The World Bank has maintained a positive outlook on Indonesia's economy despite rising external pressures that may curb growth this year.
The Washington-based lender estimated that South-east Asia's biggest economy will expand by 5.2 per cent this year and continue the same pace in 2019.
Dr Frederico Gil Sander, the lead economist for the World Bank in Indonesia, said surging household consumption on the back of high employment will be among the key growth drivers.
"As people have jobs, they have more income to spend. We saw the trend in the mining and agriculture sectors, so the rural income is relatively robust," he told the media during an Indonesia Economic Quarterly update yesterday.
However, the depreciation in the rupiah may slightly lower people's purchasing power, causing inflation to pick up modestly, he added.
The bank predicted that inflation in Indonesia will hit 3.4 per cent this year and 3.7 per cent next year.
The government's commitment to stability, along with decisive, coordinated policy actions and strong macroeconomic fundamentals have all enhanced Indonesia's resilience amid heightened global uncertainty.
DR RODRIGO CHAVES, the World Bank's director for Indonesia and Timor Leste.
HIGHER SPENDING POWER
As people have jobs, they have more income to spend. We saw the trend in the mining and agriculture sectors, so the rural income is relatively robust.
DR FREDERICO GIL SANDER, the lead economist for the World Bank in Indonesia.
It also believes that Indonesia will be able to keep its current account deficit at around 2.4 per cent this year and 2.3 per cent next year.
Dr Gil Sander said that despite the risks, due in part to the deficit, the outlook for the economy remains "quite robust" as the government has taken steps to maintain stability.
"The fact that the Indonesian economy has developed the reputation for stability and solid macro framework actually contributes to the confidence of investors once the time is right for them to come back to Indonesia," he added.
The World Bank highlighted Indonesia's measures to cope with the increased volatility of global financial markets. These included raising Bank Indonesia's benchmark rate by a cumulative 125 basis points since May despite a higher-than-expected inflation rate.
"The government's commitment to stability, along with decisive, coordinated policy actions and strong macroeconomic fundamentals have all enhanced Indonesia's resilience amid heightened global uncertainty," said Dr Rodrigo Chaves, the World Bank's director for Indonesia and Timor Leste.
However, the bank advised Indonesia not to curb imports as that may not support its goal to boost exports and catch up with neighbours such as Vietnam and Thailand.
Indonesia recently raised taxes on 1,147 types of goods to put a brake on fast-surging imports and help avert a further depreciation of the rupiah.
However, the authorities reasoned that the goods are mostly for consumption that have substitutes produced domestically and consequently the measure will not affect the manufacturing industry.
Dr Chaves recommended that Indonesia rein in its current account deficit through more foreign direct investment.
"The best way to attract foreign direct investment is to make sure investors understand that they are both invited and welcome and they would face a level playing field in terms of regulations, access, opportunities to compete in the marketplace," he said.
He pointed out that relaxing the foreign ownership cap in certain areas, such as in the pharmaceutical industry and financial services, would be one of the necessary measures.
National Development Planning Minister Bambang Brodjonegoro said the World Bank's growth forecast is still close to his estimate. He tips the economy to expand by 5.25 per cent this year and 5.3 per cent next year.