Indonesia Plans Stimulus to Boost Consumption Amid Slowdown

Indonesia will implement stimulus measures to boost consumption and infrastructure spending as a global slowdown limits exports and an imminent election in Greece threatens to deepen Europe’s debt turmoil.

The government will tap last year’s 24 trillion-rupiah ($2.5 billion) budget surplus to fund building projects, and lift the tax-free annual income level to 24 million rupiah from 15.8 million rupiah, Bambang Brodjonegoro, head of fiscal policy at the Ministry of Finance, said in Jakarta today. Indonesia currently targets a 2012 budget deficit of 190.1 trillion rupiah, on capital spending of 168.8 trillion rupiah.

Policy makers are diverging in their responses to growth risks, with South Korea this month eschewing fiscal stimulus and keeping interest rates unchanged while countries from China to Brazil have lowered borrowing costs. Bank Indonesia has held off from adding to a February rate cut, seeking to support a currency that has fallen about 4 percent in 2012 as the European crisis hurt exports and spurred outflows from emerging markets.

“Right now, the engine of Indonesia’s economy is only from consumption and investment, as we can’t expect much from exports during the global turmoil,” Damhuri Nasution, a Jakarta-based economist at PT Danareksa Sekuritas, said by phone today. “The government needs to implement this stimulus soon to provide a chance of reaching the growth target of 6.5 percent this year.”

Motorcycle Sales

Southeast Asia’s largest economy may expand at the lower range of Bank Indonesia’s forecast of about 6.3 percent to 6.7 percent in 2012, Governor Darmin Nasution said this month, while exports fell in April for the first time since 2009.

PT Astra International, Indonesia’s largest automotive retailer, said today May motorcycle sales fell to 611,251 units from 617,508 units a month earlier, citing data from the Indonesian automotive industries association.

An adjustment to the tax-free income level this year and spending on infrastructure would support domestic consumption by increasing purchasing power amid the global slowdown, said Nasution of Danareksa Sekuritas. The potential stimulus of as much as 24 trillion rupiah isn’t significant compared with Indonesia’s gross domestic product and won’t be enough to prompt rating companies to raise Indonesia’s assessment in the short term, he said.

Credit Ratings

Standard & Poor’s kept Indonesia’s rating unchanged at BB+ with a positive outlook in April, refraining from joining Fitch Ratings and Moody’s Investors Service in raising the nation to investment grade as it highlighted policy risks.

Bank Indonesia kept the benchmark reference rate at 5.75 percent for a fourth month yesterday, holding off from easing policy to support a weakening currency. The rupiah is the worst performer in Asia after India’s rupee this year.

Indonesia has taken steps to reduce excess funds in the economy and contain inflation risks even as price gains unexpectedly eased in May, resisting the cuts in borrowing costs pursued by Australia and China in recent weeks.

Thailand and Sri Lanka kept interest rates unchanged today, while the Philippines and New Zealand are forecast to do the same later this week, according to surveys of economists by Bloomberg. Greece will hold elections on June 17 after an inconclusive earlier vote, and the result could hand power to parties that oppose the terms of the nation’s rescue package, precipitating its exit from the 17-nation euro area.

Rupiah Falls

The rupiah weakened 0.2 percent to 9,420 per dollar as of 4:51 p.m. in Jakarta today.

Bank Indonesia last month raised the rates on central bank bills and term deposits of all tenors to absorb liquidity. It also announced plans to start offering dollar term deposits this month to boost supply of the currency locally and stabilize the rupiah.

The central bank sold $550 million of seven-day dollar term deposits at 0.16709 percent today. It also sold $150 million of 14-day deposits at 0.18000 percent, according to a statement on its website.

Bank Indonesia will continue to take steps to maintain liquidity in the market by strengthening monetary operations with foreign-exchange instruments such as the dollar term deposits, it said yesterday. The central bank will also strengthen coordination with the government to mitigate the negative impact from global risks, it said.

Inflation Slows

Inflation in Southeast Asia’s largest economy unexpectedly slowed for the first time in three months in May to 4.45 percent as rice costs remained stable amid