Indonesia faces strict monetary and fiscal policy constraints

Indonesia faces strict monetary and fiscal policy constraints, despite the urgent need to arrest slowing growth and market pessimism. Bank Indonesia is unable to loosen its tight monetary policy stance, given high headline inflation of over 7%, well above its inflation target range of 3-5%. Core inflation has been creeping higher as well. Concerns about a persistent (albeit narrowing) current account deficit (forecast at 2.5% of GDP in 2015) and weak currency (having depreciated 7.6% year-to-date) are also tying the central bank's hands. BI has turned to the relaxation of macro-prudential measures in a bid to boost growth. These moves will help, but the impact may be limited.

The government's fiscal flexibility is also limited, given weak tax revenue collection on a slowing economy and a constitutional fiscal deficit limit imposed at 3% of GDP (and public debt ceiling at 60% of GDP). As of the first five months of 2015, tax collection totaled Rp435.3tn ($33bn), only 29% of the full year target, and roughly 1.6% lower than the same period last year. Revenue is falling short because of slower GDP growth, falling commodity prices, and lower oil lifting. Fuel subsidies may also be quietly returning, with the last price adjustment on 28th March. 

"We estimate the market price of RON88 gasoline to be about Rp7,900/liter currently, about 6.9% higher than the current fixed price of Rp7,400," notes BofA Merrill Lynch.