Indonesia exposure to global risk is limited

Indonesia faces limited exposure to a large exit of foreign capital at a time of global risk aversion due to strong fundamentals and relatively low dependence on external demand, the IMF said Thursday. The International Monetary Fund cited the country's strong export growth, including in manufacturing, and said the continued flexibility of the rupiah's exchange rate would help protect against volatile cash inflows. The comments come as Indonesia's central bank tries to cap huge inflows of foreign cash from investors seeking higher interest rates than in the West, which it fears could trigger economic instability. "Indonesian GDP growth is projected to remain robust at around 6.5 percent in 2011-12," the IMF said in a statement following a consultation with Indonesian officials and central bankers. "Increases in both foreign and domestic investment are supporting growth, while accelerating credit growth and expected reductions in energy subsidies should push core inflation modestly higher this year and into 2012," it said. The fund also urged Indonesia to reduce fuel subsidies so that it could boost spending on infrastructure and social welfare. IMF, however, said there was a risk of higher inflation if the government cut energy subsidies, and that the central bank would need to "act decisively" if the government took that course.