|In contrast to the fragility in a number of other emerging market economies, consumer confidence has firmed in Indonesia. The economy has slowed, and this and stronger exports have helped to narrow the current account deficit in recent months. As a result, current account concerns have dissipated, and the currency has appreciated sharply. Inflation has started to slow, as the impact of fuel subsidy cuts has abated and food prices have eased.
The rupiah remains vulnerable to international interest rate movements, but Bank Indonesia can afford to begin to lower its policy interest rates soon.Yet, external balance developments remain highly uncertain, and the authorities should stand ready to respond with monetary and fiscal measures in case of a sudden deterioration. Fiscal policy is broadly expansionary, and even though this year’s elections may put further pressure on the budget, creating more fiscal room to expand the social safety net should be a priority. Measures also need to be taken to improve international competitiveness, notably by investing in infrastructure.
Note: All data definitions based on internationally comparable standards and may differ in specific cases from common national definitions.