The Indonesian economy continues to perform well, supported by robust growth and greater macroeconomic stability. A prudent mix of macroeconomic policies and structural reforms has helped the economy weather the commodity down-cycle and several episodes of emerging market (EM) financial turbulence. Securing and boosting growth in a more uncertain external environment requires maintaining policy buffers, while upgrading the medium-term framework through fiscal and structural reforms.
The following information, which does not alter the thrust of the staff appraisal, has become available following the issuance of the staff report.
1. The latest data released include:
Headline inflation fell to 3.0 percent (y/y) in December 2016 on lower food prices inflation, while core inflation remained stable at 3.1 percent (y/y).
Based on preliminary data, the central government deficit for 2016 as a whole was 2.5 percent of GDP, with somewhat lower government revenue (12.4 percent of GDP) and expenditure (14.9 percent of GDP) than those projected in the staff report. Collections from the tax amnesty for 2016 as a whole were Rp 107 trillion (0.9 percent of GDP).
International reserves rose to US$116.4 billion at end-December 2016, following a US$3.5 billion international sovereign bond issuance in December.
2. Financial markets have stabilized. Since mid-December, the rupiah has appreciated by around 0.1 percent vis-à-vis the U.S. dollar, the 10-year government bond yields has fallen by about 25 bps, and equities rose by 1.8 percent, with stable capital flows. Market movements appear broadly in line with those of regional EM peers.
3. On December 21, Fitch upgraded Indonesia’s sovereign rating’s outlook from “stable” to “positive” and affirmed the rating at BBB- (Investment Grade). The cited factors for the upgrade were: (i) the track record of macroeconomic stability; (ii) effective monetary and exchange rate policy in response to market turmoil; and (iii) a strong structural reform drive since 2015.