IMF sees no downside risk to Indonesia outlook over US trade-probe

The International Monetary Fund (IMF) is optimistic that the US recent executive orders putting Indonesia in its trade-probe hit list will not harm the whole trade relationship between the two countries, calling it as not a “very compelling charge.”

IMF chief economist Maurice Obstfeld said the US would remain reliant to Indonesia for several goods, such as palm oil, as the world’s largest economy could not produce those goods locally in a massive scale.

“At some level […] trade is helpful for productivity as it allows specialization of production among countries. Indonesia is actually a deficit country itself, so I don’t see any charge [by the US] against Indonesia as being a very compelling charge,” he said to Indonesian journalist on the sidelines of IMF’s Spring Meetings on Thursday.

The US president Donald Trump had ordered a crackdown on “foreign importers that cheat” by signing two executive orders on March 31. Indonesia was in the 15th position on the list, with US$13 billion in trade surplus over the US, followed by Canada with $11 billion surplus.

China was in first with a $347 billion surplus followed by Japan, Germany, Mexico, Ireland, Vietnam, Italy, South Korea, Malaysia, India, Thailand, France, Switzerland and Taiwan.

However, IMF’s division chief for the Asia and Pacific department Luis Enrique Breuer said that the Fund did not see Trump’s measure as a downside risk to Indonesia’s growth, which it has estimated to reach 5.1 percent this year, as it had yet to be materialized.

“I think that the US policy is still being developed. It’s hard to give direct answer to something that's not there yet. I mean, we are not aware of the US following any specific policy with regard to Indonesia,” he said.

As for this year, he highlighted that the foundation of Indonesia’s growth was quite strong despite of the downside risks such as the sudden increase in the US Fed Fund Rate that may lead to currency volatility.

Maurice acknowledged that there has been increasing trend of trade protection, as the IMF’s data showed that there was a significant number of new protection measures that had been applied to 6.5 percent of merchandise imports.

“There is some conflicts between ‘talking the talk’ and ‘walking the walk’ on global integration since 2008 crisis. There has been uptick in protection measure, taking G20 for example. Taking it as a whole, new protection applied 6.5 percent of their merchandise imports. That is significant,” he said.

The IMF expected the trend would be reversed as the global economy was now moving into a better environment with higher growth. While he did not cite the US specifically, Maurice called for countries under trade dispute to file the case to the World Trade Organization (WTO).

“It really is injurious. It is important that trade dispute be handled through WTO process because they are there to protect everyone, prevent a sort of war each-against-all in the international arena,” he said.

However, as the political climate in the country was not pushing in that direction, the IMF forecast that shifting back the trend to the right track would be challenge in the future. “We at the Fund are talking about the importance of not only keeping trade barrier low, but also improve the distribution of gain and trade, making sure that no one left behind,” Maurice said.

All in all, the Fund was still optimistic that Indonesia would be doing well to achieve a 5.1 percent economic growth this year, and to 5.5 percent in the medium term, on the back of strong macroeconomic policy stance and sound fiscal reforms.

Maurice recommended the government to keep broadening its tax base, improve the business climate into a more friendly one for direct investment.

“Indonesia is not a country that we’re worrying about at the moment. It is doing well, that is not to say that there are no risks out there, and it could be vulnerable to protectionism as we discussed […] but the fundamental of the economy is quite great and the government has been pursuing a very constructural reform. They should continue with that,” he concluded.