Monetary policy now focusses more on economic growth than a year ago when stability concerns gained primacy amid capital outflows. Policy easing by major central banks has created space for Bank Indonesia to lower interest rates without sacrificing stability. From July to October, it lowered policy rates by 100 basis points. Bank lending rates and long‑term government bond yields have declined substantially, implying easier financial conditions. The inflation target will be lowered to 3% +/-1% in 2020 and inflation is expected to be in that range, implying scope to lower interest rates further.
Bank Indonesia has actively used macroprudential tools to make its overall policy stance more accommodative overall. Through various measures it has sought to lower interest rates and promote credit growth. For example, maximum loan-to-valuation ratios have been removed for the first loan on a property when banks meet certain criteria. While the raft of measures to encourage lending can stimulate growth, they do come with risks. Accordingly, banks’ lending standards should be monitored carefully for signs that credit quality has deteriorated. Continuing efforts to deepen financial markets will add to the overall resilience of the financial system.
Fiscal policy is expected to be broadly neutral, with the government focussed on containing the overall deficit and using the composition of revenue and expenditure to enhance growth. The central government budget deficit is on course to narrow to less than 2% of GDP in 2020. There is ample space to react if the growth outlook deteriorates. Infrastructure spending is to be revived through guarantees and other instruments to promote public-private partnerships. Given the associated fiscal risks, alternatives such as concessioning and foreign direct investment should also be promoted. Social assistance could be better targeted by gradually replacing direct and indirect fossil fuel subsidies with transfers.
Raising revenues remains a major challenge to realise spending plans. Lower commodity prices and trade are weighing on revenues, as will new tax incentives to stimulate investment. Non‑tax‑related factors that are likely to be more important in firms’ investment location decisions should be tackled. Raising tax compliance remains critical, through administrative simplification to improve voluntary compliance and making better use of available data to strengthen enforcement.
Renewed reforms are needed to spur private investment and job creation, and to raise productivity. Streamlining and simplifying business regulations should remain a priority. Improvements to the online single submission system are ongoing and should continue based on user feedback. Reducing stringent labour market regulations, accompanied by measures to support workers, would make it easier to hire workers formally. More sectors should be opened to foreign investment, as discussed. Sustaining the fight against corruption is also crucial. Policy uncertainty in the mining sector should be addressed too. At the same time, some regulations need better enforcement, as evidenced by the widespread forest fires associated with illegal clearing of peatland despite stronger de jure regulations.
