Economic policy is focusing on macro stabilization. To check inflationary pressures and support the rupiah, the central bank raised its policy rate from 5.75% to 7.5% between mid-June and mid-November 2013, and around where it is set to remain over an extended period. The authorities also tightened reserve requirements and macroprudential regulations last year to moderate credit expansion. In addition, the fiscal deficit is being kept around 2.5% of GDP, although greater-than-planned fuel subsides because of the delay in raising administered prices require offsetting spending restraint.
The measures have lowered the current account deficit, assuaged market sentiment and stabilized the rupiah, but are also slowing economic growth. Growth eased to 5.8% in 2013 from 6.2% in 2012, while we project growth of 5% this year and 5.6% next year. The current account deficit moderated to around $4 billion in the first quarter of 2014 from a record high of $10 billion in the second quarter of last year due mainly to lower imports. While macro stabilization is set to take hold, the onus of advancing structural reforms will fall on the next government after presidential elections on July 9.
While the PDI-P party won the April parliamentary elections, it secured only 19% of the popular vote and has to depend on coalition partners to form the next government. Although its well-regarded candidate, Mr. Joko Widodo, has chosen the pro-business former Vice President Jusuf Kalla as his running mate and should become the next president in mid-October, he will form another coalition government, which, along with a fractious and divided parliament, may constrain his ability to push needed structural reforms. In addition, inward FDI is being negatively impacted by policy uncertainties in the trade and investment regime along with burdensome regulations.
March 12, 2014
The government is persevering with measures to mitigate vulnerabilities and put the economy on a firmer macroeconomic footing. Monetary policy is being kept tight to lower the elevated current account deficit and inflation, with possibly more rate increases later this year. Further fiscal restraint and subsidy reform is planned. While macro stabilization should take hold, there is a need for strong political leadership to tackle the structural challenges and reinvigorate growth after the upcoming elections.Read More
November 05, 2013
The limitations of dependence on commodity exports and domestic credit growth were evident in acute external pressures over the summer, exacerbated by the midyear sell-off in emerging markets. The tightening of macroeconomic policies and more difficult external conditions implies a significant slowing of growth momentum.Read More
August 05, 2013
The belated hike in administered domestic fuel prices and monetary tightening should help foster the correction of macroeconomic imbalances and bolster the sagging rupiah, but at the cost of slower growth.Read More
March 12, 2013
Subsidies have become a pressing problem in the current context of the emergence of an external constraint for the first time in more than a decade. In the absence of corrective fiscal and monetary steps, pressures for a market-induced adjustment are likely in the run-up to next year’s national elections.Read More
February 14, 2013
The large current account deficit along with easy monetary conditions, rising energy subsidies and recent trade and investment policy missteps brought downward pressures on the exchange rate. The rupiah is at risk of weakening further before a delayed policy response prompts a gradual firming by the end of the year.Read More
July 31, 2012
The fall in oil prices means that the trigger point for the government to raise domestic fuel prices closer to market levels will not be reached this year. While this also means that oil subsidies will remain high, greater-than-planned revenue growth and spending restraint should contain the budget deficit.Read More
April 10, 2012
The government remains committed to a small budget deficit and low public debt, although the failure to hike administered domestic fuel prices closer to market levels leaves fiscal policy exposed to an oil price shock. A long delay in adjusting prices also threatens to undermine investor and credit confidence.Read More