Indonesia's economy is forecast to sustain its solid pace of growth in 2015 despite weakening commodity prices and tightening financial conditions, an Article IV mission report from the International Monetary Fund said Thursday.
The GDP growth is projected to be sustained at 5.1 percent in 2015, about the same as in the 2014, the report said. This is expected to be aided by a recovery in investment demand and more buoyant manufacture exports.
"Sound macroeconomic management has bolstered policy credibility and external resiliency in Indonesia. Over the past 18 months, policy and reserve buffers have been strengthened considerably, " David Cowen, who lead the IMF team, said.
"Reforms to expand fiscal space, deepen financial markets, and close infrastructure and skills gaps could raise growth to 6 percent or more in the medium term."
He also said that the monetary policy continues to anchor inflation expectations in Indonesia. Inflation, which temporarily rose following the November 2014 increase in subsidized fuel prices, was forecast to return to within Bank Indonesia's 2015 target band of 4.0 ±1 percent by the end of next year.
Going forward, the combination of a tight monetary policy bias and exchange rate flexibility should help narrow the current account deficit, provided it is supported by a prudent fiscal stance and accelerated structural reforms, Cowen said.
The IMF report said the current account deficit was projected to decline to around 2.75 percent of GDP in 2015, supported by rising manufacture exports as well as a lower oil import bill.
Risks to the outlook arise mainly from a deeper-than-expected slowdown in emerging market trading partners and surges in global financial market volatility, the IMF said.
"The decisive action taken by the government in November to reduce fuel subsidies has freed up space in the budget to provide safety nets in the near term to the more vulnerable and to support plans to increase growth-critical social and capital spending," Cowen said.
"The fiscal position is expected to be further strengthened by additional reforms to fuel pricing."
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