The Indonesian economy proved resilient during the global financial crisis, and has since continued to grow at a robust rate. Increases in both foreign and domestic investment are expected to offset lower growth contributions from net exports as import demand rises. A key risk is deterioration in growth for advanced economies. Continued exchange rate flexibility will be important in managing volatile capital flows, and the build-up in reserves. Fiscal developments are consistent with the government’s firm commitment to sustainability and strong public finances.
The information below has become available following the issuance of the staff report. It does not alter the thrust of the staff appraisal.
1. Similar to other emerging markets, Indonesian financial markets have recently been experiencing large sell-off pressures as concerns about advanced economies intensified (see chart). On the back of heavy foreign selling, the Jakarta equity index plunged by almost 13 percent and Indonesia’s EMBI and CDS spreads rose 110-125 bps from end-August to October 3, in line with other emerging markets. At the same time, the rupiah has depreciated by about 4 percent against the U.S. dollar. Bank Indonesia (BI) intervened to stabilize the exchange rate and both BI and the government purchased government securities to support the bond market. Indonesian markets have recovered in the last week, with both bonds and the rupiah retracing most of their initial losses. Local 10-year government bond yields, for example, have fallen back to near their end-August levels, after rising 119 bps during September 9-22.
2. Headline inflation eased to 4.6 percent y/y in September from 4.8 percent in August reflecting a larger-than-expected fall in food prices after Ramadan and base effects related to the timing of the holiday relative to last year. Core inflation has slowed to 4.9 percent y/y from 5.2 percent y/y in August. The trade surplus widened to US$3.8 billion in August, from US$1.2 billion the previous month. Exports (f.o.b.) grew 37.1 percent y/y, while import growth (c.i.f.) slowed to 23.7 percent y/y in August.
3. On October 3, 2011, BI issued a new regulation requiring that export proceeds and external borrowing in the form of non revolving loan agreements and debt securities be received by domestic banks. However, there is no minimum period for which these funds need to be kept at a domestic bank, implying that firms are free to transfer them offshore immediately afterwards. The regulation will not take effect until January 2012, and there will be a one-year transition period.