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Statement by the IMF Staff Representative on Indonesia

Author(s):
International Monetary Fund
Published Date:
September 2010
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The information below has become available following the issuance of the staff report. It does not alter the thrust of the staff appraisal.

1. Economic recovery continued in Q2 of 2010 as indicated by the 6.2 percent annual real GDP growth. While private consumption continues to drive economic growth, the contribution from investment—including from rebounding FDI inflows—was significant. The recovery in credit growth has continued with July numbers showing an increase of 19½ percent (y/y). Despite continued export growth, the contribution of net exports declined somewhat with the acceleration of investment—related imports, but remained positive. The balance of payments surplus narrowed somewhat in Q2, primarily due to a slowdown in portfolio inflows driven by global turbulence related to the European debt crisis, and a marginally weaker current account amid strong imports. These developments are consistent with the projections for 2010 in the staff report.

2. Staff revised the 2010 inflation outlook upward by a ¼percentage point to 5 percent for the annual average and 6 percent at year end—the upper end of Bank Indonesia´s (BI) target range—reinforcing the case made in the staff report for the authorities to respond to inflationary pressures to keep expectations within the target range. Inflation has been driven by persistent increases in food prices, with annual headline inflation rising to 6¼ percent in July. Core inflation also increased in July to near 4 percent. While earlier signaling that the holding stance was consistent with the inflation target, BI´s August policy statement signaled some concern over price pressures.

3. Market sentiment remains upbeat and strong capital inflows continue. During July and August, the rupiah has been trading at about Rp 9,000 per U.S. dollar. Local government debt yields have continued to fall despite the uptick in inflation. Net foreign purchases of BI certificates (SBIs) kept pace with those of government notes at US$2 billion since the beginning of July, indicating continued appetite for SBIs despite the one-month holding period requirement announced on June 16.

4. The government revised down its estimate for the overall 2010 budget deficit to 1 percent of GDP from 2 percent, largely reflecting higher projected revenue as well as slower capital spending. The preliminary 2011 budget framework released on August 17 projects an overall deficit of 1¾ percent of GDP, reflecting a planned increase in capital spending and improved revenue collections (in line with staff projections).

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