IMF Downgrades Indonesia's Economic Growth in 2013 to 5.25%
The International Monetary Fund (IMF) expects the economy of Indonesia to expand by 5.25 percent in 2013, which is considerably lower than the IMF's earlier forecast. In its World Economic Outlook, released in April 2013, the institution set economic growth of Indonesia at 6.3 percent. However, after emerging markets were hit by large capital outflows when the Federal Reserve began to speculate about an end to its quantitative easing program (QE3), Indonesia's GDP growth assumptions were quickly revised downwards.
According to the IMF, the main factors that contribute to the downgrade are weak exports and a slowdown in investments. Amid weak global conditions in recent years demand for commodities plunged, resulting in low commodity prices. For Indonesia, which exports mostly commodities, this implies a large negative impact on its trade balance.
At the end of August, a delegation from the IMF went to Jakarta to conduct meetings with several public and private institutions, which include Indonesia's central bank, the government and several business parties. Based on these discussions, the IMF believes that the country's current account deficit will reach 3.5 percent of GDP in 2013, while inflation is expected to accelerate to 9.5 percent (but to ease to 6 percent in 2014).
The IMF advises the Indonesian government to prioritize several matters. Inflation should be limited to a safe rate, the current account deficit should be reduced, and the foreign exchange reserves should be kept at a healthy level. Furthermore, subsidy and tax reforms should be continued in order to provide more room for government spending on infrastructure.
However, the IMF believes that Indonesia's economic growth in 2014 will be better due to the improving global economy as well as increased spending in the context of legislative and presidential elections in mid-2014.