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NEWS UPDATES Asean Affairs   19 April  2012

IMF revises down Indonesia’s growth estimates

 19 April, 2012

The International Monetary Fund (IMF) has cut its estimates on Indonesia’s economic growth this year as potential spillovers from global risk aversion and uncertainty will likely continue.

The country’s economy will likely grow by 6.1 per cent in 2012, lower than an earlier estimate of 6.3 per cent, the IMF said in its latest flagship World Economic Outlook, titled “Growth Resuming, Dangers Remain”, released on Tuesday ahead of its annual Spring Meeting.

That is markedly lower than the government’s growth target of 6.7 per cent, the Bank of Indonesia’s estimate of 6.3 per cent and a recently announced Development Bank (ADB) growth forecast of 6.4 per cent.

Deputy division chief of the IMF’s research department, Abdul Abiad, said that like other Asean countries, the moderation of Indonesia’s growth was caused by external slowdowns, given the open nature of its economy.

"Downside risks are mainly the same with many open economies, especially for re-intensification of the euro-area crisis, and risks emanating from the possibility that we may get an oil-price shock because of the tensions in the Middle East,” he told The Jakarta Post after launching the report in Washington.

In the report, the IMF said global growth was improving slowly as the United States’ economy recovered and fiscal consolidation was in effect in the eurozone, but the risk of another crisis “is still very much present” and could affect both advanced and emerging economies.

The global economy is projected to expand by 3.5 per cent this year and reach 4.1 per cent next year, while the emergence of Asia, comprising newly industrialised countries like Korea and Singapore and developing nations such as China, India, Indonesia, Thailand and Vietnam, will likely grow by 6.8 per cent this year and 7.4 per cent
in 2013.

Milan Zavadjil, the IMF’s senior resident representative for Indonesia, pointed out that an important risk to the near-term Indonesia’s outlook would be a deterioration in global prospects, especially a possible downturn in China, which would dampen commodity prices. Indonesia exports a large bulk of its natural resources, such as coal, rubber, palm oil, nickel and aluminum, to China, its largest trading partner at present.

Indonesia also remains vulnerable to capital outflows due to a relatively larger share of debt held by foreign investors amid a possible increased global risk aversion, Milan said.

The planned fuel-price hike could also impact household consumption, but it would be necessary in the medium term as it would allow bigger spending on infrastructure and social protection, he added.

"In the fiscal area, continued efforts at subsidy reform as well as revenue mobilisation and improved expenditure execution are needed to fund higher infrastructure spending by the government and social expenditure,” he said.

Crude oil prices have risen higher than expected in the past few months, pushing up the allocation of fuel subsidies in the 2012 state budget and creating concerns that the government would reduce public spending.

In a recent plenary session, the House of Representatives allowed the government to increase fuel prices only if the average Indonesian Crude Price (ICP) in the past six months was 15 per cent higher than the US$105 per barrel assumed in the revised budget. As of March, the average price was $116 per barrel.

The government has considered reviving a plan to restrict subsidised fuel from private cars to partly overcome the continuing budget deficit.

On the macro-stability side, as domestic demand and credit growth remained strong, the Bank of Indonesia will be required to tighten measures to stabilise inflationary expectations, particularly due to the potential fuel price, according to Milan.

"Further efforts to improve the business climate would also support the strong pick-up in investment that has taken place over the past few years,” Milan said.

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