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IMF Urges Indonesia to Strengthen Economy as Growth Slows

Indonesia’s government 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 in 2012, the IMF staff projected in its annual assessment. The World Bank also sees Indonesia’s growth slowing to 5.3 percent next year and called for structural reforms to support exports and increase foreign investment, it said in a quarterly report in Jakarta today.

Indonesia was one of the emerging markets most affected 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 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.”

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The IMF 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. The World Bank sees the gap decreasing to 2.6 percent of GDP next year, and said Indonesia needs to increase exports rather than regulatory measures to curb imports.

Indonesian “monetary policy should remain focused on anchoring inflation expectations and reducing balance of payments pressures,” according to the IMF report. 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, it said.

The country’s real exchange rate is broadly in line with fundamentals, with a further depreciation since September “suggesting possible undervaluation, ” the Washington-based fund said.

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Risks remain high, according to the World Bank. Expectations for the U.S. to reduce stimulus are keeping external financing conditions tight, while private consumption may come under pressure and the burden of fuel subsidies means the fiscal outlook is vulnerable. Monetary policy should not be the main policy response, it said.

“Measures to improve the business environment are key in attracting investment,” said Ndiame Diop, the World Bank’s lead economist for Indonesia. “Easing trade regulations and logistics would also deliver ‘quick wins’ to lift exports.”

Indonesia may open up its ports to 95 percent foreign ownership under private-public partnership term deals, and its airports to 49 percent foreign ownership in a planned review of investment restrictions, Mahendra Siregar, the head of the country’s investment coordinating board, said in Jakarta today.

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