Economic surveys and country surveillance

Policies for a Sustainable Current Account in Indonesia


This Workshop took place on 22 January 2014, OECD, Paris

Opening remarks (10h15- 10h30):  Deputy Secretary General, OECD, Rintaro Tamaki


Session 1 (10h30-11h30):   Does Indonesia have a current account problem?

Presenter: Richard Dutu and Petar Vujanovic, OECD Economics Department.

Discussant: Catherine Bouvier d'Yvoire, Standard Chartered Bank.

Discussant: Thierry Apoteker, Chief Executive Officer, TAC.


The current account challenge: the current economic environment

The current account challenge: Is there a current account problem?

Indonesia bond market overview


Indonesia’s economy has slowed in recent quarters, on the back of weaker domestic and foreign demand. Inflation has risen as fuel subsidies have been cut and the exchange rate has depreciated sharply, the rupiah being at its lowest level since March 2009. The current account has continued to deteriorate, due to weak trading-partner growth, declining terms of trade and structural impediments in a number of export sectors. Monetary policymakers have responded to higher inflation and the weak exchange rate with higher interest rates. While this has helped to defend the currency, it will also restrain economic growth. Economic policy in Indonesia has begun to focus on the vulnerability of the current account and debate is ongoing as regards measures to address it. This presentation starts by looking at the current economic climate in Indonesia, and then examines whether there is indeed an external imbalance problem – beyond just perceptions.

Coffee Break (11h30 – 11h45)


Session 2 (11:45h- 12:30h): Structural policy and current account balance

Presenter:  Luky Alfirman, Director, Ministry of Finance, Indonesia

Discussant: Kensuke Tanaka, OECD Development Centre

Presentation: Dealing with the current account deficit


The current account balance is highly related to the country’s structural policies – In the case of Indonesia, the current account deficit is caused by both external factors (slowdown in major trading partners and significant decline in commodity prices) and domestic factors (high import growth in line with the vibrant domestic economic activity). At the same time, a current account deficit is a reasonable outcome for a country which is still at an early stage of development, but it should be (i) managed at a reasonable level, (ii) supported by adequate financing, and (iii) freed from structural problems such as the fuel subsidy regime or too much reliance on commodity-based exports. To manage the current account deficit at a reasonable and sustainable level, the Indonesian government and the relevant authorities have been and will be issuing a series of policy measures, both for short term and long term. This session will address the policy issues related to the current account balance, focusing on structural policies.

Lunch (12h30-14h00)


Session 3 (14h00-15h00):  Polices for a sustainable current account deficit

Presenter: Petar Vujanovic, OECD Economics Department.

Discussant: Catherine Bouvier d'Yvoire, Standard Chartered Bank. 

Presentation: Policies for a sustainable current account


Policy makers in Indonesia are considering measures to address a perceived weakness in the external balance. Economic theory suggests a number of possible approaches. The first set of policies are called “expenditure-switching” and are designed to change the relative prices of exports and imported goods and services, causing consumers to change the pattern of their spending. The second set of policies is called “expenditure-reducing” and these are designed to reduce aggregate demand and therefore lower the demand for imports. The third approach is to try to improve the supply-side of the economy through structural and industrial policies. This presentation looks at what each of these might entail for Indonesia and comments on the appropriateness of each approach in light of the policy advice that the OECD has been providing to Indonesia over recent years.


Session 4 (15h00-16h00):  Services and international competitiveness

Presenter: Hildegunn Nordas, OECD Trade and Agriculture Directorate.
Discussant: Peter Jarrett, OECD Economics Department.

Presentation: Services and international competitiveness


Indonesia’s position in global value chains reflects its comparative advantage in basic commodities and other upstream inputs, and its supply chains in manufacturing industries are relatively short. A more competitive manufacturing sector requires better connectivity to world markets and access to competitive services such as finance, engineering, transport, telecommunications and many more.  Indonesia’s services sectors tend to be heavily regulated and market access for foreign services providers remains highly restricted.  This presentation highlights Indonesia’s position in global value chains, the role of services for competitiveness in manufacturing and discusses the importance of services trade policy and trade facilitation reforms for competitiveness.

Coffee Break (16h00 – 16h15)


Session 5 (16h15-17h15):  The currency and current account rebalancing

Presenter:  Thierry Apoteker

Discussant: Petar Vujanovic, OECD Economics Department

Presentation: Currency and current account rebalancing in Indonesia


While it can be said that the Rupiah’s depreciation in 2013 was a result of the large and growing current account deficit, it is also important to assess the implication of potentially overvalued exchange rate on external performances. This is particularly relevant when currencies like the rupiah, which can be subject to “speculative appreciation” during euphoric periods or “risk-on” strategies by international investors. This presentation will look at valuation issues for the Rupiah, and its role in current account deterioration. It will also draw some conclusions from the recent depreciation on current account outlook and medium-term sustainability, and derive some questions to policy makers.


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