By Arijit Ghosh
July 29 (Bloomberg) -- Indonesia, Asia’s third-fastest expanding major economy, needs to gradually build its foreign reserves and follow a “cautious” monetary policy stance to keep investor confidence, the International Monetary Fund said.
The Washington-based agency also recommended Indonesia boost spending in a statement today, saying the government has room for a bigger fiscal deficit.
Indonesia’s reserves fell to $57.58 billion in June from a record $60.56 billion in July 2008. Higher foreign reserves and attractive asset prices may keep investors from pulling money from the Southeast Asian nation should another global economic crisis arise, the IMF said.
“Although the economic outlook for 2009 remains positive, another round of global risk aversion could adversely affect external liquidity, demand, and growth prospects for Indonesia,” the IMF said. It’s “prudent” for the nation to build larger reserves, implement its stimulus plan and “strengthen monetary policy framework” to ensure macroeconomic and financial stability, it said.
Indonesia’s reserves are less than 3 percent of China’s $2.1 trillion of assets. The $433 billion economy may expand 3.5 percent, this year making it the fastest growing in Asia after India and China, according to IMF data. Growth may accelerate to 4.5 percent next year, the lender said.
IMF Rescue
Indonesia’s move to increase currency swap deals with Japan and China, and regional agreements to pool reserves may help Bank Indonesia boost its assets, said Thomas Rumbaugh, division chief at the IMF’s Asia & Pacific Department.
“There are a lot of contingency arrangements, swap lines being discussed bilaterally and within the region, and to the extent those are made effective it is a very inexpensive way to do it,” Rumbaugh said on a conference call today. “If there are delays on that side, they could build on their own reserves a little bit more.”
The IMF arranged a $25 billion package between 1997 and 2003 to help rescue Indonesia’s banking system and rehabilitate the economy by restructuring private and government debt. Indonesia paid the debt early.
Indonesia is nearing the end of its interest-rate reduction cycle, Rumbaugh said. The central bank cut its policy rate to 6.75 percent this month.
Economy ‘Saved’
Bank Indonesia has cut its benchmark interest rate for eight straight months to help boost growth as inflation slows. President Susilo Bambang Yudhoyono’s government has also planned stimulus measures valued at 71.3 trillion rupiah ($7 billion) to spur economic expansion.
“For boosting growth, a key issue now for Indonesia is getting fiscal policy to work,” said Helmi Arman, an economist at PT Bank Danamon Indonesia in Jakarta.
The government plans to announce another package to attract investors to the nation’s infrastructure projects, Vice President designate Boediono said yesterday. Southeast Asia’s largest economy expanded 6.1 percent last year and local consumption “saved” the economy this year, he said.
Indonesia needs to maintain its stimulus plan next year as it has “room” for a higher fiscal deficit, the IMF said. The government has targeted a budget shortfall of 2.4 percent of gross domestic product this year and forecasts a deficit of between 1.5 percent and 1.8 percent in 2010.
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