IMF: we still like Indonesia

As the global economic outlook continues to deteriorate, Indonesia is well placed to weather the storm, the IMF has concluded in its latest annual review.

The ongoing economic problems in the US and Europe, and slowing growth in China and India, will be a slight drag on Indonesia’s prospects, with the IMF forecasting GDP growth of 6 per cent this year, down from 6.5 per cent last year, the highest level since before the Asian financial crisis.

But strong domestic demand, which accounts for two-thirds of GDP, will help protect south-east Asia’s biggest economy from the external slowdown, and the corporate and financial sectors are in a relatively healthy position from which to withstand any financial contagion.

The government, which like banks and companies has been wary of piling on too much debt since the meltdown of the Asian financial crisis, is also in a good position to provide fiscal stimulus to the economy, should it be necessary.

“Ideally, a list of infrastructure projects that could be quickly ramped up could be prepared, but given expenditure execution constraints, other avenues for injecting fiscal stimulus, such as direct cash transfers, may also need to be considered,” the IMF said.

Economists at Credit Suisse and Morgan Stanley, among others, have warned that the recent weakness in Indonesia’s current account is a sign of possible overheating, with imports surging to meet robust domestic demand but exports not keeping pace.

But the IMF supports the Indonesian’s government’s view that the weakness is “a natural and desirable consequence” of economic development as businesses import more of the machinery and other capital goods that are needed to deepen the base of the economy.

“The projected current account deficit is not due to any fundamental weakness in the Indonesian economy, but is to be expected given the authorities’ welcome plans to boost investment over the medium term, and to strengthen social protection schemes,” said Sanjaya Panth, the head of the IMF’s mission to Indonesia.

The IMF has not given government economic policy a completely clean bill of health, echoing warnings from the World Bank and others that Indonesia must continue with deeper structural reforms in order to improve competitiveness and revise its budget priorities to cut costly fuel subsidies and increase spending on much-needed infrastructure.

But, if the organisation is to believed, there are few major emerging Asian economies better placed to ride out these challenging global times.

Related reading:
Indonesia: archipelago apprehension, FT
Protectionism hits Indonesia’s reputation
, FT
Indonesia’s current account: a yawning gap
, beyondbrics