the government to focus on maintaining household spending, the primary driver of GDP growth in the country, amid a bleak world economy.

“We have a lot of room for fiscal leverage to maintain household spending,” said Enrico, adding that, aside from higher fiscal spending on social aid programs, fiscal incentives could also be directed toward industries that tended to use more local content to spur domestic economic activity.

The government projects a fiscal deficit equivalent to 1.76 percent of GDP next year, barely half of the 3-percent legal limit.

However, there was a risk lurking behind Indonesia’s relative isolation from global trade, Coordinating Economic Minister Darmin Nasution said.

“The weakness [of this position] is that, when the world economy recovers in the future, the growth of export-reliant countries will outpace ours,” he stated.

IMF economic counsellor and research department director Gita Gopinath said removing trade barriers as well as easing geopolitical tensions should be an ideal scenario to boost confidence and investment as well as arrest the decline in global manufacturing.

An alternative to such a scenario would be to utilize fiscal and monetary policies to boost domestic growth in a bid to raise potential output, said Gopinath.

“Monetary policy cannot be the only game in town and should be coupled with fiscal support where fiscal space is available and where policy is not already too expansionary,” she wrote in the report.

Bank Indonesia (BI) cut its key rate for a third consecutive month in September and relaxed down payment rules and intermediation requirements for banks to encourage more loans, boost economic activity and in turn stoke growth amid global risks.

Despite the IMF’s bleak outlook, Indonesian Employers Association (Apindo) deputy chairwoman Shinta Kamdani expressed confidence that the country's economy was still doing well as national growth was better than global growth.

"However, we still need the country's economy to grow by 7 percent per year to provide 2.2 million new jobs," said Shinta, adding that the current economic growth would prevent the government and private sector from providing much-needed new jobs.

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