Indonesia Has Room to Cut Rates Further, Finance Minister Says

(Bloomberg) -- Indonesia has a raft of stimulus options available to bolster Southeast Asia’s biggest economy if global conditions worsen, Finance Minister Sri Mulyani Indrawati said.

The government is prepared to boost spending and “re-activate” measures used during the global financial crisis if domestic growth needs a boost, Indrawati said Tuesday in an interview in Jakarta. The administration could both widen the budget deficit and provide tax relief, she said.

“We are not facing recession but we are facing external pressure,” she said. “We have space, fiscal and monetary space” to do more, she said, adding that the central bank “still has room” to cut rates further.

The government already plans to boost spending to a record level next year, while Bank Indonesia has cut interest rates twice to cushion the economy. The government expects gross domestic product to grow 5.2% this year, a figure the central bank says may be a bit too optimistic as global worries mount.

On top of the U.S.-China trade war and concerns that America might be headed for recession, the German government is drawing up contingency plans to counter a potential crisis in Europe’s largest economy. Political upheaval in Hong Kong also has been cited as a potential tipping point for the global economy.

“It is becoming now what I call a trend, a self-fulfilling prophecy. Everybody is talking about recession,” Indrawati said. “We definitely have to make sure that our policy is ready when we see this kind of challenge.”

Indonesia’s economy is projected to pick up pace next year -- the government forecasts 5.3% GDP growth -- but there’s risk of a “spillover effect” if the trade war escalates, Indrawati said. While consumption remains healthy, exports have fallen “into the negative zone,” she said.

The budget deficit is expected to come in below 1.8% of GDP this year and next -- well within the mandated limit of 3% -- meaning there’s ample room for more stimulus, Indrawati said.
Factors such as a significant weakening in the currency or stock market volatility could trigger an emergency response, she said.

Adam Slater, lead economist at Oxford Economics, wrote in a research note that monetary policy is offering diminishing returns against slowing growth, leaving "fiscal policy as the other option to combat a slowdown.” Emerging markets, however, may find investors less forgiving of debt and deficits, limiting those governments’ scope for action.

Still, Indrawati said Indonesia’s overall debt-to-GDP ratio of around 30% is “way below” levels during the global financial crisis a decade ago or the Asian financial crisis in the 1990s.

“Our experience in 1997 and 1998, as well as 2008 and 2009 -- it’s already there and we always, within our authority, re-calibrate and monitor very closely the developments,” she said.

No Race to Bottom

The government also is pushing ahead with tax reform, which President Joko Widodo announced in July as part of a package to boost foreign investment and support the economy. The president wants to cut the corporate rate to 20% or less, from 25% now.

The tax cut, slated to take effect in 2021 if parliament signs off, would bring Indonesia’s corporate rate in line with regional rivals such as Thailand and Vietnam. It aims, in part, to help Indonesia lure companies seeking to relocate away from China amid the trade war.

“We are now accelerating that reform and really trying to make sure that the tax base is going to be expanded enough so that when we reduce the rate, the implication is not going to be that severe,” Indrawati said. “But definitely we don’t want to see a race to the bottom” with the country’s neighbors.

Even before parliament has approved next year’s budget, Indrawati didn’t rule out revising it or advancing the tax plan as the global landscape shifts rapidly.

“If the situation warrants it we will act accordingly,” she said. “The president and the government have the option to respond when the situation requires it.”

To contact the reporters on this story: Karlis Salna in Jakarta at ksalna@bloomberg.net;Viriya Singgih in Jakarta at vsinggih@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Michael S. Arnold

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