MONETARY POLICY REVIEW Economy, Monetary, and Finance

Transcription

1 MONETARY POLICY REVIEW Economy, Monetary, and Finance December 18

2

3 Monetary Policy Review December 18 The Monetary Policy Review (MPR) is published monthly by Bank Indonesia after the Board of Governors Meeting each January, March, April, June, July, September, October and December. This report is intended as a medium for the Board of Governors of Bank Indonesia to present to the public the latest evaluation of monetary conditions, assessment, and forecast for the Indonesian economy, in addition to the Bank Indonesia monetary policy response published quarterly in the Monetary Policy Report in February, May, August, and November. Specifi cally, the MPR presents an evaluation of the latest developments in infl ation, the exchange rate, and monetary conditions during the reporting month and decisions concerning the monetary policy response adopted by Bank Indonesia. The Board of Governors PERRY WARJIYO Governor MIRZA ADITYASWARA Senior Deputy Governor ERWIN RIJANTO Deputy Governor SUGENG Deputy Governor ROSMAYA HADI Deputy Governor DODY BUDI WALUYO Deputy Governor Bank Indonesia Monetary Policy Review December 18 1

4 Table of Content 1. Executive Summary 3. Economic Developments and Monetary Policy Global Economic Developments Global Financial Market Risks Global Commodity Markets Economic Growth Indonesia Balance of Payments Rupiah Exchange Rate Inflation Financial Market Interest Rate Channel Economic Liquidity Bank Intermediation Nonbank Financing Stock Market SBN Market Monetary Policy Review December 18 Bank Indonesia

5 1 Executive Summary The BI Board of Governors agreed on 19 th and th December 18 to hold the BI 7-Day (Reverse) Repo Rate at 6., while also maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at. and 6.7, respectively. Bank Indonesia believes that the policy rate is still consistent with efforts to reduce the current account deficit and maintain the attractiveness of domestic financial assets with due consideration to global interest rate trends in the next few months. Furthermore, Bank Indonesia will also constantly strengthen coordination with the Government and other relevant authorities to maintain economic stability and strengthen external resilience, which includes reducing the current account deficit to around. of GDP in 19. The global economy is moderating, while financial market uncertainty remains high. The solid economic gains achieved in the United States during 18 are expected to consolidate in 19. The prospect of economic consolidation and financial market uncertainty will slow the pace of Federal Funds Rate (FFR) hikes in 19 after the US Federal Reserve, as expected, voted to lift the key interest rate on 19th December 18 by a further bps to.-. amid concerns about global growth. In Euro Area, growth tended to slow, although monetary policy normalisation by the European Central Bank (ECB) in 19 still demands attention. In China, economic growth continued to moderate on sluggish consumption and net exports due, amongst others, to the ongoing trade tension with the United States and financial system deleveraging. Plateau global economic growth, coupled with the simmering trade tension and widespread geopolitical tensions, have lowered world trade volume (WTV). Consequently, international commodity prices are falling, including the global oil price due to increasing supply from the United States, OPEC and Russia. National economic growth remains solid on the back of domestic demand. The latest economic indicators point to strong private consumption, backed by maintained public purchasing power and consumer confidence as well as preparations for the elections to be contested in 19. Investment continues to grow, supported by government infrastructure projects, contrasting slower growth of nonbuilding investment due to the developments unfolding in the manufacturing and mining sectors. Meanwhile, net exports remain negative after export growth decelerated in line with retreating global demand and falling international commodity prices, while imports remained high to satisfy strong domestic demand. Looking ahead, Bank Indonesia projects national economic growth in the.-. range in 19, buoyed by domestic demand and improvements in terms of net exports. Indonesia s trade balance recorded a deficit in November 18 as a corollary of less condusive global dynamics. The trade deficit stood at USD. billion in the reporting period due to declining export performance on plateau global economic growth and sliding prices for Indonesian export commodities. In contrast, imports growth begin slowing down as the government implement import management policy, albeit remain high to meet demand for productive activities, namely investment. Non-resident capital flowing into the domestic financial markets in November 18 totalled approximately USD7.9 billion, finding its way to all assets, Bank Indonesia Monetary Policy Review December 18 3

6 including the stock market and corporate global bonds. The position of reserve assets at the end of November 18 remained solid at USD117. billion, equivalent to 6. months of imports or 6.3 months of imports and servicing government external debt, which is well above the international standard of three months. Bank Indonesia will continue to strengthen coordination with the Government to bolster external sector resilience, including the trade balance, thus reducing the current account deficit to around. of GDP in 19. The Rupiah moved consistently with prevailing market mechanisms, thereby supporting external sector rebalancing. Point to point, the Rupiah appreciated 6.9 in November 18 as an influx of foreign capital flowed back into Indonesia as a result of solid domestic economic fundamentals and a slight thawing of trade tensions between the United States and China. In December 18, the Rupiah was hit by another wave of depreciatory pressures as global economic uncertainty increased and seasonal demand for foreign exchange ticked upwards towards yearend. Bank Indonesia will remain vigilant of global financial market uncertainty and continue to implement exchange rate stabilisation measures in line with the currency s fundamental value, while maintaining market mechanisms, backed by financial market deepening efforts. Inflation is low and stable within the 3.±1 target corridor for 18. CPI inflation stood at.7 (mtm) in November 18, or 3.3 (yoy), relatively unchanged from the.8 (mtm) and 3.16 (yoy) recorded the month earlier. Inflation was kept under control with the help of minimal core inflation pressures, relatively stable at 3.3 (yoy) in the reporting period and supported by policy consistency by Bank Indonesia to anchor rational inflation expectations, including managing exchange rate movements in line with the currency s fundamental value. Furthermore, price pressures on volatile foods (VF) were lower than the historical average, alleviated by adequate supply and lower international food prices. Moving forward, Bank Indonesia will consistently maintain price stability and strengthen policy coordination with the Central Government and Local Administrations to maintain low and stable inflation, which is projected within the inflation target of 3.±1 in 19. Financial system stability has been maintained as the bank intermediation function improves and the banking industry effectively contains credit risk. The Capital Adequacy Ratio (CAR) of the banking industry was reported at.9 and the liquidity ratio at 19. in October 18. In addition, the banking sector maintained a low level of non-performing loans (NPL) at.6 (gross) or 1. (net). In terms of the intermediation function, credit growth was reported to accelerate from 1.7 (yoy) in September 18 to 13.3 (yoy) in October 18, while deposit growth increased from 6.6 (yoy) to 7.6 (yoy). On the other hand, economic financing through the financial markets, such as initial public offerings (IPO) and rights issues, corporate bonds, medium-term notes (MTN) and Negotiable Certificates of Deposit (NCD), reached a cumulative total of Rp178.9 trillion (gross) as of October 18, which is below the Rp31.6 trillion (gross) recorded in the same period last year. Consequently, Bank Indonesia projects credit growth in 19 at -1 (yoy), while predicting deposit growth in the 8- (yoy) range. Bank Indonesia will continue to monitor liquidity adequacy and distribution in the banking system in conjunction with the other relevant authorities consistent with efforts to help maintain financial system stability. Monetary Policy Review December 18 Bank Indonesia

7 Solid domestic economic performance is backed by maintained cash and noncash payment systems. In terms of cash payments, the position of currency in circulation increased by 7.3 (yoy) in November 18 to meet the seasonal spike in demand during the Christmas and New Year holiday season. Regarding wholesale noncash payments, the average daily growth of high-value transactions settled through the Bank Indonesia Real Time Gross Settlement (BI- RTGS) system declined by 1.7 (yoy) in November 18. Meanwhile, noncash transaction value settled through the National Clearing System (SKNBI) grew by 9.7 (yoy) in November 18, up from 6.7 (yoy) in the previous period. Retail transactions through ATM, debit and credit cards as well as e-money grew 13. (yoy) in October 18. Bank Indonesia will continue to ensure the exceptional operational availability of the payment systems operated by Bank Indonesia and the industry, thus safeguarding the security and reliability of the payment system towards end of year. Bank Indonesia Monetary Policy Review December 18

8 Economic Developments and Monetary Policy GLOBAL ECONOMIC DEVELOPMENTS The global economy is moderating, while financial market uncertainty remains high (Graph.1). The solid economic gains achieved in the United States during 18 are expected to consolidate in 19 (Graph.). The prospect of US economic consolidation and financial market uncertainty will slow the pace of Federal Funds Rate (FFR) hikes in 19 after the US Federal Reserve, as expected, voted to raise FFR on 19 th December 18 by a further bps to.-. amid concerns about global growth. In Europe, growth tended to slow, although monetary policy normalisation by the European Central Bank (ECB) in 19 still demands attention. In China, economic growth continued to moderate on sluggish consumption and net exports due, amongst others, to the ongoing trade tension with the United States and financial system deleveraging. Plateau global economic growth, coupled with simmering trade tensions and widespread geopolitical unease, have lowered WTV. Consequently, international commodity prices are falling, including the global oil price due to increasing supply from the United States, OPEC and Russia. Robust economic growth is projected in the United States for 18, supported by consumption and government spending. A faster pace of economic growth is predicted in the United States for 18 compared to growth a year earlier in line with accelerating consumption in the fourth quarter of 18 due to the trickle-down effect of personal income tax cuts, a strong labour market and expansionary fiscal policy (Graph.3). Such dynamics were corroborated by a number of consumption indicators, amongst others, Source: IHS Markit; Data as of November Graph.1 US Japan Source: WEO October 18 US Global.9. Euro Zone 1. Developed Countries Emerging Market Global Manufacturing PMI Graph. Advanced Economic Growth Divergence F 19F F.9.8 Index 6 yoy Monetary Policy Review December 18 Bank Indonesia

9 persistently high incomes in October 18, a positive Conference Board Consumer Index and growing demand for manufactured goods. Congruently, a high Markit Purchasing Managers Index (PMI) coupled with gains in terms of capacity utilisation and the Institute of Supply Management (ISM) All Economy Index to meet domestic and export demand further confirmed a surge in production activity. In contrast, slower investment growth is expected with regard to residential and non-residential investment due to several salient factors, including below than expected corporate taxcuts effect as well as the escalator of trade tensions. Concerning the external sector, net exports are expected to contribute less to the US economy, restrained by high imports to meet persistently robust consumption activity. Meanwhile, economic moderation in trading partner countries is forecasted to undermine export performance. Milder inflationary pressures are anticipated in the United States in line with lower inflation expectations (Graph.). In general, price pressures are predicted to ease in line with lower inflation expectations as a corollary of the declining oil price. Nevertheless, robust economic growth, coupled with a strong labour market and positive wage growth should offset further inflation declines. In the Euro Area, economic moderation is predicted in 18 in line with weaker export performance, slower consumption growth and fiscal consolidation ongoing since 13. Flagging economic growth in the Euro Area is expected in 18 compared with dynamics a year earlier. The slowdown is congruent with the projected fourth-quarter softness caused by weak retail sales and retreating consumer and business confidence in October 18 (Graph.). Consumer and business confidence have decreased due to expectations of economic moderation, political uncertainty in the region and escalating Government Expenditure Private Investment GDP Private Consumption Source: Bloomberg, calculated Graph.3 US Economic Growth 3. CPI (yoy) 3 Core CPI (yoy) Target : Core PCE (yoy) 1 PCE (yoy) PCE (mtm)..1 PCE Projection Graph. US Inflation I II III IV I II III IV I II III IV I II III IVF Source: Bloomberg, calculated Government Expenditure Net Export Graph. Euro Zone Economic Growth Net Export Private Investment Private Consumption I II III IV I II III IV I II III IV I II III IVF Source: Bloomberg, calculated GDP (yoy) Bank Indonesia Monetary Policy Review December 18 7

10 trade tensions. In addition, investment is also slowing down, held back by manufacturing and construction investment. Accordingly, industrial production is also projected to decline as global demand dwindles. Regarding the external sector, export and import activities in the euro area are also predicted to slump compared with conditions in the previous year as a result of deteriorating WTV. A transitory increase in inflation was recorded but remained within the ECB s target. CPI inflation in the Euro Area stood at. (yoy) in October 18, up from.1 (yoy) the month earlier (Graph.6). The increase was triggered by energy prices, particularly after gas prices were raised in France. Nonetheless, analysts expected the slight bump in inflation to be temporary in line with the lower global oil price. In addition, the ECB effectively managed inflation expectations below the target. 3 ECB CPI Inflation Taget CPI (yoy). Core CPI (yoy) CPI (mtm) Source: Bloomberg, calculated Graph.6 Euro Zone Inflation Japan s economy is expected to achieve moderate gains in 18 as the impact of fiscal stimuli and the contribution of the external sector fade. After posting significant growth in 17, Japan s economy is predicted to post moderate gains in 18, weighed down by the end of fiscal stimuli in 17, limited support from productivity and the labour market as well as a constrained external sector. Notwithstanding, Japan s economy is projected to accelerate in the fourth quarter of 18 after recording flat growth in the third quarter of 18 (Graph.7). The economic surge is driven by consumption and investment growth as well as improving net export performance. Externally, the position of net exports is projected to bounce back on solid demand from the United States and despite weaker demand from Europe and China. Inflation in Japan has increased but remains below the BoJ s target. CPI inflation in Japan was recorded at 1. (yoy) in October 18, increasing from 1. (yoy) the month earlier Government Consumption GDP (yoy). Net Export Private Consumption Private Investment F Source: Bloomberg, calculated Graph.7 Japan Economic Growth Monetary Policy Review December 18 Bank Indonesia

11 (Graph.8). Headline inflation in Japan was induced by rising prices of non-durable goods, or consumables. Despite the rise, CPI inflation remains below the Bank of Japan s target. Furthermore, rising inflation was negated by prudent household and corporate behaviour in terms of wages and prices, together with increasing corporate competition. China s economy is projected to experience a slowdown in 18, impacted by financial deleveraging and the escalating trade tension. The downswing is consistent with the economic lull projected in the fourth quarter of 18 (Graph.9). Economic moderation in China is stemming from weaker consumption numbers, contrasting strong export performance. Consumption has been hit by a dampened wealth effect, increasing global financial market uncertainty and ongoing financial deleveraging policy. Meanwhile, the economy has been blighted by restrained manufacturing performance in response to lower domestic demand and a subdued export outlook due to the escalating trade tension. In contrast, investment has begun to recover, led by infrastructure, manufacturing and real estate investment in October 18. Furthermore, China has maintained robust export growth through front-loading in order to circumvent the import tariffs planned for full implementation by the United States in January 19. yoy yoy Tokyo CPI CPI (exc. fresh food) Jan-1 Feb-1 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Source: Bloomberg CPI (exc. food and energy) GDP Source: Bloomberg, calculated Graph.8 Japan Inflation Primary Industry Tertiary Industry Secondary Industry Graph.9 China Economic Growth yoy I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV CPI 17 18F 19F F yoy Inflation in China has decreased due to lower food prices. CPI inflation in November 18 stood at., down from. the month earlier (Graph.). The main contributors to lower headline inflation in China were corrections to food prices. On the other hand, inflationary pressures on non-food prices remained high in line with rising house rental prices. May China Core CPI yoy CPI..1 Exc. China Food CPI China Food CPI yoy Aug-1 Nov-1 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Source: Bloomberg Graph. China Inflation Feb Bank Indonesia Monetary Policy Review December 18 9

12 India s economy is forecasted to accelerate in 18 on the back of solid investment, consumption and net exports. A faster pace of economic growth is predicted in India for 18 due to projected fourth-quarter gains after decelerating in the previous period (Graph.11). The latest gains come amidst persistently solid consumption, increasing investment and improving net exports. Solid consumption was confirmed by a surge of automotive sales in October 18. Meanwhile, the sliding global oil price is also expected to bolster public purchasing power. In addition, investment is expected to pick up in line with strong industrial production data, growing business confidence and improvements in the Manufacturing PMI recorded in October 18. Concerning the external sector, lower imports due to the decreasing oil price should offset the wider trade deficit. CPI inflation in India continued to track a downward trend and is projected to remain within the.± target range (Graph.1). CPI inflation stood at 3.3 (yoy) in October 18, falling from 3.7 (yoy) the month earlier due to milder price pressures on foods and beverages as well as the decreasing oil price. 1 Investment GDP Others Private Consumption Government Consumption Net Export F Source: Bloomberg Graph.11 India Economic Growth Fuel and Electricity 8 CPI (yoy) Tobacco and Alcohol Food and Beverages 6 Core CPI Dec-1 Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Source: Bloomberg Graph.1 India Inflation Feb-18 Apr-18 Jun Aug-18 Oct-18 GLOBAL FINANCIAL MARKET RISKS Uncertainty risk continues to subvert the global financial markets due to a softening of global economic growth, Federal Funds Rate (FFR) hike dynamics and the ongoing trade tensions. Global economic uncertainty is fuelled by global economic moderation, which has undermined WTV and lowered international commodity prices. In addition, financial markets continue to confront the high risks associated with financial market uncertainty in the United States, despite easing, including the pace and magnitude of monetary policy normalisation in advanced economies (Graph.13 and Graph.1). The Source: Bloomberg; Data as of December 18, Graph.13 Increases of FFR Probability 18 and Monetary Policy Review December 18 Bank Indonesia

13 prevailing risks have prompted several central banks in developing and advanced economies to respond by raising policy rates (tightening). Widespread global financial market uncertainty has also amplified the uncertainty and risks faced in developing economies, thereby seriously impacting capital flows to and from developing countries. Such developments have triggered the risk of capital outflows from emerging market economies (Graph.1). Nevertheless, capital flows have defied the pressures, with developing economies currently drawing inflows (Graph.16). Index Source: Bloomberg Graph.1 Economic Policy Uncertainty (EPU) US Trade Policy 6 3 Index Source: EPFR. Fund Flows (FF) 18 Index Graph.1 Uncertainty and Risk of Developing Countries billion USD, Capital flow billion USD, Capital flow accumulation since Nov-8 accumulation since Nov Developing Countries 3 Outflow Period Emerging market 9 Capital Flow(Rhs) Developing Countries Capital Flow Series3 18 Series Series1 Source: IIF Graph.16 Flight to Quality from Emerging Market to Advanced Economies Bank Indonesia Monetary Policy Review December 18 11

14 GLOBAL COMMODITY MARKETS Global economic moderation and financial market uncertainty have reduced WTV growth. The projection for WTV has been downgraded (Graph.17) due to realised WTV in the first three quarters of the year, which were lower than expected as a result of restrained trade activity in advanced economies in line with flagging economic growth (except in the United States) along with inward-looking trade policies, such as the imposition of import tariffs by the United States and negative sentiment spurred by the difficult Brexit negotiations. Meanwhile, export and import activities have accelerated in developing economies, catalysed by the front-loading of export shipments from China, economic gains in India and policy in China to reduce import duties. Congruent with slower growth of WTV, international commodity prices have also fallen, including oil. Export commodity prices from Indonesia have decreased due to the ongoing price declines affecting metals and agricultural produce in the fourth quarter of 18, including crude palm oil (CPO), rubber and nickel. The CPO price has been held back by decreasing demand from China and India, combined with increasing supply, which has spurred a larger net supply. In addition, low soybean prices, as a viable substitute, have also supressed CPO prices. The rubber price has continued to slide on dwindling demand from China as a result of deleveraging policy and escalating trade tensions with the United States, while supply remains abundant. Finally, the nickel price recently experienced a correction as Indonesia boosted supply through expansion of the hyper-efficient HPAL smelter in Morowali, Central Sulawesi. Coal prices increased more slowly than projected in line with lower coal prices in Indonesia. The export price of low-calorie coal from Indonesia has continued to decline on weaker demand from China precipitated by the application of more stringent import yoy. IMF (WEO Oct 18) WTO (Outlook Sep 18) f 19f Source: WEO October and WTO September 18 Graph.17 World Trade Volume Growth Monetary Policy Review December 18 Bank Indonesia

15 requirements and increasing domestic supply. In addition, coal prices have been affected by fewer imports to India and greater supply from the United States. The downward global oil price trend continues. The oil price hit a new low in December 18 since the third quarter of 17 (Graph.18). The oil price continues to decline as the United States ramps up production, thereby usurping Russia as the largest global oil producer. Production is expected to continue expanding in line with increasing pipe capacity in the Permian Basin as the United States pursues energy independence or self-sufficiency. In addition, OPEC and Russia have also increased production beyond previous expectations after oil production recovered in Libya. On the demand side, lower oil consumption is commensurate with global economic moderation, which is considered the main driver of further oil price declines. USD / Barrel Brent Price Quarterly Average Source: Bloomberg, calculated; Data as of December 11, 18 Graph.18 Oil Price ECONOMIC GROWTH National economic growth remains solid on the back of domestic demand. The latest economic indicators in the fourth quarter of 18 point to strong private consumption, backed by maintained public purchasing power and consumer confidence as well as preparations for the elections to be contested in 19 (Table.1). Investment continues to grow, supported by government infrastructure projects, contrasting slower growth of nonbuilding investment due to the developments unfolding in the manufacturing and mining sectors. Meanwhile, net exports remain negative after export growth decelerated in line with retreating global demand and falling international commodity prices, while imports remained high to satisfy strong domestic demand. Looking ahead, Bank Indonesia projects national economic growth in the.-. range in 19, buoyed by domestic demand and improvements in terms of net exports. Bank Indonesia Monetary Policy Review December 18 13

16 Private consumption remains solid, underpinned by maintained public purchasing power and consumer confidence as well as the beneficial impact of preparations for the legislative and presidential elections. Rising incomes and controlled inflation have bolstered public purchasing power and, therefore, edged up household consumption. Positive growth of the farmers terms of trade (ToT) and real farmworker wages in November 18 pointed to higher incomes amongst low-income households (Graph.19). Furthermore, middleincome earners enjoyed higher salaries in the private sector, as confirmed by an increase in the salary expense reported by the corporate sector. Household consumption growth was also supported by upbeat consumers, with the index remaining in optimistic territory (above ) and tracking an upward trend in November 18 (Graph.). In addition, strong private consumption was also down to consumption by non-profit institutions serving households (NPISH), which has increased in line with historical trends two quarters prior to the legislative and presidential elections (Graph.1). Strong retail and automotive sales also suggested solid consumption in the reporting period. Retail sales are surging in the fourth quarter of 18 on the back of clothing sales in line with seasonal yearend Source: BPS, calculated Farmers' Terms of Trade Farmworker Wages (real).87.1 Graph.19 Farmers Terms of Trade and Real Wages yoy 3 I II III IV I II III IV I II III IV* Index 13 Spending >Rp Million Spending Rp 1- Million 13 1 Spending 1 Rp- Million 11 Consumer Confidence Index (CCI) 1 9 I II IIIIV I II IIIIV I II IIIIV I II IIIIV I II IIIIV Source: Bank Indonesia Graph. Consumer Confidence Index Table.1 Economic Growth by Expenditure Percent, yoy Components Household Consumption Non-Profit Institutions Serving Households Government Consumption Investment Building Investment Non-building Investment Exports Imports GDP I II III IV I II III Source: BPS 1 Monetary Policy Review December 18 Bank Indonesia

17 trends. Moreover, dealers are reporting buoyant motorcycle sales in the fourth quarter of 18, which is also indicative of improving consumption numbers. The reading on car sales also demonstrated growth, led by multipurpose vehicles (MPV) and Low Cost Green Cars (LCGC) (Graph.). Positive government spending growth is expected in the fourth quarter of 18. Based on budget realisation as of November 18, the government maintained consumption growth through central government spending on employee expenditure and procurement as well as absorption by the regional administrations. Furthermore, government spending was also supported by greater absorption of local government budget spending in the fourth quarter of 18 compared with the same period a year ago. Government infrastructure projects continued to sustain solid investment performance. In terms of building investment, robust growth stemmed from government infrastructure development, with several projects scheduled for completion at the end of 18 or beginning of 19, including electrification, roads, toll roads and ports. In addition to ongoing public infrastructure projects, building investment is also supported by improving private commercial projects in the form of residential property and industrial zone development. The surge of construction activity was confirmed by cement sales, with the data showing an upward trend in the fourth quarter of 18 (Graph.3). Furthermore, imports of goods for infrastructure projects also accelerated at the beginning of the fourth quarter of 18. On the other hand, moderate non-building investment growth has been achieved as a result of mining and manufacturing sector developments. The mining sector is expected to slow down in line with weaker exports Q Before Q1 Before Legislative Elections Source: BPS, calculated 9 Election 1 Election.7 Graph.1 Historical NPISH Consumption Source: Bank Indonesia, Gaikindo, AISI.8 Presidential Elections Graph. Retail Sales and Motor Vehicles yoy yoy Retail Sales (Total) Car Sales. 3.1 Motorcycle Sales I II III IV I II III IV I II III IV* Cement Sales Graph.3 Cement Sales yoy I II III IV I II III IV I II III IV* Source: Indonesian Cement Association Bank Indonesia Monetary Policy Review December 18 1

18 of mining commodities. Congruently, the manufacturing industry has maintained stable performance, as reflected by the Purchasing Managers Index (PMI), thus restraining further non-building investment gains (Graph.). Such dynamics are exacerbated by the expected decline of capacity utilisation in the manufacturing and mining sectors based on the Business Survey (SKDU) conducted by Bank Indonesia, thus obviating the need for new investment. Furthermore, the projected slowdown of non-building investment activity was also corroborated by muted imports of capital goods in November 18 in the form of machinery and transportation equipment (Graph.). Net exports are still negative due to weaker exports in line with a softening of global demand and lower export commodity prices. Exports remain constrained by a downturn of world trade volume that has undermined demand for exports. Additionally, export performance has also been hit by sliding international commodity prices (Graph.6). By commodity, slower export growth stems from agricultural exports, CPO in particular because of lower prices on the international market and limited demand. In addition to sluggish agricultural exports, mining exports in the form of coal are the latest victim of the escalating trade tension combined with a shift in global demand towards high-calorie coal due to environmental concerns (Graph.7). Meanwhile, the manufacture of basic chemicals as well as the iron and steel subsector have helped to catalyse manufacturing exports. Import growth remains high to meet strong domestic demand. Imports maintained solid growth in the fourth quarter of 18 despite slowing on a monthly basis in November, held back by capital goods and consumer goods, while imports of raw materials were stable (Graph.8). In terms of capital goods, the broad-based decline affected imports destined for infrastructure projects, such as electrical PMI level PMI SKDU PMI Markit Economics 8 6 I II III IV I II III IV I II III IV I II III IV Source: Markit Economics, Bank Indonesia Graph. Purchasing Manager Index yoy Capital Goods Except Transport Equipment Transport Equipment for industry Passenger car Capital Goods I II III IV I II III IV I II III IV I II III IV* Source: Bank Indonesia Source: Bank Indonesia Graph. Imports of capital goods yoy yoy Mining Total Manufacture Agriculture I II III IV I II III IV I II III IV* yoy Graph.6 Non-Oil and Gas Export Prices Agriculture Mining yoy Total Manufacture - I II III IV I II III IV I II III IV* Source: Bank Indonesia Graph.7 Non-Oil and Gas Real Exports 3 16 Monetary Policy Review December 18 Bank Indonesia

19 machinery and equipment, as well as noninfrastructure projects, including transportation equipment for the mining sector. On the other hand, imports of raw materials correlate closely with demand for spare parts for transportation equipment, which have been affected by deteriorating mining sector performance. Furthermore, imports of raw materials for industry have been pared back in line with cyclical yearend factors. Meanwhile, imports of consumer goods declined significantly, restrained by processed food and beverages for households as well as durable goods. yoy Consumer Goods Raw Material 6. Import Total Capital Goods I II III IV I II III IV I II III IV I II III IV* Source: Bank Indonesia Graph.8 Non-oil and Gas Real Imports INDONESIA BALANCE OF PAYMENTS Indonesia s trade balance recorded a USD. billion deficit in November 18. The overall trade deficit stemmed from deficits recorded in the non-oil and gas as well as oil and gas trade balances (Graph.9). Cumulatively from January November 18, therefore, Indonesia s trade deficit stands at USD7. billion. The non-oil and gas trade balance recorded a larger deficit in November 18 compared with the month earlier. The nonoil and gas trade deficit stood at USD.8 billion in November 18, increasing from USD.39 billion in the previous period. The larger deficit stemmed from a deeper decline of non-oil and gas exports than imports, falling USD.9 billion (mtm) due to exports of jewellery/gems, crude palm oil, coal, wood pulp as well as electrical machinery and equipment. On the other hand, imports fell USD.71 billion (mtm) due primarily to capital goods and raw materials, including electrical machinery and equipment, mineral fuels, food industry waste/ leftovers, cereals as well as machinery and mechanical appliances. Cumulatively from January November 18, however, the nonoil and gas trade balance has maintained a USD.6 billion surplus. Non-Oil and Gas Oil and Gas Source: BPS, calculated Graph.9 Trade Balance Billion USD Total Bank Indonesia Monetary Policy Review December 18 17

20 A decline of oil and gas exports fed through to a larger oil and gas trade deficit. The oil and gas trade deficit stood at USD1.6 billion in November 18, up from USD1.38 billion the month earlier. The increase was caused by a USD.17 billion drop (mtm) in oil and gas exports, primarily in the form of refined products, crude oil and gas. The export decline was accompanied by fewer imports, retreating USD.8 billion (mtm) on the back of crude oil, refined products and gas. Cumulatively from January November 18, therefore, the oil and gas trade deficit stands at USD1.1 billion. Stock SBI SBSN SUN Source: Bank Indonesia, IDX, Bloomberg, calculated; *Data as of Nov 3, 18 Graph.3 Non-Resident Capital Flows Billion USD Non-resident capital inflows through portfolio investment were recorded in November 18. The inflow was drawn to all instruments (Graph.3), with SUN attracting the largest inflow totalling USD. billion. Meanwhile, non-resident capital inflows to Government Islamic Securities (SBSN) stood at USD.9 billion in the same period. The influx of non-resident capital to the SBN market flowed to all tenors, including short, medium and long, thereby confirming the attractiveness of domestic financial assets in line with the competitive SBN yields perceived by investors. Non-resident capital inflows also targeted equity instruments to the tune of USD.61 billion. Consequently, total foreign capital inflow to domestic financial markets in November 18 was recorded at USD7.9 billion, affecting all asset types, including the stock market and issuances of corporate global bonds. The position of official reserve assets increased at the end of November 18 on the previous period. International reserves were recorded at USD117. billion at the end of November 18, up from USD11. billion at the end of October 18 (Graph.31). The current position of reserve assets is equivalent to 6. months of imports or 6.3 months of imports and servicing government external debt, which is well above the international standard of three Billion USD Source: Bank Indonesia Month of Imports and Servicing Government External Debt (rhs) Graph.31 Reserve Assets Reserve Assets Month Monetary Policy Review December 18 Bank Indonesia

21 months. International reserves increased in the reporting period due to oil and gas proceeds, government withdrawals of external debt and other foreign exchange earnings that exceeded the requirement to service government external debt. Bank Indonesia considers the current position of reserve assets adequate to maintain external sector resilience as well as macroeconomic and financial system stability. RUPIAH EXCHANGE RATE Rupiah movements were in line with market mechanisms and consistent to support external sector rebalancing. The rupiah appreciated strongly compared with peer currencies due to an influx of non-resident capital flows along with improving global sentiment in November 18. Nevertheless, the rupiah succumbed to depreciatory pressures in December 18 in line with external dynamics and seasonal factors. The rupiah appreciated higher than other currencies. In November 18, the rupiah appreciated 6.9 (ptp) to Rp1,33 from Rp1,3 the month earlier (Graph.3). Point-to-point, rupiah appreciation outpaced all other peer countries except the South African rand in November 18. On average, the rupiah strengthened 3.1 from Rp1,176 to Rp1,661 per US dollar. BRL MYR EUR CNY THB SGD KRW PHP INR TRY IDR ZAR Nov vs Oct Point-to-point Average Source: Reuters, Bloomberg, calculated; Data as of November 3, 18 Graph.3 Regional Exchange Rates (November vs October 18) 8.6 The stronger rupiah was impacted by a deluge of foreign capital inflows in November 18 due to positive domestic and external sentiment. From domestic, sentiment stemmed from economic dynamics conducive to growth, as confirmed by the release of stronger GDP data than previously expected. Meanwhile, external sentiment was influenced by a slight thawing of trade tensions between the United States and China. Furthermore, the promising domestic economic outlook also buoyed rupiah exchange rates. Bank Indonesia Monetary Policy Review December 18 19

22 Rupiah volatility was contained in November 18 against a backdrop of rupiah appreciation. As of November 18, rupiah volatility was well mitigated and lower than the readings recorded in Turkey, South Africa and Brazil (Graph.33). Furthermore, rupiah volatility was below the regional average of 1.7 in the reporting period. Notwithstanding the gains, the rupiah capitulated to depreciatory pressures in December 18 stemming from another wave of global uncertainty combined with increasing seasonal demand for foreign currencies towards yearend (Graph.3). In December 18, the rupiah fell.97 (ptp) to Rp1,3 from Rp1,33 the month earlier (Graph.3). On average, however, the rupiah defied the headwinds to post a 1.3 gain in December 18 to Rp1,8 from Rp1,661 in the previous period. Consequently, as of 19 th December 18, the rupiah had depreciated 6.6 (ytd), which was less severe than that recorded in Turkey, Brazil, South Africa, India and the Philippines (Graph.36). Moving forward, Bank Indonesia will remain vigilant of global financial market uncertainty and continue to implement exchange rate stabilisation measures in line with the currency s fundamental value. Furthermore, Bank Indonesia will maintain market mechanisms and continue to back financial market deepening efforts YTD 18 YTD 18 Average TRY ZAR BRL INR KRW IDR THB PHP SGD MYR Source: Bloomberg, Reuters, calculated; Data as of November 3, 18 Graph.33 Rupiah Volatility and Peers 1, 1,88 1, IDR/USD 1,8 1, 1,61 1,7 1,661 1, 1, 13,9 1,3 1, 13,76 Monthly Average Quarterly Average 13,7 13, 13, Source: Reuters, Bloomberg, calculated; Data as of December 19, 18 Graph.3 Rupiah Exchange Rate Movements Dec vs Nov 18 ZAR TRY PHP INR IDR BRL KRW -..3 MYR.1.9 SGD Point-to-point THB Average.6 EUR CNY.79 JPY Source: Reuters, Bloomberg, calculated; Data as of December 19, 18 Graph.3 Regional Exchange Rates (December vs November 18) YTD 18 vs 17 TRY BRL ZAR INR PHP IDR CNY Point-to-point Average KRW MYR SGD -..3 THB JPY Source: Bank Indonesia; Data as of December 19, 18 Graph.36 Regional Exchange Rates (YTD 18 vs 17) Monetary Policy Review December 18 Bank Indonesia

23 INFLATION Low and stable inflation has been maintained within the 18 inflation target of 3.±1. Inflation in November 18 was recorded at.7 (mtm), relatively stable on the.8 (mtm) posted the month earlier. Stable inflation was supported by controlled core inflation as Bank Indonesia successfully anchored rational inflation expectations and the exchange rate fluctuated in line with the currency s fundamental value. Volatile foods edged up inflation in the reporting period as price pressures increased on several food commodities. Inflationary pressures on administered prices also accumulated due to the second-round effect of fuel price hikes the month earlier. Cumulatively from January November 18, therefore, inflation was recorded at. (ytd) or 3.3 (yoy) annually, which is relatively stable on the 3.16 (yoy) posted in October 18. The latest developments point to CPI inflation at yearend within the target corridor for 18, namely 3.±1 (Graph.37). Moving forward, Bank Indonesia will consistently maintain low and stable inflation through close policy coordination with the Central Government and Regional Administrations. CPI Source: BPS, calculated Volatile Food Core Graph.37 Inflation (yoy) Administered Prices yoy Core inflation has been kept under control. Core inflation in November 18 stood at. (mtm), down from.9 (mtm) the month earlier. Non-traded core inflation was the main contributor to lower core inflation as price pressures eased on house rentals. Nonetheless, further non-traded core inflation declines were stifled by higher construction workers wages. Annually, core inflation was recorded at 3.3 (yoy), relatively stable on the.9 (yoy) in the previous period and supported by controlled traded and non-traded core inflation (Graph.38). Controlled core inflation is linked to policy consistency by Bank Indonesia with regards to maintaining inflation expectations within the target corridor, including rupiah exchange rates. In addition, Source: BPS, calculated Core Non-Traded 3.1 Core 3.3 Core Traded.8 3 Graph.38 Traded vs Non-Traded Core In flation yoy Bank Indonesia Monetary Policy Review December 18 1

24 anchored inflation expectations were also reflected in November s Consensus Forecast (CF), averaging 3.3 (yoy), which is within the target corridor of 3.±1 and lower than the previous month s survey (Graph.39). Inflationary pressures on volatile foods (VF) intensified in November 18. VF inflation stood at.3 (mtm) in the reporting period, rising from.17 (mtm) the month earlier (Graph.). Notwithstanding the increase, realised inflation in November 18 was still below the historical average for November over the past three years at.86 (mtm). Shallots, rice, purebred chicken eggs, tomatoes and carrots were the main contributors to VF inflation in the reporting period (Table.). Shallot and rice supply were disrupted at the main hubs by production constraints upon entering the monsoon season, while price pressures on purebred chicken eggs stemmed from seasonal factors during the approach to Christmas and New Year. Inflationary pressures on volatile foods were also amplified by Mawlid al-nabi celebrations in the middle of November. Annually, VF inflation stood at.3 (yoy) in November 18, decreasing from.8 (yoy) the month earlier. Inflationary pressures on administered prices (AP) also increased compared with conditions in the previous period. Administered prices recorded. (mtm) inflation, increasing from.3 (mtm) the month earlier and higher than the November average for the past three years at.18 (mtm) (Graph.1). Price pressures on airfares and special fuels were the key contributors to AP inflation (Table.3). Airfares rose.18 (mtm) in line with the cyclical spike in demand during the Christmas and New Year holiday season after experiencing deflation during the previous four consecutive months. Meanwhile, higher non-subsidised fuel prices (special fuels) pushed up fuel prices in the reporting period. In addition, filtered and nonfiltered clove cigarettes also exacerbated inflationary Table. Contributors to Volatile Food Inflation/Deflation Commodity Shallot Rice Purebred Chicken Egg Tomato Carrot Red Chili Purebred Chicken Meat Bird s Eye Chili Cooking Oil Melon Source: BPS, calculated 17 Inflation Expectation 18 Inflation Expectation 19 Inflation Expectation Source: Consensus Forecast Graph.39 Inflation Expectation Graph. Volatile Food Inflation Inflation/Deflation ( mtm) yoy 6. mtm yoy Volatile food (mtm) Volatile food (yoy) - rhs Source: BPS, calculated Contribution () Monetary Policy Review December 18 Bank Indonesia

25 pressures on administered prices in November 18. Consequently, annual inflation of administered prices in November 18 was recorded at 3.7 (yoy), increasing from.7 (yoy) the month earlier. Controlled inflation nationally was supported by price developments in all provinces. In November 18, nearly all provinces effectively controlled inflationary pressures, with five provinces recording deflation. North Sumatra province registered the deepest deflation, namely.1 (mtm) after red chilli and shallot prices experienced corrections. Annually, nearly all provinces controlled inflation within the 3.±1 target range (figure.1). The lowest rates were recorded in Sumatra (.8 yoy), Bali and Nusa Tenggara (3.6 yoy) and Java (3.3 yoy). In contrast, a number of provinces recorded higher rates of inflation, such as Central Sulawesi, Papua, West Papua and North Maluku, due to rising food commodity prices. In addition, devastating natural disasters in Central Sulawesi also contributed heavily to high local inflation. mtm yoy 1 Administered Prices (mtm) Administered Prices (yoy) - rhs Source: BPS, calculated Graph.1 Administered Prices Inflation Table.3 Contributors to Administered Prices In flation/deflation Commodity Air Transportation Fares Fuel Clove Cigarrete Filter Clove Cigarrete Source: BPS, calculated Inflation/Deflation ( mtm) Contribution () SUMATRA Sep Oct Nov Aceh.7 North Sumatra 1.77 Riau.7 West Sumatra 3. Lampung.86 Riau Islands 3. Bengkulu.6 Babel Islands 3.7 South Sumatra.7 Jambi 3.8 KALIMANTAN Sep Oct Nov West Kalimantan 3. South Kalimantan.1 East Kalimantan 3.7 Central Kalimantan 3.9 North Kalimantan. SULAWESI Sep Oct Nov Gorontalo. North Sulawesi 3. Central Sulawesi 7.7 West Sulawesi 1.93 South Sulawesi 3.68 South-east Sulawesi 3.98 NATIONAL INFLATION November 18: 3.3 (yoy) Inf. 3. Inf <.. Inf < 3. Inf <. Source: BPS, calculated JAVA Sep Oct Nov Banten 3.9 Jakarta 3.33 West Java 3.6 Central Java 3. East Java.96 Yogyakarta 3. BALI-NUSA TENGGARA Bali 3.3 West Nusa Tenggara 3. East Nusa Tenggara. 17 Sep Oct Nov MALUKU-PAPUA Sep Oct Nov Maluku.6 North Maluku.6 Papua 6.83 West Papua.19 Figure.1 Regional Inflation Map November 18 (,yoy) Bank Indonesia Monetary Policy Review December 18 3