Indonesia must strengthen buffers, policy mix to shun outflow: IMF

While the global financial stability is seen improving in the last 6 months, Indonesia must improve buffers and policy mix to counterbalance new downside risks that potentially lead to capital outflow, the International Monetary Fund (IMF) has said.

The Fund has retained from revising up its estimate for GDP growth in Indonesia this year — despite of its optimism on the global economic momentum, as imminent challenges are seen in the form of fiscal imbalances in the United States (US) and a shift toward protectionism.

IMF’s division chief for the Asia and Pacific department, Luis Enrique Breuer, said the capital flows could be volatile this year, as political and policy uncertainty in advanced economies potentially open new channels for negative spillovers.

“That’s why it is important for the country to protect its policy buffer: keep a good level of international reserves, keep the exchange trade flexible to allow rupiah to move up and down depending on supply and demand consideration, and maintain prudent fiscal and monetary policies,” he said in Washington on Wednesday.

So far, Luis further explained, Bank Indonesia’s (BI) monetary stance was appropriate by leaving the benchmark interest rate unchanged since November. “Again, it’s the right thing to do because of the higher uncertainties in the international financial market,” he said.

As for the right policy mix to address potential external financial volatility, the central bank must work with the government to protect the economic growth and stability, as well as maintaining the inflation rate at a low level.

“The policy mix in the context of Indonesia involves, on the one hand, maintaining a level of fiscal deficit. Last year it was a bit over 2 percent of GDP, which is okay. The other, has to do with monetary policy allowing a flexibility in the exchange rate policy and that is what the authorities have been doing in the last few months,” Luis said.

In its Global Financial Stability report, the fund warned that emerging markets—which include Indonesia—and developing economies remained at risk from a rapid rise in interest rates, US dollar appreciation and lower commodity prices.

“A sudden reversal of market sentiment could reignite capital outflows and hurt economic growth prospects, as could a global shift toward protectionism,” said IMF financial counsellor Tobias Adrian in a press conference.

Those risks could, according to IMF, exacerbate debt vulnerabilities and trigger the materialization of “contingent liabilities, in particular those related to implicit government guarantees on corporate borrowing."

Therefore, Tobias called for the advanced economies, especially the US, to propose policies that aim not only their economic growth but also avoid creating fiscal imbalances and negative global spillovers.

On the other hand, emerging market policymakers should address their external and domestic imbalances. “That includes improving corporate-restructuring mechanisms, monitoring corporate vulnerabilities, and ensuring banks to have healthy buffers,” he explained,

In its 2017 World Economic Outlook, the IMF set its forecast for Southeast Asia’s largest economy at 5.1 percent, unchanged from its earlier estimate made last year, affirming the government’s projection at the same level. It sees Indonesia’s annual growth rate at 5.3 percent in 2018.

“We think that many countries would love to grow by 5 percent. For large countries like Indonesia with GDP that almost [reaches] a trillion dollars, growing 5.1 percent is very fast. Remember we are still living with the legacy from the global financial crisis in the US,” he said.

The growth estimate is maintained even after the US President Donald Trump ordered a probe for potential trade abuse, which make Indonesian businesspeople worry over the potential drop in the future trade surplus with the US.

“We don’t see any bilateral risk that is large in the trade relation between us and Indonesia. We, in IMF, need to see concrete action to evaluate. We can’t speculate on what could happen. We haven’t seen anything concrete [from president Trump’s administration],” Luis said.