Corrective macroeconomic policies are being put in place in response to market pressures. The government hiked gasoline prices by 44% and diesel prices by 22% in late June to check surging energy subsidies. The central bank raised its policy rate several times between mid-June and mid-November to check inflationary pressures and support the rupiah. It also tightened reserve requirements and macroprudential regulations in mid-August to contain credit expansion. In late August, the authorities extended tax incentives to labor-intensive exports, hiked tariffs on luxury imports and eased restrictions on short-term external borrowing by banks along with other foreign currency liquidity-enhancing steps. The investment promotion regime is to be revised.
The measures are aimed at assuaging market sentiment and stabilizing the rupiah, but are also slowing economic growth. The central bank revised its 2013 growth forecast down to 5.5-5.9%, while we project growth of 5.6% this year and around 5% next year. Meanwhile, weak exports and greater imports shifted the current account from a surplus of $1.7 billion in 2011 to a deficit of $24.4 billion in 2012. The deficit further rose from $5.8 billion in the first quarter of 2013 to a record high of $9.8 billion in the second quarter before edging down to $8.4 billion in the third quarter. The large external financing needs and investor concerns led to downward pressures on the exchange rate. The rupiah slipped from Rp9433/$1 in mid-2012 to a four-year low of Rp12028/$1 in late November before stabilizing slightly above that level.
- The 12-month increase in consumer prices rose 8.4% in November from 5.9% in June with the fuel price hike.
- The central bank hiked the policy rate from 5.75% to 6% in mid-June, to 6.5% in mid-July, to 7% in late August and progressively to 7.5% between September and mid-November.
- In mid-August, the secondary minimum reserve requirement was raised to 4% from 2.5% and the upper limit of the loan-to-deposit rate was reduced to 92% from 100%.
- The revised budget calls for the deficit to rise from 1.8% of GDP in 2012 to 2.4% in 2013 with the delayed fuel price hike contributing to larger-than-planned outlays on energy subsidies along with the cash compensation program. The 2014 budget calls for expenditure restraint to lower the deficit to 1.7% of GDP.
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
February 17, 2012
The commitment to maintaining a small budget deficit and low public debt is a key source of strength for the economy. Fiscal restraint and lower inflation are also allowing the central bank to respond to concerns of a slowdown in external demand by easing monetary policy.Read More