Country Report Indonesia May 2009

Outlook for 2009-10

• Susilo Bambang Yudhoyono is expected to be re-elected in the second round of the presidential election in September 2009, but he will have to defend the performance of his government in the coming months.
• Following the April 9th legislative election, Mr Yudhoyono's Democratic Party (PD) emerged as the biggest party in the House of Representatives (DPR, the legislature), but building a coalition government could still be difficult.
• Fiscal and monetary policies will be used to stimulate domestic demand in 2009-10. The authorities have made moves towards financial and trade protectionism, and may look to go further down this path.
• The budget deficit will widen to an average of 3% of GDP in 2009-10, owing to falling tax revenue as the economy slows and the introduction of a Rp71.3trn (US$6.9bn) stimulus package aimed at supporting domestic demand.
• The Economist Intelligence Unit has revised up its forecast for GDP growth. Private consumption is holding up better than it was expected to as a result of fiscal stimulus. Real GDP will expand by 2.4% in 2009 and 3.2% in 2010.
• We expect the current account to record an annual average surplus equivalent to 0.9% of GDP in 2009-10.

Monthly review

• According to the final results of the legislative election, the PD almost tripled its share of the national vote to 20.9%. As a result, it will have a provisional 148 seats in the new 560-member DPR.
• On April 23rd Golkar concluded its alliance with the PD by unveiling MrYudhoyono's deputy, Jusuf Kalla, as a candidate in the presidential election. Mr Kalla's running mate will be a retired general. Wiranto.
• The government has raised US$650m in its first ever auction of international Islamic bonds, known as sukuk. According to the debt management office, the five-year bonds were priced to yield 8.8%.
• Bank Indonesia (BI, the central bank) has cut interest rates for the sixth time in as many months. On May 5th the bank lowered the BI rate by 25 basis points to 7.25%, the lowest level since the rate was introduced in July 2005.
• According to the state statistical bureau, real GDP expanded by 4.4% year on year in the first quarter of 2009, the economy's slowest rate of growth since the first quarter of 2004.
• Although Indonesia's merchandise exports continued to contract in March, there were signs of a recovery. On a month-on-month basis, exports were up by 20.6%the sharpest rise for ten years.