Indonesia’s Finance Minister Sees Weaker Growth, Rate Cut Room

(Bloomberg) -- Indonesia’s finance minister said the economy will probably expand at a slower pace than previously forecast, and that there’s ample room for the central bank to cut interest rates in coming months to spur growth.

The U.S.-China trade war is hitting Indonesia’s exports, curbing its imports and reducing commodity prices, all of which will weigh on the country’s growth, Sri Mulyani Indrawati said Tuesday in an interview with Bloomberg Television’s Tom Keene and Nejra Cehic in London, where she was attending the Bloomberg Emerging & Frontier Forum.

“These are all the downside risks that Indonesia is going to face when we are talking about the projection of growth,” Indrawati said. The economy is projected to grow between 5.17% and 5.2% this year, she said.

The government had earlier forecast Southeast Asia’s biggest economy would expand 5.3% this year. The worsening trade dispute between the world’s two biggest economies is curbing that outlook, while also putting pressure on the current-account deficit, exposing Indonesia to currency risks.

Indrawati said the government has fiscal room to boost growth, but must take care to ensure any steps are consistent with structural reforms it’s promoting.

“We are using fiscal instruments in a very flexible and agile way to stimulate private sector investment, whether it’s in infrastructure or in other sectors which have priorities,” she said.

Southeast Asian economies, including Indonesia, see opportunities from the trade war as businesses look to move production out of China to avoid higher U.S. tariffs, Indrawati said. Indonesia wants to improve its investment climate to take advantage of that, she said, adding that she’s confident the country can attract more foreign direct investment.

“In the past, our industrialization was more a standalone rather than being a part of the global supply chain,” she said. “And that is going to make attracting investment to Indonesia much harder.”

Discussing the government’s priorities with Bloomberg’s Editor-in-Chief John Micklethwait, Indrawati said the country of 267 million people must develop its human capital, improve infrastructure and simplify regulations.

Competing with other Southeast Asian nations such as Vietnam that increasingly are integrated into global supply chains, Indrawati said the government is focused on “how to build an environment in Indonesia that is equally or even more attractive” to foreign investors. One challenge is ensuring that local authorities across the sprawling archipelago are aligned with policy set by the central government, she said.

Room to Maneuver

Indonesia’s central bank was one of the most aggressive in Asia last year, raising interest rates six times by a total of 175 basis points to fend off an emerging-market rout. While regional central banks from Australia to India have all started easing this year, Bank Indonesia has taken a more cautious approach, leaving rates unchanged.

Indrawati said there’s “a lot of room for them to actually maneuver within the second half of this year.” The central bank “will find the right timing” to move, reiterating the view from Governor Perry Warjiyo.

The finance minister said macroeconomic policy can’t take the place of necessary structural reforms though.

The government “needs to provide the playing field for everybody to have confidence and stability,” she said.

--With assistance from Michael S. Arnold and Tassia Sipahutar.

To contact the reporters on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net;Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net;Thomas Kutty Abraham at tabraham4@bloomberg.net

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