The report instead commends the government for what it regards as its correct macroeconomic management, which focuses more on concerted measures to maintain macroeconomic stability amid the global economic uncertainty, financial-market volatility, ongoing US Federal Reserve money tightening and the escalating US-China trade war. 

The government gave a strong policy signal that it will consistently prioritize stability over growth by proposing on Aug. 16 tighter fiscal spending for 2019, an election year. The fiscal deficit will be cut to 1.84 percent next year from an estimated 2.1 percent this year. This fiscal consolidation reinforces Bank Indonesia’s (BI) monetary tightening, which saw the BI benchmark rate rise by 125 basis points over the past few months. Government capital expenditure was cut by over 14 percent in the first half because of delays in a number of infrastructure projects. 

These decisive and coordinated policy actions have significantly increased Indonesia’s resilience in the face of financial-market volatility even though the risks of capital outflows are likely to persist as a result of the shallowness of the financial sector and the relatively low levels of exports and foreign direct investment. 

But the Word Bank underlined that while the risks of economic growth slowing down persist, risks associated with a financial crisis for the country remain small thanks to the strong policy coordination between the fiscal and monetary authorities and sound economic fundamentals.

The high level of coordination between the fiscal and monetary policies will lend credibility to the macroeconomic management and protect the rupiah from financial-market volatility and prevent the rupiah from falling steeply. A fairly stable rupiah is crucial for macroeconomic stability because about 50 percent of the fiscal deficit is financed by foreign portfolio (short-term) capital. A fairly stable currency is also important to curb inflation because Indonesia imports 60 percent of its daily oil needs of 1.6 million barrels. 

But even though the tighter spending will have a negative impact on growth prospects, the growth rate for next year is still forecast at a respectable 5.2 percent, similar to this year’s economic expansion.

The report nonetheless warns of the risk of an accelerated normalization of US monetary policy in the light of that country’s strengthening economic conditions and low inflation. Hence, there is a risk that pressure from capital outflows may intensify, weighing on the rupiah and government bond prices. These risks in turn may force the government to further tighten its fiscal and monetary policies to curb capital outflows.

Hopefully, the political campaigning for next year’s general elections, which officially started Sunday and will run until mid-April, will proceed smoothly and peacefully without any violence or expressions of strong nationalistic sentiments against foreign capital. We badly need more foreign direct investment now to cut our current account deficit and to reduce our dependence on short-term capital, which tends to be highly volatile.

Popular

RI, Australia strengthen partnership on taxing crypto assets

Analysis: Indonesia denies normalization with Israel to enter OECD

Citroen to produce electric cars in Indonesia