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Indonesia short on policy ammunition as it targets higher growth

Bloomberg News - January 6, 2020

Karlis Salna – Indonesia's government and central bank are running into policy limits as they try to stimulate Southeast Asia's largest economy.

Authorities are predicting growth in 2020 will be the fastest in seven years despite lingering trade tensions between the U.S. and China and subdued global demand. Yet policy options to spur demand are limited: The central bank is already taking a more cautious approach after four interest rate cuts last year, while a revenue shortfall is pushing the budget deficit close to the legally mandated cap of 3% of gross domestic product.

"Fiscal stimulus as this point is more effective than adjustments in monetary policy, and the government needs to be more proactive," said David Sumual, chief economist of PT Bank Central Asia in Jakarta. But the deficit ceiling "locks us into a soft pro-cyclical policy," and even if the deficit were pushed to the limit this year it would only add 60 basis points to the growth rate, he said.

Economic growth has been hovering around the 5% mark for several years now. The government forecast 5.1% for 2019 – down from an initial 5.3% – and sees growth rebounding to as much as 5.6% this year.


To support the economy, the central bank cut interest rates by a total of 100 basis points in 2019. It has kept the benchmark rate unchanged at 5% at its past two meetings as the Federal Reserve signals a prolonged pause in U.S. rates.

For its part, the government has been widening the budget deficit and planning to front-load spending in the first quarter to support the economy. Last year's deficit was projected to come in at about 2.2% of GDP amid a revenue shortfall. The government is targeting a deficit of 1.76% of GDP in 2020, but says it will be flexible on the target.

"On one hand we will continue to maintain prudent debt management, but at the same time we will also be supportive and flexible enough when the economy is under strong pressure coming from the global economy," Finance Minister Sri Mulyani Indrawati said in November.

Deficit ceiling

President Joko Widodo has held discussions with the cabinet about adjusting the deficit ceiling, but no immediate change is expected, according to the Finance Ministry.

Economists surveyed by Bloomberg expect the central bank to lower its benchmark rate to 4.75% this year. Inflation, which eased to 3% in November, is forecast to stay within the central bank's new target of 2%-4%, while the economy is projected to grow about 5%.

"The monetary policy space looks limited," said Charu Chanana, deputy head of Asia research at Continuum Economics in Singapore. "Fiscal easing is likely to be more effective to lift credit demand, and we see room for the Indonesian government to announce targeted measures despite the revenue and deficit ceiling constraints."

Source: https://www.bnnbloomberg.ca/indonesia-short-on-policy-ammunition-as-it-targets-higher-growth-1.136936