Indonesia entered the current global crisis with strong initial conditions. This 2009 Article IV Consultation highlights that notwithstanding the initial impact of the global crisis, the economy has rebounded in 2009. Macroeconomic policy responses have kept appropriate pace with the evolving economic conditions. Executive Directors have welcomed the resilience of the Indonesian economy, which owed much to strong initial fundamentals and appropriate policy responses. The financial sector has recovered from the adverse initial impact of the global turmoil, and investor sentiment has improved in recent months.
July 13, 2009
1. This statement provides information that has become available since the staff report was circulated to the Executive Board on June 30, 2009. This information does not alter the staff’s assessment of policy issues and recommendations contained in the report.
2. Financial markets have been generally quiet in the period leading up to and since the Presidential elections, which were successfully held on July 8. The official results will be known on July 27. The rupiah/U.S. dollar exchange rate has remained flat so far in July, government bond yields and CDS spreads have been stable, and foreign exchange reserves have remained broadly unchanged.
3. Recent data continue to point to a sustained rebound in economic activity. Leading consumption indicators continued to rise in May, including motor vehicle sales and retail sales, and consumer confidence reached a 4½-year high in June. Moreover, tourist arrivals are also on the rise and have increased by 4 percent in April and May (y/y). Reflecting rising commodity prices, non-oil exports have continued to recover in April and May relative to Q1 of 2009, and imports were also up in May in all groups, including raw materials and capital goods. On an annual basis, however, non-oil exports and imports are still down about 15 percent and 30 percent, respectively.
4. Headline inflation fell to 3.7 percent (y/y) in June, the lowest rate since June 2000. To a large extent, the deceleration reflected the unwinding of base effects (there was a 30 percent fuel price adjustment in late May 2008). Core inflation also slowed, but is still at 5.6 percent. While there may be some upward pressure on food prices as the economy recovers, year-end inflation could potentially finish slightly below the current projection of 5 percent.
5. In line with expectations, Bank Indonesia (BI) reduced the policy rate on July 3 by 25 basis points to 6.75 percent. Consistent with the staff report, BI noted that the room for more easing has become limited due to possible inflation risks in 2010.