International Monetary Fund chief economist Maurice Obstfeld, left, speaking at the 2018 IMF-World Bank Annual Meetings in Nusa Dua, Bali, on Tuesday. (Antara Photo/Nyoman Budhiana)

IMF Cuts Indonesia's 2018, 2019 Growth Forecast


OCTOBER 10, 2018

Nusa Dua. The International Monetary Fund has cut Indonesia's economic growth forecast for this year and next year due to global uncertainty, due in part to a trade war between the United States and China, and rising global oil prices.

According to the IMF's World Economic Outlook report, published on the sidelines of 2018 IMF-World Bank Annual Meetings in Nusa Dua, Bali, on Tuesday, the Indonesian economy is expected to grow 5.1 percent this year and next year, down from a forecast in April of 5.3 percent.

"Indonesia's growth has been a real success story, even though we have downgraded our growth forecast in the next couple of years due to number of factors: tighter global financial conditions, oil prices and the effect of US-China trade tension, and how those might affect Indonesia," IMF chief economist Maurice Obstfeld told reporters.

Southeast Asia's largest economy expanded by 5.28 percent in the second quarter from the same period last year, its fastest pace in the past five years. The government expected a growth pace of between 5.2 percent and 5.4 percent this year and set growth target of 5.3 percent for next year.

The IMF forecast considers the government's tax policy, administration and fuel subsidy pricing reforms that have been introduced since January 2015, and a gradual increase in social and capital spending over the medium term, in line with the fiscal space, according to the fund's report.

Still, for countries with Indonesia's income level, tax revenue should have been higher, which would allow investment in the country's education system, infrastructure and social safety net, Obstfeld said.

"Our sort of advice to all countries with Indonesia's income status is to look at those issues to try to raise the agility of the workforce, to raise the capital of the workforce, and to fight further against inequality," Obstfeld added.

The report also highlighted Indonesia's need to prioritize boosting economic growth by enhancing infrastructure, streamlining regulations in a bid to boost competitiveness, improving the quality of education, and easing labor regulations to support employment.

The IMF report is published twice a year – in April and October – and has been the reference for the government and public sectors on the global economic outlook.

The IMF has also downgraded the global economic growth forecast to 3.7 percent this year and next year, down 0.2 percentage points from its previous projections in April. The fund noted that tariff wars between the United States and China would drag global trade, while rising interest rates have forced emerging markets such as Argentina, Brazil, Indonesia, Mexico, South Africa and Turkey, to tighten monetary policies to cope with capital outflows.

Obstfeld said many emerging-market economies have managed relatively well to prevent further fallout.

Indonesian Finance Minister Sri Mulyani Indrawati, who is also attending the annual meetings, told reporters on Tuesday that the country cannot escape external factors that drag down the economy, but that the government and the central bank have implemented several measures to lessen the impact.

She said Bank Indonesia's decision to increase interest rates would attract investment, which is currently responsible for a third of the growth in the country's $1 trillion economy. But the central bank also allowed the rupiah to gradually weaken, forcing firms and consumers to trim imports but allowing revenue from manufacturing and commodity exports to increase, she said.

"If the [export] response can be more timely, it can cancel [out the impact of slowing investment]. Let's see if our industry can come up with strong response to this situation," the minister said.

The government has implemented measures to further boost the country's net exports by introducing higher import taxes on consumptive goods, from cosmetics to cars, but maintaining low tax levels on raw materials used in the manufacturing of goods destined for export.