Abstract
Since the taper tantrum episode in mid-2013, the Indonesian authorities have taken significant steps to strengthen the policy framework, including through sound monetary management and a prudent fiscal stance, underpinned by historic fuel subsidy reforms in 2015. This has led to improved economic fundamentals. Nevertheless, Indonesia, like many emerging market economies (EMs) is facing pressures from shifts in the global economy due to slower growth and rebalancing in China, a severe down cycle in commodity prices, and monetary policy normalization in the United States. While the near-term outlook is positive, downside risks and vulnerabilities remain elevated.
The information below has become available following the issuance of the staff report. It does not alter the thrust of the staff appraisal.
1. Recent Developments
Real GDP in the fourth quarter of 2015 expanded by 5.0 percent (y/y), led by domestic demand, with higher public-sector investment and public consumption, while private consumption continued its steady growth. For 2015 as a whole, real GDP growth is estimated at 4.8 percent (4.7 percent in the staff report).
Headline inflation rose to 4.1 percent (y/y) in January 2016 on higher food prices, while core inflation continued to slow to 3.6 percent (y/y).
Based on latest preliminary data, the central government deficit in 2015 was about 2½ percent of GDP as revenues were somewhat higher and expenditures somewhat lower than the estimates in the staff report (2.8 percent).
The current account deficit for 2015 is estimated at 2.1 percent of GDP (2.0 percent in the staff report). In January 2016, a small trade surplus was recorded, mainly driven by lower oil and gas imports, while reserves fell to US$102.1 billion due to government external debt repayments.
2. The government has taken actions to liberalize the foreign direct investment (FDI) regime. The changes introduced on February 11 to the negative investment list of FDI include: caps on foreign ownership on 35 industries were removed (e.g., toll roads, tourism-related services, e-commerce, etc); majority foreign ownership for selected sectors are now allowed (e.g., warehousing, telecommunication networks and services, healthcare facilities, etc); and 20 sectors that were closed were partially opened (e.g., land transport, etc). On the other hand, the authorities restricted FDI in 19 sectors to protect small- and medium sized enterprises (e.g., small value construction, coral reef harvesting, plantations up to 25 hectares, etc). Overall, this constitutes further progress in the authorities’ reform agenda.
3. On February 18, Bank Indonesia reduced the policy interest rate by 25 basis points (bps), to 7 percent, and reduced reserve requirement by 100 bps, to 6.5 percent. Inflation remains within the target band (3–5 percent) and financial markets continue to be calm. Since end-2015 (as of February 18), the rupiah has appreciated by 2.1 percent with respect to the U.S. dollar, equity prices have risen by 4 percent, and the yield on 10-year government bonds has fallen by 69 bps.