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GDP growth is projected to gradually pick up, underpinned by domestic demand. Rising household incomes will support private consumption. Public infrastructure investment is continuing to expand, and private investment will be boosted by easier monetary conditions and a more business-friendly regulatory environment. Exports will continue to benefit from the recent revival in regional trade. Inflation is projected to remain benign, partly reflecting low food price inflation.
Lower inflation and greater currency stability allowed Bank Indonesia to reduce its policy rates twice in recent months. Monetary policy is now expected to remain on hold. Fiscal policy is supporting growth by enhancing the quality of government spending, including on much-needed infrastructure, education, health and social programmes. Further subsidy reductions would allow more effective and targeted social spending. Continued efforts to reform tax administration and strengthen enforcement will improve the system’s equity and provide revenues for redistribution.
Bank asset quality has deteriorated somewhat in recent years as the economy slowed. Although non-performing loans have stabilised, quality concerns appear to be weighing on bank lending. Nonetheless, banks are well capitalised, and bank lending is low relative to GDP, limiting macroeconomic risks. A high share of corporate debt is denominated in foreign currency. However, the associated risks are reduced by regulations requiring partial hedging of foreign exposures. Further financial market deepening could increase financial resilience by developing instruments for managing risk.
Economic Survey of Indonesia (survey page)