(EnergyAsia, July 18 2012, Wednesday) — Indonesia’s economy will again perform well this year, growing by 6.1% to follow on last year’s 6.5% expansion, said the International Monetary Fund (IMF).
An IMF study team which visited the country from June 25 to July 6 said Indonesia would have to watch out for knock-on effects from the “renewed weakness” in the global economic environment.
It noted that Indonesia’s external current account has turned from a surplus to a small deficit recently as exports fell by more than imports, reflecting a combination of the deteriorating external environment and continued strong domestic demand.
Easy domestic monetary conditions, combined with the weaker current account, are contributing to pressure on the local currency during bouts of global risk aversion, said a statement issued by Milan Zavadjil, the IMF’s senior resident representative.
However, the IMF team said Indonesia has sufficient foreign reserves, while the central bank’s policy mix of letting the exchange rate adjust and increased supply of foreign exchange is softening the impact.
Led by its Asia Pacific division chief, Sanjaya Panth, the IMF met with the government leaders and Bank Indonesia to discuss global and local economic developments as well as public and private representatives.
Of last year’s economic performance, the IMF said the 6.5% rate of growth was the highest in over a decade.
“Inflation is currently within the central bank’s target range, credit growth is robust, and measures of business and consumer confidence remain strong,” the agency said.
“Growth is expected to continue to ease modestly in the near term. The current account should end the year with a deficit of about 1% of GDP, which is fully consistent with Indonesia moving towards its medium-term equilibrium as suggested by fundamentals.
“A somewhat widened budget deficit is appropriately helping offset the impact on growth of slowing external demand. On this basis, GDP growth is projected at 6.1% in 2012 but should pick up again subsequently.
“Annual inflation bottomed out at 3.6% in January but has since edged up to 4.5% and is expected to reach 5 percent by year-end, still within the authorities’ target range.
“The external environment continues to pose risks to this outlook. Risks include an intensification of the Euro area problems, as well as a sharper-than-expected slowdown in China.
“Exchange rate flexibility, combined with interventions to smooth temporary sharp mismatches in supply and demand of foreign exchange, is key to helping buffer the economy from shocks.”