BANK INDONESIA. Telephone : Fax. : Website :

Transcription

1

2 BANK INDONESIA For further information, please contact: Economic Outlook & Policy Dissemination Bureau of Monetary Policy Directorate of Economic Research and Monetary Policy Telephone : Fax. : BKM_TOD@bi.go.id Website :

3 MONETARY POLICY REPORT BANK INDONESIA MONETARY POLICY REPORT QUARTER I-2009 The Monetary Policy Report is published quarterly by Bank Indonesia after the Board of Governors» Meetings in January, April, July, and October. In addition to fulfilling the mandate of article 58 of Act Number 23 of 1999 concerning Bank Indonesia, amended by Act No. 3 of 2004, the report has two main purposes: (i) to function as a tangible product of a forward-looking working framework in which formulation of monetary policy is based on economic and inflation forecasts; and (ii) as a medium for the Board of Governors of Bank Indonesia to present to the public the various policy considerations underlying its monetary policy decisions. The Board of Governors Boediono Miranda S. Goeltom Hartadi A. Sarwono Siti Ch. Fadjrijah Governor Senior Deputy Governor Deputy Governor Deputy Governor S. Budi Rochadi Deputy Governor Muliaman D. Hadad Ardhayadi Mitroatmodjo Budi Mulya Deputy Governor Deputy Governor Deputy Governor i

4 ii MONETARY POLICY REPORT BANK INDONESIA

5 MONETARY POLICY REPORT BANK INDONESIA Enhanced Monetary Policy Measures Under Inflation Targeting Framework In July 2005, Bank Indonesia implemented and enhanced monetary policy measures within the Inflation Targeting Framework (ITF) which encompasses four main areas: the use of the BI rate as an operational target, enhanced decision making process, more transparent communications strategy, and strengthened policy coordination with the Government. The measures is intended to strengthen the effectiveness and to provide good governance to its monetary policy making to achieve the price stability needed to support suistainable economic growth and attain social welfare. Monetary Policy Strategy Underlying Principles Under the ITF, the inflation target is established as the overriding objective and nominal anchor for monetary policy. In this regard, Bank Indonesia has adopted a forward looking strategy by guiding the present monetary policy response for achievement of a medium-term inflation target. The application of the ITF does not mean that monetary policy disregards economic growth. The basic monetary policy paradigm of striking the optimum balance between inflation and economic growth is retained in both setting the inflation target and in the monetary policy response by focusing on achievement of low, stable inflation in the medium to long-term. The Inflation Target After consultations with Bank Indonesia, the Government has determined and announced the CPI inflation target at 5%+1%, 4.5%+1% and 4%+1% for 2008, 2009 and The inflation target is consistent with the process of disinflation aimed at medium to long-term inflation competitive with other nations at about 3%. Monetary Instruments and Operations The BI Rate is the published policy rate reflecting the monetary policy stance adopted by Bank Indonesia. The BI Rate is a signal for achieving the medium to long-term inflation target and is announced periodically by Bank Indonesia for a specific period. To strengthen the operational framework for monetary policy, Bank Indonesia changed from use of the 1-month SBI rate as the operational target to the overnight interbank rate with effect from 9 June In monetary operations, the BI Rate is implemented through liquidity management on the money market to achieve the monetary policy operational target, reflected in movement in the overnight interbank money market rate. To enhance the effectiveness of liquidity management on the market, a set of standing facilities in combination with an interest rate corridor is employed in day-to-day monetary operations. Policymaking Process The BI Rate is determined by the Board of Governors in the Monthly Board of Governors» Meeting. In unforeseen circumstances, the monetary policy stance may be adjusted in advance of the Monthly Board of Governors» Meeting in a weekly Board of Governors» Meeting. Changes in the BI Rate essentially depict the Bank Indonesia monetary policy response for guiding the forecasted level of inflation within the limits of the established inflation target. Transparency Monetary policy is regularly communicated to the public through customary media for communication, such as statements to the press and market actors, website postings and publication of the Monetary Policy Report (MPR). This transparency is aimed at building improved understanding and shaping public expectations of the economic and inflation outlook and the monetary response taken by Bank Indonesia. Coordination with the Government For the purpose of coordination in inflation targeting, monitoring and control, the Government and Bank Indonesia have established a team of officials representing the various relevant agencies. The task of the Team is to deliberate and recommend the necessary policy actions for the Government and Bank Indonesia in managing inflationary pressures for achievement of the established inflation target. Steps for Reinforcing Monetary Policy with the Overriding Objective of Price Stability (Inflation Targeting Framework) In July 2005, Bank Indonesia launched a reinforced monetary policy framework consistent with the Inflation Targeting Framework (ITF), encompassing four key elements: (1) use of the BI Rate as the policy reference rate, (2) anticipatory monetary policymaking process, (3) more transparent communications strategy and (4) closer policy coordination with the Government. These measures are intended to strengthen monetary policy effectiveness and governance in order to achieve the overriding objective of price stability in support of sustainable economic growth and greater public prosperity. iii

6 iv MONETARY POLICY REPORT BANK INDONESIA

7 MONETARY POLICY REPORT BANK INDONESIA The Governor of Bank Indonesia Foreword The fallout from the global economic downturn has begun taking its toll on the domestic economy. In Q1/ 2009, growth stagnated in response to falling exports and weakening public purchasing power. Externally, the balance of payments posted a surplus. Inflationary pressure maintained a declining trend, although pressures on the financial market continue unabated. Looking ahead, the Indonesian economy in 2009 will be influenced by the dynamics of the global economy. Bank Indonesia will stay the course with monetary policy conducive to growth while remaining committed to economic stability in the medium to long-term. In Q1/2009, the economy charted more modest growth at an estimated 4.6%. A key factor in this slowdown is the export downturn brought on by the global economic recession. Nevertheless, growth is not expected to slump further due to the surge in economic activity related to the national elections. In analysis by sector, preliminary figures indicate sharply curtailed activity in industry and mining. The balance of payments posted an estimated USD3.5 billion surplus. Imports plunged more steeply than exports, helping to produce a current account surplus in Q1/2009. The financial account also posted a surplus on the strength of capital inflows from global bond issuances by the Government. As a result, international reserves in Q1/2009 reached an estimated USD54.8 billion, equivalent to 5.9 months of imports and servicing of official external debt. The domestic financial market came under further pressure, despite some improvement at the end of the period. Foreign investors continued to offload asset portfolios. Measured in average value and point to point, the rupiah depreciated 5.7% to Rp 11,555 to the US dollar. Cooperation in the Bilateral Currency Swap Arrangement (BSCA) with the People»s Bank of China and the increased ceiling on the Bilateral Swap Arrangement (BSA) with the Government of Japan helped to bolster sentiment at the end of the period. Inflationary pressure eased due to the slowing pace of economic activity. In Q1/2009, inflationary pressure dropped to 0.36% (qtq) or 7.92% (yoy). The drop in inflationary pressure created room for Bank Indonesia to lower the BI Rate to 7.50%. v

8 MONETARY POLICY REPORT BANK INDONESIA The domestic banking sector retains a considerable level of resilience. The capital adequacy ratio (CAR) remains significantly high, while banking liquidity is on the rise. Even so, the banking system needs to be more vigilant against potential for escalating credit risk amid the current gloomy condition of the global economy. Looking forward, Indonesia»s economic growth will inevitably be affected by the dynamics of the global economy. With the ongoing global economic recession in 2009, the economy is forecasted to grow in the range of 4%-5%. Inflationary pressures are also set to ease further, with inflation in 2009 predicted at the lower end of the 5%-7% range. Bank Indonesia will stay the course with monetary policy conducive to domestic demand while remaining committed to safeguarding economic stability in the medium to long-term. In the banking sector, Bank Indonesia will move forward with the banking consolidation and intermediation programmes and bolster the resilience of the banking system amid the global economic turmoil. This concludes the highlights of the Bank Indonesia progress report for Q1/2009. Jakarta, 31 March 2009 THE GOVERNOR OF BANK INDONESIA Boediono vi

9 MONETARY POLICY REPORT BANK INDONESIA Contents Monetary Policy Report - Quarter I-2009 Contents 1. General Review Latest Macroeconomic Indicators... 4 Economic Growth... 4 Balance of Payments Monetary Indicators and Policy, Q1/ Inflation Rupiah Exchange Rate Monetary Policy The Indonesian Economic Outlook Assumptions and Scenarios Economic Growth Outlook Inflation Forecast Risks Monetary Policy Response, Q Statistics vii

10

11 General Review 1. General Review The continuing downturn in the global economy took an increasingly heavy toll on the Indonesian economy in Q1/2009, necessitating a downward revision in the economic growth forecast for Indonesia. This slowing trend is explained not only by flagging exports, but also weakening public purchasing power. Despite this, economic activity fuelled by the political campaign activities for the national election is expected to keep the domestic economy from further decline. Looking forward, the economy in 2009 continues to be daunted by uncertainty over global economic recovery, and therefore economic growth in Indonesia is forecasted below the 4.0%- 5.0% level predicted at the beginning of the year. In April 2009, following an assessment of the current economic conditions and outlook, Bank Indonesia lowered the BI Rate a further 25 bps to 7.5%, representing the fifth consecutive cut in the BI Rate since December Measured cumulatively for the December April 2009 period, the BI Rate came down by a total of 175 bps. Estimated Q1/2009 growth in the Indonesian economy reached 4.6%. On the expenditure side, decline was reported in all growth components, led by exports. Despite this, economic activity during the election period, fuelled by political campaigns and the organisation of elections throughout Indonesia, is believed to have prevented further decline in private consumption. In analysis by sector, estimates suggest that the steepest downturns took place in industry and mining. In contrast, non-tradable sectors, such as transport and communications and the electricity, gas and water utilities sector, maintained brisk growth accompanied by a slowing trend. In disaggregation by region, falling exports have been the key factor in the economic slowdown in regions such as Sumatra, Kalimantan, Sulawesi, Maluku and Papua. The downward inflationary trend continues. Inflationary pressure in Q1/2009 slowed further to 0.36% (quarterly, q-t-q) or measured annually to 7.92% (y-o-y). Inflationary pressure eased mainly in response to the ongoing first round and second round effects of the cut in fuel prices. Added contribution to low inflationary pressure came from improvement in inflation expectations and softening domestic demand. Alongside this, similarly low pressure was reported from administered prices and volatile foods, with domestic food crop production maintained at adequate levels. Concerning external performance, the Q1/2009 balance of payments recorded an estimated 3.5 billion US dollar surplus. Export volume of some mainstay commodities, such as palm oil, copper and paper, maintained a positive trend. However, other commodities, such as coal and chemicals, faltered in the face of weakening global demand. Alongside this, imports of raw materials and capital goods for domestic industry came down significantly, due to slumping domestic demand. In the financial account, the issuance of global bonds by the Government helped to generate account surplus. Under these conditions, international reserves 1

12 Monetary Policy Report - Quarter I-2009 in Q1/2009 reached an estimated USD54.8 billion, equivalent to 5.9 months of imports and servicing of official external debt. On the financial market, downward pressure continued although the end of the quarter was marked by some improvement. These pressures are related to lack of improvement in corporate performance and still heightened perceptions of risk shared by owners of capital. Nevertheless, at the end of Q1/2009, the financial market saw a rebound of positive sentiment from the more robust international reserves position following the issue of Indonesian Government global bonds, the expanded Bilateral Swap Arrangement (BSA) with the Government of Japan and the signature of a Bilateral Currency Swap Arrangement (BSCA) with the central bank of China. Amid the steady deterioration in global economic conditions and weakening inflationary pressure, Bank Indonesia is maintaining a pro-growth focus while seeking to avoid further losses in public purchasing power. The various monetary policy actions pursued by Bank Indonesia are designed to support recovery in the real sector with focus on MSMEs and thus bolster domestic economic growth. Besides monetary policy relaxation, Bank Indonesia launched supplementary policy packages aimed at accelerating disbursement of bank credit and mitigating credit risk. These supplementary packages include early restructuring of the banking system, request for Government loan guarantees for strategic projects, such as clean water, electricity, housing and road and bridge infrastructure financed by the State Budget, and facilitation to match banks with sectors offering potential for strengthening the banking intermediation function. Vigorous efforts were pursued in support of the banking business activity focus on MSMEs and the linkage program for cooperation between commercial banks and rural banks or micro financial institutions such as cooperatives and Islamic community trusts (baitul maal wa tamwil). These measures are expected to provide added support for people»s livelihoods and prevent further slowing in the economy. Looking ahead, the Indonesian economy in 2009 will be strongly influenced by the dynamics of the global economy. Indonesia»s economic growth forecast has been revised downwards from the 4.0%-5.0% initially predicted for Even so, Bank Indonesia believes that international commodity prices have now reached a trough with signs pointing to a turnaround that could bolster prices and in turn support export growth. In other developments, the world economic slowdown and falling aggregate demand have eased inflationary pressure. For the future, the prospects of further economic slowdown in 2009 augur for a sustained downward trend with inflation on track for the lower end of the 5%-7% range. Indonesia»s banking industry is predicted to feel the effects of the global financial crisis and world economic slowdown. Nevertheless, the national banking industry will still retain considerable resilience, as reflected in the CAR and NPL key banking indicators. The capital adequacy ratio (CAR) will remain strong at 17.7%. Banking 2

13 General Review liquidity is also predicted to improve on the strength of brisk 19.8% (y-o-y) growth in depositor funds. Despite this, the slowing trend in credit expansion is set to persist due to the cautious stance adopted by banks amid the present uncertain economic outlook. After factoring in these various developments, the Bank Indonesia Board of Governors decided to lower the BI Rate by 25 bps in April 2009 to 7.50%. Bank Indonesia will stay the course with monetary policy conducive to domestic demand while remaining committed to economic stability in the medium to long-term. On the operational level, further cuts in the BI Rate will be possible provided that the inflation outlook remains consistent with the medium-term inflation target. In banking, Bank Indonesia will keep pressing forward with the consolidation programme for a sound, strong and competitive banking system. In further actions, Bank Indonesia will maintain its focus on strengthening prudential management in the banking industry in order to weather the global crisis. 3

14 Monetary Policy Report - Quarter I Latest Macroeconomic Indicators Estimated figures for economic growth in Q1/2009 point to a slowing trend in line with the global economic downturn. On the demand side, household consumption estimates slowed further due to weakening public purchasing power. Economic stagnation in major trading partner nations in tandem with low export commodity prices sent exports tumbling in Q1/2009. Investment activity and imports are similarly predicted to see reduced growth due to falling domestic and external demand. In addition, the still high risks of uncertainty in the world economy have also dampened investment vigour. On the supply side, flagging growth is predicted in nearly all economic sectors. Nevertheless, various factors are expected to provide some mitigation of slowdown in domestic oriented sectors (non-tradable) ECONOMIC GROWTH Aggregate Demand Based on estimates, the economic slowdown in the preceding quarter carried forward into the quarter under review. Q1/2009 GDP growth is projected significantly below preceding quarters at 4.6% (y-o-y, Graph 2.1). The softening GDP growth is largely the result of sharply falling exports in line with the deterioration in global economic conditions and weakening public purchasing power. At the same time, the slowdown in domestic and external demand alongside weakening business tendencies will discourage investment. Externally, export growth is predicted to tumble due to the collapsing economic growth in major export I II III IV I II III IV I II III IV I* markets and the current low level of commodity prices. Consistent with the slowing investment and external demand, preliminary Graph 2.1 figures for imports in Q1/2009 point to diminished growth from Growth of Gross Domestic Product (GDP) one quarter earlier (Table 2.1). % y-o-y I II III IV 2005 %Y-o-Y, Base Year 2000 Table 2.1 Economic Growth - Demand Side I t e m * I II III IV I II III IV* I* Total Consumption Private Consumption Government Consumption Gross Domestic Fixed Capital Formation Export of Goods and Services Import of Goods and Services GDP * Bank Indonesia Projection figures 4

15 Latest Macroeconomic Indicators Import of Consumer Goods, Real M1, CPI GDP Household Consumer CLI Household Consumer 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 I II Graph 2.2 Leading Indicators of Consumption Household consumption in Q1/2009 showed weakened expansion compared to the preceding quarter. This slowdown is consistent with the leading indicators for household consumption, which suggest that the contractionary cycle will persist at least another quarter (Graph 2.2). The tapering off in private consumption during the quarter is thought to be linked to weakening public purchasing power caused by declining incomes and the surge in worker dismissals. Despite this, the onset of falling inflationary pressure followed by the launching of a range of Government policies, such as direct cash transfers, pay rises for civil servants and the spending for the national election are expected to keep growth from excessive decline. In the overall analysis, household consumption recorded lower estimated growth during the quarter under review at 4.1% (y-o-y) Index optimistic 80 pessimistic Expectation Consumer 70 Present Situatuions Index (PSI) Consumer Confidence Index Graph 2.3 Consumer Confidence Index - BI Consumer Survey Stagnating household consumption growth in Q1/2009 is also confirmed by several other early indicators, such as electronic and automotive sales and the diminishing growth in imports of consumption goods. Concerning financing, the real M1 and real consumption credit indicators show a slowing trend. On the other hand, consumer confidence is on the rise despite loss of public purchasing power. The Bank Indonesia Consumer Confidence Index (IKK-BI, Graph 2.3) is improving mainly in response to more optimistic perceptions of future economic conditions related to expectations of a civil servant pay rise and Government plans for the fiscal stimulus. However, as of mid-q1/2009, the retail sales index was tapering off due to falling sales in the food and tobacco categories Gross Fixed Capital Formation IPI, Sales Commercial Car, IPI Machinery and Equipment, Cement Consumption Graph 2.4 Investment Leading Indicators Investment CLI 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 I II Nevertheless, private consumption was kept from slowing further by growth in worker remittances and spending on the 2009 national election. As of Q4/2008, worker remittances to Indonesia were still showing a rising trend. Alongside this, the flurry of campaign activities by political parties and candidates for legislative posts provided a boost for non-food consumption expenditures during the quarter under review. Investment growth is estimated lower in Q1/2009 compared to 4.8% (y-o-y) in the preceding quarter. This is reflected in leading private investment indicators that are now in a contractionary cycle expected to carry forward at least through the coming quarter (Graph 2.4). The ongoing decline in external demand coming after heightened risk of uncertainty in the global economy and domestic economic conditions in advance of the national 5

16 Monetary Policy Report - Quarter I (%, yoy) Manufacturing Non Manufacturing Gross Fixed Capital Formation (rhs) 0 I II III IV I II III IV I II III IV I 2006* 2007** 2008*** 2009*** (%) Graph 2.5 Construction and Non-Construction Investment Growth Gross Fixed Capital Formation (y-o-y) Import of Capital Goods Graph 2.6 Import of Capital Goods Graph 2.7 Business Sentiment - BPS (%, yoy) I II III IV I II III IV I II III IV I Index BTI (%) 25 I II III IV I II III IV I II III IV I* Using Production Capacity Business Income Working Time election prompted business to delay investments during the quarter under review. The measures expected to counter this trend, beginning with the cuts in fuel prices and industrial electricity billing rates and extending to fiscal stimulus initiatives in infrastructure projects and key subsectors, are not expected to have sufficiently strong impact to prevent further slowing of investment. Analysed by component, investment growth in Q1/ 2009 was again driven by construction investment (Graph 2.5). Confirmation of falling investment growth also came from early investment indicators, such as tapering off in the cement production and consumption indices and slowing imports of capital goods (Graph 2.6). Concerning investment financing, real investment credit expansion has slowed in keeping with the downturn in domestic and external demand. In a similar vein, changes in business sentiment also provide indication of falling investment activity. In the findings of a Central Statistics Agency (BPS) survey for Q1/2009, diminishing business revenues are thought to have prompted a weakening business trend (Graph 2.7). This indication is also supported by the results of the Business Survey (SKDU), which forecast a downturn in investment and number of businesses intending to proceed with investment during the first half of 2009 compared to the same period one year earlier. The flagging pace of global economic activity augurs for a reversal of export growth to -5.1% (y-o-y). Spreading pressure from the global economic slowdown on trading partner nations in tandem with continued low export commodity prices has borne down significantly on export growth. Also driving down exports is the reduced take-up of agricultural commodities and industrial products by the industrial sector in major export markets (Graph 2.8). The export financing scheme is also not expected to have halted the slowdown in exports during the quarter under review. In keeping with the drop in domestic and external demand, preliminary figures point to faltering import growth in Q1/2009. Indications of this are evident in the leading import indicators, set to remain in the contractionary stage of the cycle for another quarter (Graph 2.9). Depressed import growth is largely attributable to declining intensity of production, especially in export-oriented manufacturing, and falling private consumption in tandem with tighter imports of consumer goods. In response to these developments, estimated Q1/2009 imports weakened considerably with negative growth at -7.1% (y-o-y). 6

17 Latest Macroeconomic Indicators (%) (%) 16 Export (yoy) rhs agriculture export industry export mineral export I II III IV I II III IV I II III IV Feb Graph 2.8 Export Growth by Sector contraction phase contraction phase imp_gdp import_cli Industrial Production Index, Volume of Industrial Electricity, Automotive Production, Japan Manufacturing Index, Paper/Paper Products Production Index, Clothing and, Rp to Accessories Production Index, Korea Production and Services Index, Rp to USD, Rp to JPY, Real Consumption Credit, Real M1 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 I II Graph 2.9 Leading Import Indicators Government Financial Operations In the period ending February 2009, Government financial operations produced a fiscal surplus of Rp 10.3 trillion (0.2% of GDP), down from the Rp 26.6 trillion surplus for the same period one year earlier (0.5% of GDP). State revenues and grants measured against target were down considerably from the same period one year before, due to the flagging performance of the taxation sector. Nevertheless, absorption of budget expenditures fared better during the quarter, with improvements recorded in central government expenditures and transfers to the regions. The continuing slowdown in the domestic economy and new government taxation policies have impacted taxation revenues. Inline with the slowdown in the economy and the implementation of reductions in income tax rates and increase in the tax-free income band, will dampen growth in taxation revenues from non-oil and gas sources. In further developments, growthsensitive tax revenues, such as VAT, recorded negative growth in January-February Export tax revenues also steadily declined in the second half of 2008, indicating a lack of recovery in Indonesian exports. In non-tax revenues, the much lower than predicted oil prices compared to the same period one year earlier also resulted in considerably reduced oil and natural gas revenues during this period Budget expenditures showed improved performance compared to the same period one year earlier, with higher realised Central Government spending and transfers to the regions. The improved outcome in Central Government spending is supported by higher levels of line ministry/statutory agency expenditures, subsidy payments and debt interest. The stronger outcome in line ministry/statutory agency expenditures, such as personnel, procurement and capital expenditures are indicative of an expanding fiscal contribution to the real sector, although still only minimal. During the quarter, the electricity subsidy accounted for the largest share of subsidy expenditures, while interest payments mounted due to the increased official debt burden. As a result of these conditions, the Central Government expenditure outcome came to 6.7% of the State Budget, up slightly from the 6.2% of Budget recorded for the same period one year earlier. Regional expenditures were also marked by increased transfers to the regions due to the working meetings for the January-February General Allocation Fund payments held in January. The Profit Sharing Funds, on the other hand, underwent significant contraction due to the drop in international market oil prices. In response to these developments, Transfers to the Regions came to 14.7% of the Budget outcome, representing improvement over the 12.2% of Budget recorded for the same period last year. 7

18 Monetary Policy Report - Quarter I-2009 Aggregate Supply On the supply side, preliminary figures for Q1/2009 point to slowing economic growth in keeping with demand-side developments (Table 2.2). Tradable sectors, such as mining and agriculture and especially the estates subsector, recorded slower estimated growth in keeping with lack of recovery in world demand and international commodity prices. Performance in non-tradable sectors, such as trade, construction and the transportation and communications sector, started to show strain from the influence of the slowing tradable sectors. The sectoral analysis of slowing growth during the quarter was confirmed by the findings of the BI Business Survey and the BPS Business Tendency Survey that indicated more pessimistic business expectations during Q1/2009. However, analysed by contribution, the most important growth sectors were trade, hotels and restaurants, manufacturing and transport and communications. Table 2.2 Economic Growth - Supply Side %Y-o-Y, Base Year 2000 S e c t o r * I II III IV I II III IV* I* Agriculture Mining and Quarrying Manufacturing Electricity, Gas and Water Supply Construction Trade, Hotels and Restaurants Transportation and Communication Financial, Rental and Business Services Services GDP * Bank Indonesia Projection figures Manufacturing is estimated to have slowed further in Q1/2009 with growth at 1.7% (y-o-y). However, this slowdown has been offset to some extent by rising domestic spending in advance of the national elections. Growth was distributed mostly among such industry subsectors as transportation manufacturing, machinery and tools, the food, beverages and tobacco subsector and the chemical industry and rubber products subsector. Similarly, the major contributors to manufacturing growth were transportation manufacturing, machinery and tools, the food, beverages and tobacco subsector and the chemicals and rubber products subsector. Performance improved in domestic oriented industry subsectors early in Q1/2009. Signs of resistance to the slowdown in manufacturing were evident in an upturn in index performance and production capacity in subsectors oriented to the domestic market, such as food, beverages and tobacco and textile manufacturing. Despite this, export oriented subsectors, such as transportation equipment, machinery and 8

19 Latest Macroeconomic Indicators tools and the non-metals quarrying sector, maintained a downward trend. Other early indicators, such as car and motorcycle production, showed modest improvement at mid-q1/2009. This was also borne out by the comparatively stable bank credit expansion to manufacturing until mid-q1/2009. The trade, hotels and restaurants sector charted more modest growth at an estimated 5.2% (y-o-y) in preliminary figures for Q1/2009. One factor contributing to the slowing performance in this sector was falling demand due to weakened public purchasing power. Nevertheless, election campaign activities are thought to have provided a lift for domestic demand and prevented further slowing of growth in the trade sector. Early indicators for the trade, hotels and restaurant sector, such as the retail sales index (SPE-BI) also point to decline in mid-q1/2009. Similar behaviour was visible in indicators for the hotels subsector, with stagnating average occupancy rates in Bali hotels as of mid-q1/2009. As regards financing, at mid-q1/2009 banks were engaged in credit expansion to the trade sector, although below the average growth recorded in Agriculture sector growth in Q1/2009 is estimated at a relatively stable 4.2% (y-o-y). The stability of this growth is reflected primarily in rice production within the food crops subsector. In the First Forecast Figures published by BPS, the outlook for stable rice production is supported by expansion in cultivated area and improved productivity. On the other hand, the estates subsector was still marked by a decline in Q1/2009 due to lack of improvement in export demand. As regards financing, banks continued to expand their lending to the agriculture sector as of mid-q1/2009, although below the average growth recorded in Estimated growth in the mining and quarrying sector slowed from the previous quarter to 1.1% (y-o-y). This stagnating performance in the mining sector is explained mainly by weakening export demand and falling mining commodity prices, as evident in exports of metal ores, matte and concentrates, coal and aluminium. Further confirmation of slowing mining sector growth came from financing, with lending to the sector maintaining a downward trend as of mid-q1/2009. Estimated growth in the transport and communications sector came below the previous quarter, slipping to 13.7% (y-o-y). Reflecting less vigorous growth in the communications subsector was some levelling in the growth of cellular telephone subscribers beginning in Q4/2008. Similar behaviour was observed in the transportation subsector, with growth following a stagnating trend reflected in downward movement in numbers of air and rail passengers as of mid-q1/2009. Slowing growth in the transportation and communications sector was also confirmed in financing, with lending to the sector halfway through Q1/2009 reported in decline. Construction sector growth slowed during Q1/2009 to an estimated 4.7% (y-o-y). Confirmation of the stagnating construction sector trend came from flagging growth in commercial property construction (Commercial Property Survey BI). The slowing growth was also reflected in weaker expansion in cement consumption as of early 9

20 Monetary Policy Report - Quarter I-2009 Q1/2009. In financing, bank lending channelled through property credit and construction credit recorded more modest expansion. The infrastructure stimulus originally expected to halt the slowdown in construction still faces various hurdles, among others the poor state of readiness of infrastructure projects slated for funding. BALANCE OF PAYMENTS The contraction in imports brought about by slowing domestic economic activity coupled with the Government»s successful GMTN issuance enabled the Q1/2009 balance of payments to chart a surplus of 3.5 billion US dollars. Impact from the global economic slowdown on the market for goods was reflected in falling activity in trade flows, including exports and imports. Exports showed flagging performance in keeping with falling global demand. Despite this, export volume of some mainstay commodities, such as palm oil and copper, maintained a positive trend. Imports sustained even sharper correction due to weakening demand in the domestic economy. The combination of these developments is expected to produce a current account surplus. Alongside this, inflows of foreign capital through placements in Government foreign currency bonds and direct investment resulted in a positive contribution in the capital and financial account. Following these developments, the international reserves position at end-q1/2009 stood at USD54.8 billion, equivalent to 5.9 months of imports and servicing of official external debt. The Current Account Indonesia»s current account recorded a surplus, with imports growing at a faster rate than exports. Imports, most importantly of crude oil, are estimated to have plunged more drastically in response to the steeper than expected downturn in the domestic economy. Countering this were signs of improved export volume for some mainstay commodities, such as palm oil, copper and paper. The faltering demand for Indonesian products caused by recession in trading partner economies was partially offset by the levelling off in the downward price trend in Q1/2009. Despite this, performance declined for other mainstay commodities, such as coal and chemicals. Taken together, the merchandise trade balance is forecasted to post a surplus. Exports received a boost from the halt in the slide in commodity prices during Q1/ Non-oil and gas exports were down due to falling exports of agricultural, mining and industrial goods. Imports, on the other hand, are projected lower for Q1/2009 in response to the forecast for further slowdown in the domestic economy. The weakening trend in consumption and manufacturing has been followed by reduced imports of consumption goods and raw materials, while capital goods imports are indicated to be quite positive. The influence of weakening domestic economic activity has also been felt in the oil and natural gas sector. The oil trade deficit is estimated lower following a limited improvement in oil prices and reduced domestic consumption of fuels. 10

21 Latest Macroeconomic Indicators The services, income and transfers account posted an estimated reduced first quarter deficit in The lower services deficit is explained by falling cost of imports in keeping with the forecast for import decline. In a similar development, the narrower income deficit is related to lower repatriation of returns on foreign investment in domestic financial assets in the wake of foreign-held portfolio adjustments prompted by risk aversion. Despite this, the flow of remittances in current transfers continued to benefit from consistency in remittances from domestic workers employed in the Middle East. Capital and Financial Account The capital and financial account is estimated to have posted a Q1/2009 surplus, buoyed by a successful issuance of government foreign currency bonds and net FDI inflows. These FDI inflows were related to investment in the telecommunications sector. Also contributing to the increased net direct investment were limited outflows from direct investment in the oil and natural gas sector under the cost recovery regulations. Amid the ongoing global financial market turmoil, the USD3 billion issue of Global Medium Term Notes (GMTNs), comprising foreign currency government bonds, represented a significant contribution to the capital and financial account. Positive local investor response to the GMTN issues was reflected in heavy oversubscriptions. These GMTNs were released in 2 tranches, one at USD1 billion maturing in 5 years and the second at USD2 billion with a 10-year tenor. International Reserves Following the latest developments in the current account and the capital and financial account, international reserves reached USD54.8 billion at end-q1/2009, a level equivalent to 5.9 months of imports and servicing of official external debt. 11

22 Monetary Policy Report - Quarter I Monetary Indicators and Policy, Q1/2009 In early Q1/2009, global economic conditions still showed no sign of improvement. Instead, various developments indicated that conditions were worsening beyond original predictions. Accordingly, estimates for Q1/2009 point to slowing growth in the Indonesian economy. The most important factor in this adverse turn is the significant drop in exports brought about by collapsing growth in trading partner nations, in addition to weakening purchasing power due to worker dismissals. On the other hand, Q1/2009 saw some moderation in inflationary pressure. At the end of the quarter, CPI inflation was recorded at only 0.36% (q-t-q), well under the historical trend. Similarly, the annual measure of CPI inflation eased to 7.92%, down considerably from the end-december 2008 level of 11.06%. Alongside this, pressure continued to bear down on the exchange rate in Q1/2009 due to adverse external conditions. Depreciation in the rupiah reached 5.67% (p-t-p) with the currency dropping to Rp 11,555 to the US dollar, while average value came down 5.74%. Even so, some improvement was reported at the end of the period under review, buoyed by the better than expected outcome in the balance of payments and improving perceptions of risk. Consistent with global developments, conditions on the domestic financial market also showed a downward trend. The domestic stock market sustained further pressure in the absence of improved corporate performance, while yield on the Government Securities market widened in response to unchanged perceptions of high risk. Despite this, positive sentiment related to the world financial market at the end of the quarter provided a lift for the Indonesian Composite Index and brought down yield on Government Securities. In view of the various developments during Q1/2009, Bank Indonesia policy will maintain a pro-growth track for the domestic %, yoy CPI Core (exclusion) Volatile Food Administered Price economy while curbing inflation and safeguarding financial sector stability for the medium-term. At the end of the quarter, Bank Indonesia decided to lower the BI Rate by 50 bps to 7.75% Graph 3.1 CPI Inflation INFLATION Monthly inflation maintained a downward trend throughout Q1/2009, primarily from the first round and second round effects of the cut in fuel prices. Annual CPI inflation at the end of the quarter came to 7.92% (y-o-y), far below the previous 11.06% (y-o-y) one quarter earlier (Graph 3.1). Monthly inflation in March 2009 was recorded at 0.22% (m-t-m), bringing quarterly inflation to only 0.36% (q-t-q). Analysed by category of expenditure, the low March 2009 inflation is explained primarily 12

23 Monetary Indicators and Policy, Q1/2009-4, Education, Recreation & Sport Health Clothing Housing, Electricity, Water, Gas, and Fuel Transportation, Communication & Financial Service 0.02 Share (qtq) 0.22 Inflation (qtq) by the transportation category, following the decision to cut fuel prices under the policy for strategic administered prices. However, the miscellaneous expenditures category was marked by persistent inflationary pressure with the highest inflation recorded in the clothing category, due to increased gold jewellery prices The low inflation in Q1/2009 came as the result of softening Food, Beverages, Cigarattes & Tobacco pressure in fundamentals and non-fundamentals. In regard to Proccesed Food fundamentals, core inflation eased along with improvement in % inflation expectations on the strength of measures to safeguard Graph 3.2 adequate supply of staple needs and the reduction in fuel prices. Inflation and Contribution to Inflation by Category, Added to this, demand side pressure was comparatively low in Goods and Services Q1/2009 (q-t-q) response to weakening domestic demand. On the nonfundamentals side, falling international commodity prices and the safeguarding of domestic supply of staple goods helped keep volatile foods inflation in check. In another important development, the first round and second round effects of the fuel price cut quickly brought down inflationary pressure in administered prices to the point of deflation. Core inflation maintained a downward trend in Q1/2009. Measured annually, core inflation reached 7.15% (y-o-y) at end-q1/2009, down from the previous quarter»s level of 8.29% (y-o-y). This trend came in response to improving inflation expectations and minimum demand-side pressure. Lower inflation expectations were supported by actions to ensure adequate domestic supplies of staple needs and the cut in fuel prices. At the same time, pressure from the output gap remained minimal, due to sharply weakened domestic demand. However, while core inflation showed a declining trend, upward pressure on core inflation came from external factors, led by imported inflation and depreciation in the rupiah %, yoy Graph 3.3 Inflation Expectation - Consensus Forecast Like core inflation, volatile foods inflation also maintained a softening trend. The annual measure of volatile foods inflation reached 10.57% (y-o-y) at end-q1/2009, down from the previous quarter»s level of 16.48% (y-o-y). This reduction is explained largely by the ongoing decline in international commodity prices and improved domestic supply of staple goods, notably red chilli peppers and fresh fish. In further developments, the relatively bountiful harvest paved the way for downward movement in rice prices, resulting in a deflationary contribution of 0.02%. The Q1/2009 deflation in administered prices was more pronounced compared to the preceding quarter. Measured annually, administered prices inflation dropped to 8.27% (y-o-y) from 15.99% (y-o-y) one quarter earlier. The minimum increases in administered prices and implementation of the conversion programme without the shortages that had dogged initial 13

24 Monetary Policy Report - Quarter I-2009 %, yoy %, yoy The impact of a decrease in rupiah's depreciation bore up a decrease in inflation 20 from imported commodities Graph 3.4 Exchange Rate and Trade Partner Countries Inflation Graph 3.5 Rupiah Exchange Rate Average Rp/$ % Daily Exchange Rate Daily Volatility Quarterly Volatility Jan Dep (+)/Apr(-) Rp (LHS) Trade Partner Inflation (RHS) Import Commodity Inflation (LHS) Rp/USD Daily Exchange Rate Quarterly Average Monthly Average ,103 9,221 10, Jan Jan 29 Feb 26 Mar 26 Apr 23 May 21 Jun Jul AugSep Oct NovDec 3 Dec 31 Jan 28 Feb 25 Mar 24 Apr 21 May 19 Jun Jul AugSep Oct NovDec DecJan Feb 23 Mar Apr Jul Oct Jan Apr Jul Oct Jan Graph 3.6 Rupiah Exchange Rate Volatility , implementation contributed to the reduced inflationary pressure in administered prices. Disaggregated by commodity, the deflation contribution during the quarter under review was related primarily to the first round effect of the cuts in gasoline and automotive diesel prices. These significantly lowered prices subsequently produced a second round effect in reductions of transport fares. RUPIAH EXCHANGE RATE Significant pressure bore down on the rupiah during Q1/2009, mainly from external factors. Measured as an average, the rupiah depreciated 5.7% from Rp 10,914 to the US dollar in the previous quarter to Rp 11,578 to the US dollar (Graph 3.5). At the end of the period, the rupiah closed at Rp 11,555/USD, having weakened point-to-point by 5.67%. The downward movement in the exchange rate was driven more by negative sentiment over the increasingly pessimistic outlook for the global economy. As a result, investors have flocked to safe haven assets and in so doing have pulled funds from what are perceived as higher risk emerging markets, including Indonesia. Over time, this trend eventually put pressure on the rupiah. However, this pressure eased at the end of the quarter on the strength of positive sentiment on the global financial market, spurred by reported earnings by some financial institutions and the policy response of the Fed. Added support also came from positive domestic sentiment over better than expected performance in the balance of payments. Alongside this, rupiah volatility eased from 9.8% to 2.6% (Graph 3.6). Continuing risk aversion towards emerging market assets (including rupiah assets) was reflected in the EMBIG spread, which remained high (Graph 3.7). The EMBIG spread eased from 724 at end-q4/2008 to 628 at the end of Q1/2009, reflecting the global pressure on stock markets. Despite this, at the end of the period under review, foreign investors began to show improved risk appetite, which also marked a renewed improvement in risk factors. At the same time, the swap premium, which serves as one indicator of expected direction of movement in the rupiah, showed renewed fluctuation in all tenors (1, 3, 6 and 12 months) (Graph 3.8). Despite this, the policy actions taken by Bank Indonesia succeeded in bringing down risk premium from a peak, with some easing by the end of the quarter. Relaxation of monetary policy led to decline in yield on rupiah instruments, albeit within safe limits. Uncovered Interest Rate 14