Robust domestic demand was offset in part by the weakness in exports to slightly lower real GDP growth to 6.2% in 2012 from a 15-year high of 6.5% in 2011, and it may fall further to around 6% this year and next with the adjustment under way. The slippage in exports and greater imports shifted the current account to a deficit of $24 billion in 2012 from a surplus of $1.7 billion in 2011. The rising deficit led to downward pressures on the exchange rate, with the rupiah slipping from Rp9433/$1 in mid-2012 to a three-year low of Rp9904/$1 in mid-January 2013, before trading around Rp9750/$1.
With the current account deficit remaining high, lagging reforms and policy missteps have meant that a growth-limiting balance of payments constraint has emerged. The budget deficit is small, at 1.8% of GDP in 2012 and 1.7% in 2013, but subsidies, largely for energy, amounted to 4.2% of GDP last year. Although they are planned to be reduced slightly to 3.4% this year and electricity tariffs are being raised, subsidies will exceed the plan unless administered domestic fuel prices are hiked.
In response to market pressures, the government recently announced that a revised budget is to be presented to parliament by mid-year, which will include a fuel price hike along with a cash compensation program for the poor. With parliamentary approval awaited, the large current account deficit and investor concerns mean that downward pressures on the rupiah are set to continue before a delayed policy response prompts a gradual firming by the end of the year. The central bank has so far kept the policy rate unchanged to support growth, but corrective steps are likely to accompany a fuel price hike.
- The 12-month increase in consumer prices edged down from a 22-month high of 5.9% in March to 5.6% in April, but the central bank’s target range of 5% plus/minus 1 percentage point for 2013 is unlikely to be met with the coming fuel price adjustments.
- The central bank has held the policy rate at 5.75% since February 2012, while the rate on its deposit facility, which sets the lower limit of its interest rate corridor, was raised by 25 basis points to 4% last August.
March 12, 2013
Subsidies have become a pressing problem in the current context of the emergence of an external constraint for the first time in more than a decade. In the absence of corrective fiscal and monetary steps, pressures for a market-induced adjustment are likely in the run-up to next year’s national elections.Read More
February 14, 2013
The large current account deficit along with easy monetary conditions, rising energy subsidies and recent trade and investment policy missteps brought downward pressures on the exchange rate. The rupiah is at risk of weakening further before a delayed policy response prompts a gradual firming by the end of the year.Read More
July 31, 2012
The fall in oil prices means that the trigger point for the government to raise domestic fuel prices closer to market levels will not be reached this year. While this also means that oil subsidies will remain high, greater-than-planned revenue growth and spending restraint should contain the budget deficit.Read More
April 10, 2012
The government remains committed to a small budget deficit and low public debt, although the failure to hike administered domestic fuel prices closer to market levels leaves fiscal policy exposed to an oil price shock. A long delay in adjusting prices also threatens to undermine investor and credit confidence.Read More
February 17, 2012
The commitment to maintaining a small budget deficit and low public debt is a key source of strength for the economy. Fiscal restraint and lower inflation are also allowing the central bank to respond to concerns of a slowdown in external demand by easing monetary policy.Read More
October 21, 2011
The central bank has combated the global contagion by stabilizing domestic bond markets in addition to intervening to support the rupiah. The vulnerability to volatile external conditions stems from the foreign holdings of domestic government securities, but the small fiscal deficit, low public debt and large official reserves should help preserve financial market stability.Read More
September 30, 2011
The central bank has been cautious about returning interest rates to pre-crisis levels and has sought to contain liquidity by hiking reserve requirements. A reduction in inflation, slower credit growth and a small budget deficit pave the way for cut in the policy rate.Read More