UPDATE 1-IMF urges Indonesia to maintain stimulus in 2010

Tue Jul 28, 2009 8:05pm EDT

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WASHINGTON, July 28 (Reuters) - The International Monetary Fund on Tuesday urged Indonesia to maintain some stimulus in 2010 and said it saw room for a somewhat higher fiscal deficit than currently planned.

In its annual assessment of Indonesia's economy, the IMF said monetary policy easing since December had been "timely and appropriate".

However, the IMF said authorities should proceed more cautiously given the danger that global investors could once again shun risk if the global economic recovery falters.

The IMF board appeared divided over whether Indonesia needs to keep adding to its foreign exchange reserve.

Some directors said Indonesia should accumulate larger reserves to preserve investor confidence in case global risk aversion deteriorates. Others said current reserve levels were adequate.

Meanwhile, an IMF staff assessment concluded that Indonesia's exchange rate was "broadly in line with fundamentals" and reserves are at a comfortable level.

Overall, the IMF said Indonesia's economy had started to rebound this year, supported by strong consumption tied to fiscal stimulus measures.

But it warned that growth prospects could be set back if global investors started to turn away from risky assets in developing countries.

The IMF said it was important that Indonesia "strives to achieve the appropriate policy mix, and promptly adjust it as needed, to preserve macroeconomic and financial stability."

It said further strengthening the country's tax system and lowering energy subsidies would help create fiscal space for key infrastructure and social spending. (Reporting by Lesley Wroughton; Editing by Neil Stempleman)

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