Strengthened Economic Fundamentals Enable Indonesia to Remain Resilient amid Global Policy Uncertainties

2018-12-19T00:23:15+00:00June 9, 2017|Press Release|

Strengthened Economic Fundamentals Enable Indonesia to Remain Resilient amid Global Policy Uncertainties

SINGAPORE, June 9, 2017 – The ASEAN+3 Macroeconomic Research Office (AMRO) conducted its Annual Consultation Visit to Indonesia from May 26 to June 2, 2017. Discussions centered on a wide range of issues regarding the Indonesia economic outlook, risks and vulnerabilities, medium- to long-term growth prospects, and structural challenges, and the relevance of policy measures.

The mission was led by Dr. Lee Jae Young, AMRO Lead Economist, and participated by Dr. Junhong Chang, AMRO Director, and Dr. Hoe Ee Khor, AMRO Chief Economist.

“Our preliminary assessment shows that growth in 2017 is expected to be around 5.1 percent, likely driven by investment and exports, and will further increase in 2018,” said Dr. Lee. “We project the current account deficit to be around 1.5 percent of GDP in 2017.”

According to the assessment, the current monetary policy stance remains appropriate in light of relatively subdued core inflation and the stronger external balance. Despite the upward trajectory of US interest rates, financial conditions in Indonesia are likely to remain relatively stable, as Indonesia’s strengthening economic fundamentals have diminished the risk of acute capital outflows. Moreover, the growth recovery is still nascent and will gain further recovery momentum, while core inflation has remained well anchored.

On the fiscal front, the mission welcomed the success of the tax amnesty program which provided a significant boost to revenue last year, and the strong revenue collection in the first quarter of the year. However, the mission noted that tax buoyancy remains relatively weak and it is important that the authorities continue to focus on long-term revenue enhancement measures—such as broadening the tax base, reducing exemptions, and improving tax compliance—to further enlarge its fiscal space to meet the higher infrastructure spending.

The banking system is sound with high capital and stable profitability, but continued monitoring on credit risk from smaller banks is warranted. On the other hand, the current level of non-performing loans (NPL) will potentially record a limited increase as some of the restructured loans may reemerge as NPL with the expiration of the loan restructuring program in the near term.

The authorities have made noteworthy strides in focusing their efforts on infrastructure investment and structural reforms, which are vital to raising the country’s potential growth. The government’s emphasis on infrastructure spending will not only support short-term growth but also enhance the country’s competitiveness through better connectivity and lower logistics costs, paving the way towards a higher growth path. Moreover, better infrastructure, along with deregulation and greater competition, as a result of the series of economic policy packages, will improve economic efficiency and aid in promoting long-term growth. The recent sovereign rating upgrade by S&P to investment grade was a welcome development, as it further strengthens investor confidence and should bring in more foreign investment to Indonesia.

During the visit, AMRO’s mission team conducted a series of meetings with the public sector, including the Ministry of Finance, Bank of Indonesia, and other government agencies; the private sector; academics; and peer international organizations, including the International Monetary Fund. AMRO would like to thank the Indonesian authorities and other counterparts for their kind collaboration and assistance during the mission. The visit to Indonesia has deepened AMRO’s understanding of the current macroeconomic and financial situation, as well as critical issues related to macroeconomic stability in Indonesia.

Media Contact

Huong Lan Vu
Public Relations Officer

Tel: +65 6323 9844
Email: vu.lanhuong@amro-asia.org