5.4% growth too optimistic: Bank Indonesia

JAKARTA • Indonesia's central bank said economic growth of 5.4 per cent this year is too optimistic and the nation should aspire for higher credit ratings to catch up with its South-east Asian peers.

"In our view, the 2017 growth rate should be higher than 2016's," Bank Indonesia senior deputy governor Mirza Adityaswara said in an interview last Friday. "Maybe 5.4 per cent is still a bit too aggressive, but we think 5.1 to 5.2 per cent is still a possible number to achieve in 2017."

While South-east Asia's biggest economy is gradually recovering, it faces risks from a slowdown in China and weaker prices of coal and palm oil, the nation's main commodity exports. President Joko Widodo has pledged to boost growth to 7 per cent during his term in office, but economists surveyed by Bloomberg predict expansion of under 5.5 per cent until 2019.

The government has made inroads on some economic reforms, helping it win an investment-grade score from S&P Global Ratings this month. However, smaller neighbours including the Philippines, Thailand and Malaysia all enjoy higher ratings from S&P.

"We have to use the improvement in the credit rating to challenge ourselves to get further improvement," Mr Adityaswara said. Keeping the current account deficit under control is key, which means the nation needs to diversify into non-commodity exports and push for stronger tourism, he said.

Global funds poured a record US$6 billion (S$8.3 billion) into rupiah securities this year, helping to drive Indonesia's 10-year yield down by the most in Asia. Fitch Ratings and Moody's Investors Service already rate the nation at investment grade and Goldman Sachs said in March that an S&P upgrade may help attract as much as US$5 billion in funds from Japan alone.

The deputy governor said: "Considering that the global situation is quite stable, what we can expect is funds from Japan, and also funds from maybe European and American pension funds."

While South-east Asia's biggest economy is gradually recovering, it faces risks from a slowdown in China and weaker prices of coal and palm oil, the nation's main commodity exports.

Bank Indonesia has kept its benchmark interest rate unchanged at 4.75 per cent for seven months, after six rate cuts last year. Inflation accelerated to the highest in more than a year in April at 4.17 per cent, above the mid-point of the bank's 3 to 5 per cent target band.

"The key is to maintain prudentiality in managing the macro," said Mr Adityaswara. "The government manages the fiscal prudentiality, while Bank Indonesia maintains prudentiality in the monetary policy, basically to make sure inflation is under control and the current account deficit is under control."

The Jakarta Composite Index has gained 11 per cent in the past six months.

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A version of this article appeared in the print edition of The Straits Times on May 30, 2017, with the headline '5.4% growth too optimistic: Bank Indonesia'. Print Edition | Subscribe