Abstract
Indonesia’ 2008 Article IV Consultation reports that Indonesia’s growth performance remains strong despite the deteriorating global environment. The economy remains vulnerable to shifts in investor sentiment, and volatility in the government bond market has increased. The new policy of increased reselling of official foreign exchange receipts from oil exports should support the rupiah and help dampen inflation, but a more automatic mechanism for recycling official reserves would, in addition, enhance liquidity and foreign exchange market development.
1. This statement provides an update on recent economic developments based on information received after the staff report was issued. The new information does not alter the thrust of the staff appraisal.
2. High-frequency indicators suggest that economic activity remains firm despite the rise in domestic fuel prices in May. Motor vehicle and motorcycle sales continued to rise rapidly in June (by 38 percent (y/y) and 46 percent, respectively). Cement consumption and investment imports remain strong as well, while exports have been growing by nearly 30 percent (y/y) in nominal terms. GDP growth in the second quarter is, therefore, expected to have remained above 6 percent.
3. Indonesian financial markets have strengthened in the last few weeks. Pressures in the government bond market have eased, reflecting market expectations that inflation may have peaked, a relatively positive budget outlook, and the favorable outcome of the sovereign issue in June. Ten-year government bond yields have declined by 175 basis points from the highs in mid-June, while the last bond auctions have attracted larger than expected demand. Despite renewed strains in global financial markets, foreign ownership of SBI (central bank notes) and SUN (government bonds) has increased by nearly $5 billion since mid-June, contributing to an appreciation of the rupiah of around 2 percent against the dollar.
4. The government presented an updated projection of the 2008 budget and announced some key features of its draft 2009 budget proposal. The 2008 fiscal deficit is expected to be 1.9 percent of GDP, slightly below the revised budget, on account of stronger revenues and some cuts in expenditure. Nevertheless, energy subsidies are projected to reach 5.7 percent of GDP, compared to 4.2 percent of GDP in previous projections. The draft 2009 budget proposal, which will be submitted to parliament in August, envisages a lower fiscal deficit of 1.5 percent of GDP, as tax revenues are expected to improve by 0.4 percentage points of GDP. The proposal aims at curtailing subsidized fuel consumption through the kerosene-LPG conversion program, while increasing infrastructure and development expenditure. The draft budget proposes a new revenue sharing mechanism with the regions and incorporates contingencies to protect the budget in case oil prices reach $160 p.b.