Indonesia should continue shoring up its economy to better prepare for when the U.S. Federal Reserve starts reducing monetary stimulus, economists at the International Monetary Fund said.
Sluggish investment, weaker external demand and higher interest rates mean Indonesia’s economic growth will slow to between 5 percent and 5.5 percent this year and next, compared with 6.2 percent last year, the IMF staff projected in its annual assessment. It also forecast the current-account deficit as a percentage of gross domestic product will widen to 3.5 percent this year from 2.8 percent in 2012, before narrowing to 3.2 percent in 2014.
Indonesia was one of the emerging markets most hit by bond and equity outflows after May 22, when Fed Chairman Ben S. Bernanke said for the first time the central bank could trim its $85 billion-a-month in asset purchases. Bank Indonesia (BMRI) Governor Agus Martowardojo increased the benchmark rate five times since early June as he grappled with a current-account deficit that helped make the rupiah Asia’s worst-performing currency this year.
“Recent market volatility and reserve losses highlight the need to deal decisively with macroeconomic imbalances and contain financial stability risks,” IMF staff wrote in the report dated Nov. 1 and published today. “The current delay in tapering of unconventional monetary policies provides an opportunity to strengthen policy and financial buffers and improve market perceptions.”
According to the report, Indonesian “monetary policy should remain focused on anchoring inflation expectations and reducing balance of payments pressures.” Additionally, “fiscal policy should support monetary policy in this effort, led by tax and subsidy reforms; and the exchange rate and bond yields should continue to reflect market conditions in order to facilitate an orderly adjustment to a shifting global environment.”
The Washington-based fund also said the country’s real exchange rate is broadly in line with fundamentals, with a further depreciation since September “suggesting possible undervaluation.”
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