Jl.MH. Thamrin No.2 Jakarta Indonesia

Transcription

1 Jl.MH. Thamrin No.2 Jakarta Indonesia

2 BANK INDONESIA For further information please contact: Regulation and Policy Communication Division Monetary Policy Group Economics and Monetary Policy Department Phone : /6836 Fax. : gkm_komunikasi@bi.go.id Website : http//

3 MONETARY POLICY REPORT Bank Indonesia monetary policy report QUARTER III The Monetary Policy Report is published quarterly by Bank Indonesia after the Board of Governors Meetings in December, April, y, 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 and Act No. 6 of 2009, 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 Agus D.W. Martowardojo Mirza Adityaswara Halim Alamsyah Ronald Waas Perry Warjiyo Hendar Governor Deputy Governor Senior Deputy Governor Deputy Governor Deputy Governor Deputy Governor i

4 MONETARY POLICY REPORT Bank Indonesia ii

5 MONETARY POLICY REPORT Bank Indonesia Enhanced Monetary Policy Measures Under Inflation Targeting Framework In y 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 sustainable economic growth and attain social welfare. Underlying Principles Monetary Policy Strategy 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 longterm. The Inflation Target Government upon coordination with Bank Indonesia has set and announce an inflation target of CPI every year. Based on PMK No.143/PMK.011/2010 the inflation targets established by the Government for 2010 are 5.0%, 5.0%, and 4.5% with ±1% deviation. For the years, 2014, and 2015, the inflation target set by the Government based on PMK No.66/PMK.011/ respectively by 4.5%, 4.5%, and 4% with deviation of +1%. 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 y 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 MONETARY POLICY REPORT Bank Indonesia iv

7 MONETARY POLICY REPORT Bank Indonesia The Governor of Bank Indonesia Foreword The Indonesian economic trends remained relatively subdued in Q3/ influenced by weakening global economy shrouded in considerable uncertainty. Domestic economic growth is forecasted to reach 5.6% in Q3/, with growth for coming within the 5.5%-5.9% range. This slowdown was influenced by the global economic developments in which the slow growth of the economy and the downward trend in commodity prices had borne down on Indonesia s exports. Added to this, the sluggish pace of household consumption and investment is set to continue due to weakening purchasing power caused by upward pressure on prices following the increase in prices for subsidised fuels. The slowing trend in the domestic demand began to have a visible effect in the current account, which recorded a lower deficit in Q3/ compared to Q2/. The reduction in the current account deficit has been achieved largely from contraction in imports in keeping with softening domestic demand and the weaker exchange rate. On the other hand, the capital and financial account posted an enlarged surplus following renewed foreign investor buying of Bank Indonesia certificates and Indonesian government bonds and lower net selling by foreigners of domestic shares in response to policy actions taken by Bank Indonesia and the Government and the decision to delay tapering off the monetary stimulus in the United States. Consequently, the international reserves position at the end of September reached 95.7 billion US dollars, equivalent to 5.2 months of imports and servicing of official external debt and up from the end of August position of 93.0 billion US dollars. During Q3/, the rupiah underwent depreciation commensurate with the value of its fundamentals. Pressure continues to bear down on the rupiah from the condition of Indonesia s current account, which remains in deficit. As in the downward movement in other Asian currencies, rupiah depreciation was also influenced by diminishing non-resident holdings of domestic financial assets triggered by sentiment over the tapering off of the monetary stimulus by the United States Federal Reserve. Bank Indonesia believed that the current developments in the exchange rate are representative of the condition of Indonesia s economic fundamentals. Inflation underwent a surge in Q3/ from the effect of the increase in subsidised fuel prices. Nevertheless, monthly inflation eased in August and September, returning to the normal trend in keeping with Bank Indonesia forecasts. September in fact recorded deflation as a result of deflation in the volatile foods category. Looking forward, inflation is expected to fall in response to slowing domestic demand and actions to strengthen the coordination v

8 MONETARY POLICY REPORT Bank Indonesia between Bank Indonesia and the Government in controling inflation. Accordingly, inflation in is projected to come below 9.0% and subsequently drop to the 4.5±1% targeting range in Financial system stability was well maintained, underpinned by a solid banking industry resilience in the face of various pressures. The capital adequacy ratio (CAR) remained at a high level, while non-performing loans (NPLs) stayed comfortably low. Credit expansion had begun to ease in keeping with developments in the economy, although its growth level was still fairly high. In addition, the stress testing on the liquidity, credit and capital of the banking industry indicate a strong resiliency to a range of risks, including economic slowdown, increases in interest rates and depreciation in the rupiah. Looking forward, Bank Indonesia envisages more modest credit growth consistent with upward movement in interest rates, slowing domestic demand and macroprudential policies put in place by Bank Indonesia. Responding to these multifaceted developments and the outlook for the future, Bank Indonesia s Board of Governors Meeting on 12th November decided to hold the BI Rate at 7.25%, with the Lending Facility rate and Deposit Facility rate remained at 7.25% and 5.50% respectively. Bank Indonesia will continue to monitor global and domestic economic performance as well as to redouble coordination with the Government, particularly in terms of controling the inflation and the current account deficit. Bank Indonesia is confident that the policies already put in place will lead to make an adjustment in the current account deficit and guide inflation towards the 4.5±1% targeting rate in Bank Indonesia committed to continue issuing and calibrating the monetary and macroprudential policy mix optimally and in a timely manner in order to curb inflation and inflation expectations, keep the rupiah exchange rate commensurate to its fundamentals and bring down the current account deficit to a sound level for the long term. This concludes our overview of the Indonesian economy for Q3/ and the outlook for the future. My hope is for this document to provide reference material of benefit for us all. Governor of Bank Indonesia Agus D.W. Martowardojo vi

9 MONETARY POLICY REPORT Bank Indonesia Contents Contents 1. Monetary Policy Statement Recent Macroeconomic and Monetary Developments... 4 Development in the World Economy... 4 Economic Growth... 7 The Balance of Payments Rupiah Exchange Rate Inflation Financial Market Developments Economic Outlook and Risk Ahead Global Economic Outlook Economic Growth Outlook Inflation Forecast Statistics vii

10 MONETARY POLICY REPORT Bank Indonesia Contents viii

11 Monetary Policy Statement 1. Monetary Policy Statement At a meeting held on 8th October, Bank Indonesia s Board of Governors decided to hold the BI Rate at a level of 7.25%, with rates on the Lending Facility and Deposit Facility held respectively at 7.25% and 5.50%. Bank Indonesia will continue to monitor global and domestic economic performance as well as further synergise the monetary and macroprudential policy mix in order to ensure that inflationary pressures remain under control, rupiah exchange rate stability is maintained according to its fundamentals and the current account deficit is reduced to a sustainable level. Bank Indonesia will also continue to redouble coordination with the Government, particularly in terms of inflation control and the current account deficit. Bank Indonesia believes that such policies, coupled with existing policies, will expedite efforts on reducing the current account deficit to a level considered more sound and guiding inflation to within its target corridor of 4.5±1% in Bank Indonesia recognises that the global economy is cooling off and remains overshadowed by ubiquitous uncertainty. The economies of developed countries, such as the United States (US), countries in Europe and Japan are not performing well amid tepid signs of recovery. Meanwhile, the economies of emerging market countries are marred by the risk of weaker economic growth, weaker current accounts and weaker exchange rates. Concomitantly, commodity prices continue to slide, with the exception of oil. On financial markets, risks stem from The Fed tapering its stimulus policy, the ongoing debate on the debt ceiling and the US government shutdown. Overall, unfavourable global economic performance is placing additional pressures to emerging contries exports, through the trade channel, including Indonesia. Furthermore, non-resident funds are flowing into regional stock and bond markets in the very short term, thereby appreciating currencies in Asia. Congruent with the protracted global economic slowdown, the domestic economy is also displaying some signs of an ongoing downward trend. The national economy is projected to expand by 5.6% during the third quarter of and achieve growth in the range of 5.5%-5.9% for the year. The sluggish global economy, coupled with falling commodity prices, is limiting domestic export performance. Furthermore, weaker purchasing power due to mounting inflationary pressures in the wake of fuel subsidy reductions is expected to erode household consumption and investment. Notwith standing, the national economy is forecast to rebound in 2014 in line with a global economic recovery and prevailing commodity price trends. As a whole, economic growth in Indonesia is projected to accelerate to 5.8%-6.2%. Externally, Indonesia s balance of payments is predicted to improve during the third quarter of. The current account deficit will narrow as a result of slower import in harmony with weaker domestic demand and rupiah depreciation. On the other hand, the capital and financial account surplus is expanding, through foreign investors placement to SBI and SUN 1

12 Monetary Policy Statement instruments, and a decrease in net foreign sales of domestic shares in response to Bank Indonesia and Government policy as well as tapering policy in the US. Consequently, foreign exchange reserves totalled USD 95.7 billion at the end of September, up from USD 93 billion at the end of August. Foreign exchange reserves at the end of September were equivalent to 5.2 months of imports and servicing external debt. Depreciatory pressures plagued the rupiah exchange rate during the third quarter of the current year in line with economic fundamentals. On average, the rupiah weakened 8.18% (qtq) to Rp 10,652 per US dollar, or pointto-point the rupiah depreciated by 14.29% (qtq) to a level of Rp 11,580 per US dollar. In line with a number of countries in the Asian region beset with currency depreciation, the weaker rupiah was blamed on a correction by non-residents in their domestic financial assets triggered by the tapering off of monetary stimuli by the Fed. Fundamentally, depreciatory pressures on the rupiah are escalating with the relatively large current account deficit in Indonesia. At the end of Quarter III-, pressures on the rupiah eased in line with improvements in terms of inflation and the trade balance along with positive sentiment stemming from the Fed s tapering policy. Confidence of the foreign exchange market is beginning to recover, due to the active and balanced supply and demand in shaping the rupiah s exchange rate. Bank Indonesia believes that current exchange rate performance successfully illustrates economic fundamentals in Indonesia. Inflationary pressures eased in September with a 0.35% (mtm) rate of deflation recorded, or inflation at 8.40% (yoy). Abundant supply of several salient horticultural commodities, in particular shallots and chilli peppers, prompted a sufficiently deep correction in food prices. In addition, the start of lower beef prices also led to further deflation with volatile foods experiencing deflation of 3.38% (mtm) or inflation of 13.94% (yoy). Ebbing inflationary pressures, in terms of core inflation and administered prices, amounting to 0.57% (mtm) or 4.72% (yoy) and 0.34% (mtm) or 15.47% (yoy) respectively, are due to the less intense impact of fuel subsidy reductions and price corrections after Eidul-Fitr. The successful control of such prices is in accord with Bank Indonesia s projections that the rate of inflation will be extremely low and return to normal commencing in September and during the months thereafter. The prospect of diminishing inflation pressures is also the result of weaker domestic demand along with measures taken to strengthen coordination between Bank Indonesia and the Government in terms of inflation control. Accordingly, the rate of inflation in is projected in the range of 9.0% - 9.8% before subsequently returning to its target corridor of 4.5±1% in Financial system stability was maintained, underpinned by a solid banking industry resilience in the face of various pressures. The capital adequacy ratio (CAR) remained high at 17.89%, well above the minimum requirement of 8%, while the ratio of non-performing loans (NPL) was low at just 1.99% in August. The results of stress testing also provides clear evidence of solid banking 2

13 Monetary Policy Statement industry resilience to the variety of risks faced, including an economic downturn, higher interest rates and rupiah depreciation. Additionally, credit growth has finally showed early signs of slowing down, despite remaining high at 22.2% (yoy) in August. Credit growth is mainly attributable to credit withdrawal from previous commitments, the impact of recalculation of the exchange rate, as well as the decrease in new credit commitments. In the future, Bank Indonesia expects credit growth to continue decelerating in line with higher lending rates, weaker domestic demand and the macroprudential policy instituted by Bank Indonesia. 3

14 Recent Macroeconomic and Monetary Developments 2. Recent Macroeconomic and Monetary Developments Developments in Indonesia during Q3/ point to a series of adjustments under way in the domestic economy. These changes have come in response to the unfolding of events in a flagging global economy shrouded in considerable uncertainty. In addition, the process of adjustment in the domestic economy has been prompted by various policies introduced by Bank Indonesia and the Government to mitigate risks that have emerged on both the global and domestic level. In this adjustment process, the slowing trend in the economy is expected to carry forward through Q3/. The economic slowdown has resulted mainly from weakening domestic demand, particularly household consumption and non-construction investment. The less vibrant trend in the domestic economy is becoming visible in the current account, which in Q3/ is predicted to chart a reduced deficit compared to Q2/. The latest data for August shows that Indonesia s balance of trade is back in surplus due to falling imports. Following a surge in y, inflationary pressure visibly eased in monthly figures for August and September, returning to the normal trend. In fact, September was a month of deflation. Alongside this, financial system stability remained well in hand, bolstered by the solid resilience in the banking industry as indicated by capital adequacy ratios well above the regulatory minimum and the sustained low level of non-performing loans. DEVELOPMENTS IN THE WORLD ECONOMY In Q3/, the world economy remained sluggish, dogged by uncertainty. Indications of flagging world growth came most importantly from the lingering contraction in European economies and the softening economic performance of developing nations, despite improving trends in some advanced economies led by the US and Japan. The US and Japanese economies are predicted to improve further after estimated Q2/ growth of 1.6% (yoy) and 1.2% (yoy), ahead of the Q1/ performance of 1.3% (yoy) and 0.9% (yoy). In contrast, European economies are set to shrink even further, despite some levelling out in this trend with contraction in Q2/ at 0.5% (yoy). The economies of China and India remain in slowdown after posting growth in Q2/ at 7.5% (yoy) and 4.4% (yoy), down from the Q1/ levels of 7.7% and 4.8%. Accordingly, the world economy is forecasted to grow 2.9% in, a more modest rate compared to the earlier 3.0% projection. 4

15 Recent Macroeconomic and Monetary Developments Index expanding contracting 35 ISM Manufakcture ISM Service Source: Bloomberg Index Graph 2.1 USA PMI Manufacturing and Services -13 The US economy is predicted to improve in Q3/, as indicated by production and demand-side developments. On the production side, positive developments are in reflected in gains in the US manufacturing PMI, which climbed to 56.2 in September from the August level of 55.7 (Graph 2.1). On the demand side, economic growth is reflected in positive growth in retail sales and mounting household consumption. The housing sector is also upbeat as suggested by rising prices, despite a drop in sales of new builds. Similarly, consumer confidence continues on an upward trend in spite of a dip in monthly figures for September, during the time of concerns over the Fed plans for tapering QE (Graph 2.2). Positive growth in the economy also contributed to a reduction in unemployment to 7.3% in August, accompanied by a falling trend in jobless claims Source : Bloomberg % IP (% yoy) Cons. Confid. Future Situation (U. Michigan) Cons. Confid. Current Cond (U. Michigan) Graph 2.2 USA Consumer Confidence Graph 2.3 Japan s Industrial and Manufacturing Performance Graph 2.4 Euro PMI Manufacturing Date September PMI < 50 : contraction Date Sptember Index, PMI = 50 : neutral 75 PMI < 50 : expansion Apr Oct Apr Oct Apr Oct Apr Oct Apr Oct Source: Bloomberg Index, 50 : neutral PMI Manual (RHS) > 50 : Expansion < 50 : Contracton PMI Composit PMI Non Manufacturing PMI Manufacturng 32 Jun Nov Apr Sep Feb Dec May Oct Mar Aug Source : Bloomberg Date September Japan s economic growth has also improved in forecasts for Q3/. This is borne out in upbeat manufacturing performance as indicated in the rising Manufacturing PMI (Graph 2.3). In addition, exports are strengthening in line with indications of economic recovery in the US and levelling out in the contraction in Europe. These positive developments have benefited in part from optimism over the Abenomics policies. In contrast to the US and Japan, European economies are forecasted to sustain further contraction in Q3/, despite a levelling off in this trend. The more moderate rate of contraction in Europe is explained by expansion in Germany s manufacturing sector. As part of these developments, the Euro composite PMI reached a 27-month high in September at 52.1, up from 51.5 in the preceding month (Graph 2.4). On the consumption side, European retail sales are making steady improvement despite remaining in negative territory. Indications of recovery in the German economy and the downward trend in Germany s unemployment have begun fostering more favourable business perceptions, as indicated in the German ZEW survey. The economy in China is predicted to fall short of earlier projections. This forecast is influenced largely by falling consumer confidence following the release of realised GDP data for Q2/, with growth slowing to 7.5% (yoy) from 7.7% (yoy) in Q1/. Despite analysis pointing to a slowing trend, China s economy as a whole remains solid in both production and demand. On the production side, the Market Manufacturing/HSBC China PMI climbed in September to 51.2, the highest level in the past 6 months (Graph 2.5). These production gains were bolstered by activity in heavy industry, in keeping with the structural reforms pursued by the Government of China. The expansive production sector in China has also been supported by burgeoning domestic demand, reflected in higher volumes of new orders and new export orders in line with economic recovery in the US and Europe. 5

16 Recent Macroeconomic and Monetary Developments Index Source : Bloomberg %, yoy Source : Bloomberg NBS PMI Manuf HSBC PMI Manuf date September Graph 2.5 China PMI Industrial Production PMI Manfacturing (rhs) Graph 2.6 India s Industrial and Manufacturing Performance Graph 2.7 Global Stock Market Date September Index Index Nikkei Emerging Markets DJStoxx50 VIX (S&P500) Feb Mar Apr May Jun Aug Sep Oct Nov Dec Feb Mar Apr May Jun Aug Sep Source : Bloomberg Like in China, the economy in India is also predicted to grow less vigorously in Q3/. This condition is largely explained by weakening manufacturing performance, reflected in the manufacturing PMI that slipped in August to 48.5 from the y level of 50.1 (Graph 2.6). However, there are indications of vibrant performance on the consumption side as reflected in an increase in bank credit expansion to 16.1% (yoy) and rising car sales. The slack momentum in the global economy continues to drive down commodity prices. In annual terms, the Indonesian Export Commodity Price Index (IHEx) remains in decline with contraction at 7.7% (yoy), despite modest improvement in the level of prices during Q3/. Commodity prices were up mainly for crude oil. Following a brief downturn in the wake of the US decision to call off military strikes on Syria, world oil prices resumed upward movement after the announcement of delay in tapering by the Fed. The flagging condition of the global economy also resulted in a downward trend in global inflation during Q3/. World inflation slipped in August to 3.0% (yoy) from 3.2% (yoy) one month earlier. The easing in global inflationary pressure during August was spurred by falling inflation in some advanced economies and emerging market nations in tandem with decline in oil prices and a tapering off in mounting food prices. Amid these global economic conditions, uncertainty on financial markets remains high. A number of risks have emerged in relation to the moves by the Fed to delay tapering off the stimulus, the debate over the debt ceiling and the temporary shutdown of US government services. The combination of these developments put pressure on global financial market performance during Q3/ (Graph 2.7). Nevertheless, the Fed s decision to postpone tapering the fiscal stimulus at the end of Q3/ led to a surge of inflows of non-resident funds into stock and bond markets in the region accompanied by strengthening of Asian currencies. The flagging momentum in global economy has for the most part prompted global central banks to stay the course with accommodative monetary policy. Nevertheless, some central banks have embarked on tightening in response to inflationary pressures and imbalances in external conditions. In September, the Reserve Bank of India raised its benchmark repo rate by 25 bps to 7.5% in a move to curb inflation. The standing facility rate was lowered to 9.5% from 10.25% to free up liquidity in the banking system. The central bank of Brazil announced a further 50 bps increase in the selic rate at the end of August to 9%, following intervention in the previous month to shore up the exchange rate with heavy use of currency swaps and also credit lines. Since the end of, the central bank of Brazil has raised the selic rate by a total of 175 bps. 6

17 Recent Macroeconomic and Monetary Developments Table 2.1 Forecasts Economic Growth - Demand Side C o m p o n e n t %Y-o-Y, 2000 Price I II III Private Consumption Expenditures Government Expenditures Gross Fixed Capital Formation Exports of Goods and Services Impor of Goods and Services GDP Source : BPS-Statistics Indonesia Index Q I Q II Q III Q IV Expected Income Current Income Q I Q II Q III Q IV Q II Q III Graph 2.8 Expected Employment Index 6 months ahead Index Q I Q II Q III Q IV Q I Q II Q III Q IV Date : BI, BPS, Roy Morgan, Danareksa, AC Nielsen Graph 2.9 Consumer Confidence Index (CCI) %, yoy Q I Q II Q III Q IV Q I Source : CEIC, DSM. Gaikindo, AISI Graph 2.10 Retail & Vehicle Sales Q I Kadin-Roy Morgan Retail Sales Q I Car Sales Q II Q III Q IV Q I BI BPS Q II Q III Motorcycle Sales Q II Danareksa Aug Sep Jun Aug Sep Q III* May Jun Aug* ECONOMIC GROWTH Expenditure Side The flagging global economy and lack of improvement in domestic purchasing power in the wake of the hike in subsidised fuel prices has set the Indonesian economy on a slowing trend. Economic growth in Q3/ is forecasted to reach 5.6% (yoy), a more modest rate compared to the Q2/ growth outcome recorded at 5.8% (yoy) (Table 2.1). This slowdown is largely attributable to household consumption and investment, and most importantly non-construction investment. Household consumption is predicted to weaken in line with the softening of public purchasing power in the aftermath of the fuel price hike and depreciation in the rupiah, which in turn has depressed nonconstruction investment. On the external side, real exports maintained steady growth in Q3/, consistent with the flagging pace of global economic recovery. Imports are similarly projected to edge lower from the effects of slowing domestic demand and the depreciating trend in the exchange rate. Household consumption is expected to mark reduced expansion in Q3/, in line with the weakening of public purchasing power. Measures designed to bolster the purchasing power of middle and lower income groups with the aid of temporary direct cash transfers (BLSM) have failed to offset pressure from rising prices. Lack of improvement in purchasing power is indicated by the findings of the BI consumer survey in August, which point to a sustained downward trend in confidence in current incomes and future income expectations (Graph 2.8). In other developments, depressed purchasing power was also reflected in the decline in the BI Consumer Confidence Index (CCI) for September (Graph 2.9). The Danareksa Consumer Confidence Index also moved lower in y due to mounting consumer anxiety over rising goods prices (Graph 2.9). The slowdown in sales indicators provides an added explanation for weakening performance in household consumption. Retail sales were marked by contraction in August with performance down in almost all categories of goods except recreational items and fuels. The sluggish performance in retail indicators during Q3/ amid the religious festive season provides further indication of the limits of purchasing power. Signs of slowdown are also visible in the downward trend in purchases of durable goods since the beginning of. Car sales posted thin growth at 1.9% (yoy) in August (Graph 2.10). The slowing trend in investment is predicted to carry forward into Q3/ in line with weakening domestic demand and only limited recovery in exports. The lack of vibrant performance in household consumption and exports has reduced incentives for business to invest. A further reason for 7

18 Recent Macroeconomic and Monetary Developments % I II III IV 2010 Source : CEIC, (processed) % yoy Manufacturing Capacity Utilization Non- Building Investment (rhs) I II III IV Graph 2.11 Capacity Utilization Graph 2.12 Real Investment Credit Graph 2.13 Non Oil & Gas Export (Real Value) 71.7 Real Interest Rate : Depo 1 month (rhs) Real Interest Rate: Inv. Credit (rhs) Real Investment Credit Graph 2.14 Export Leading Indicator % yoy I II % yoy Q II Q III Q IV Q I Q II Q III Jun Aug Decelerati on phase Acceleration phase GDP Export GDP Exports Deceleration phase Acceleration phase Mining Agriculture Total Manufacture CLI Exports Deceleration phase IPI Wearing Apparel, IPI Rubber Plastics, IPI Mach Equipment, IPI Electrical Mach Equipment, ihkei total, WTI, CLI US, CLI Euro 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 III IV I II III IV Sources: CEIC, BPS, OECD CACIS (processed) % Lead: 6mos Mean Deceleration: 9Q Mean Acceleration: 5 Q Acceleration phase business reluctance to forge ahead with new investment lies in low utilisation of manufacturing capacity during the first half of which was recorded at levels below the historical minimum (Graph 2.11). The tapering level of investment growth is largely the result of contraction in non-construction investment. This projection is strongly influenced by predictions of a steeper downturn in investment in machinery, in line with the significant drop in the indicator for machinery imports in y. Investment in transportation equipment is also weak, as indicated by negative growth in vehicle imports of passenger cars and industrial transportation equipment. In other developments, growth in construction investment is similarly predicted to ease. This forecast is supported by data pointing to flagging performance in cement sales and imports of construction materials in y. Taken together, the outlook for slowing investment is also consistent with the limited availability of business financing, reflected in part in a decline in investment credit (Graph 2.12). Government consumption in Q3/ is predicted to climb in keeping with the rising trend in budget absorption towards the end of the year. The overall government expenditure outcome for the period ending September reached 63.3%, slightly above the outcome for the same period in. Personnel expenditures were up, boosted by payment of the 13th month salary for civil servants, military personnel and police. The capital expenditure outcome showed modest improvement, while material expenditures were down from the same period one year earlier. With the contribution of government consumption during Q3/, the deficit in the Revised Budget outcome for uary-september reached 1.1% of GDP, up from the 0.9% of GDP deficit for the same period in. This is largely the result of increased state expenditures alongside decline in state revenues. State revenues in the taxation sector were down as a result of domestic economic slowdown, tax incentive policies and contraction in exports. Contrasting this was an increase in realised state expenditures, in part due to accelerated capital expenditures and direct cash transfers that have now entered the second phase. On the other hand, realised provision of financing reached 79.8% of the needs of the Revised State Budget. With regard to financing for the State Budget, issues of new Indonesian government bonds reached only 70.5% of the Revised State Budget target, down from the outcome in the previous year. On the external side, real exports are projected to maintain stable growth for Q3/ (Graph 2.13). This forecast is supported by accelerated movement in leading export indicators to the end of (Graph 2.14). In analysis by commodity, agricultural and manufactured exports are estimated to be in decline, while mining exports are on the rise. Agricultural exports have been affected by declining exports of shrimp, coffee, fish and other mainstay 8

19 Recent Macroeconomic and Monetary Developments % yoy Q II Q III Q IV Q I Q II Q III Jun Aug GDP Import Cons Raw Total Capital Graph 2.15 Non Oil & Gas Import (Real Value) commodities. Similarly, moderate growth in exports of CPO, basic metal products and processed timber has led to some slowing in manufactured exports. In contrast, mining exports have gained momentum, driven by rising demand for coal, copper and nickel. Mining exports are set to benefit from relaxation in mineral import policy soon to take effect that has potential to boost mining exports through early Imports are forecasted to weaken somewhat in Q3/, due to the effects of slowing domestic demand and the depreciating trend in the rupiah (Graph 2.15). In disaggregation by category, import performance has been affected primarily by slowing imports of raw materials and consumer goods, in addition to the contraction in imports of capital goods. The drop in imports of raw materials is dominated by raw materials for export-oriented manufacturing and components of capital goods. Imports of consumer goods have also slowed as a result of falling demand for passenger vehicles and food and beverage commodities for household use. Alongside this, imports of capital goods are predicted to undergo contraction in line with the drop in non-construction investment. %Y-o-Y, 2000 Price Table 2.2 Forecasts Economic Growth - Supply Side S e c t o r Agriculture, Livestock, Forestry & Fisheries 4.0 I 3.6 II 3.2 III 3.2 Mining and Quarrying Manufacturing Industries Electricity, Gas, and Water Supply Construction Trade, Hotel & Restaurant Transportation & Communication Financial, Rental, and Business Services Services GDP Source : BPS-Statistic Indonesia Analysis by Business Sector The slowing trend in the Indonesian economy during Q3/ was visible in the performance of leading sectors. Faltering growth was observed in the mining and quarrying sector, manufacturing and the construction sector (Table 2.2). The mining sector is projected to chart reduced growth during Q3/. The slowdown in the mining sector is the result of faltering growth in oil production until y, due to production outages at some oil and gas fields. On the other hand, indications of stronger performance in non-oil and gas mining are reflected in a rise in mining exports, led by coal. As mentioned, manufacturing and construction growth is predicted to chart less vigorous growth in Q3/. The dampened rate of growth represents the impact of the fuel price hike on public purchasing power. In September, the HSBC Purchasing Manager Index (PMI) pointed to the still constrained level of manufacturing activity. Performance also weakened in the transportation equipment subsector, as reflected in slower movement in car and heavy equipment sales. Similarly, flagging performance is forecasted in the food and beverages subsector. The construction sector is also projected to experience reduced growth. The slowdown in the construction sector is consistent with the predicted slowing trend in construction investment. In August, sales of cement and heavy construction equipment were visibly down. In a report by Jones Lang LaSalle property consultants, some property developers have begun delaying planned expansion, particularly for office space and shopping centres. 9

20 Recent Macroeconomic and Monetary Developments Performance has also weakened in the trade, hotels and restaurants sector, the transport and communications sector and the financial sector. The trade, hotels and restaurants sector is projected to chart reduced growth for Q3/. Hotel occupancy rates were down in August in keeping with the drop in numbers of domestic travellers during the Eidul-Fitr festive season. Meanwhile, the retail sales index in Q3/ was marked by weaker growth (Table 2.2). The transport and communications sector is predicted to lose some momentum, mainly due to slowdown in the transportation subsector. The communications subsector continues at a brisk pace, buoyed by data sales and a surge from communications activity for the coming national elections. However, the aviation subsector is showing signs of diminished growth, reflected in air passenger numbers as of mid-q3/. The financial services, leasing and other services sector is projected to chart reduced growth in Q3/. This slowdown is the result of more moderate economic activity and increases in loan interest rates. Further indications of slowing performance are visible in less vigorous expansion in bank credit and NBFI financing as of halfway through Q2/. The overall slowing trend in the Indonesian economy during Q3/ was reflected, among others, in most areas of Sumatra and in Jakarta. This is indicated by the weakening trend in a number of indicators related to household consumption, such as farmer terms of trade, consumer goods imports and consumption credit in these regions (Diagram 2.1). Exports in Sumatra are also tapering off due to the limited improvement in global commodity prices. In addition, estate crop production is showing signs of diminished growth, due to the influence of weather conditions and minimum incentive from selling prices. The economy in Jakarta also faces pressure from slackening investment, a *) gpdrb estimation numbers are from BI offices in each region **) national economic growth (average) = 6,3% Diagram 2.1 Regional Economic Developments Map in Quarter III 10

21 Recent Macroeconomic and Monetary Developments development related to renewed increases in loan interest rates and depreciation in the rupiah. Economic growth in Java and Eastern Indonesia is showing signs of improvement, supported by gains in exports and comparatively stable domestic consumption. Higher exports from Java have been driven largely by manufactured products. In Eastern Indonesia, export gains have been driven by exports of mining products, such as nickel, coal and copper, despite the still limited improvement in prices on global markets US$ M Trade Balance Non Oil and Gas Trade Balance Oil and Gas Trade Balance Total May-11 Sep May-12 Sep May-13 6,000 4,000 2, ,000-4,000-6,000-8,000 US$ Mn Graph 2.16 Trade Balance Stock SUN SBI USD/IDR IDR/USD Mar May Sep Nov Mar May Sep Nov Mar May Sep Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug 11,500 11,300 11,100 10,900 10,700 10,500 10,300 10,100 9,900 9,700 9,500 9,300 9,100 8,900 8,700 8,500 Graph 2.17 Non Resident Flow of Funds at Dollar Portfolio THE BALANCE OF PAYMENTS Indonesia s balance of payments is projected to improve in Q3/. This forecast takes into account reduction in the current account deficit in response to weakening domestic demand and depreciation in the rupiah exchange rate. In other developments, the capital and financial account is forecasted to chart an increased surplus with foreign investors returning to buy SBIs and Indonesian government bonds, and the drop in net foreign selling on the domestic stock market in response to policies launched by Bank Indonesia and the Government and the decision to postpone tapering off in the US. Bolstering this outlook for a reduced third quarter current account deficit is the trade surplus achieved in August. This surplus is explained largely by a fall in imports. Imports contracted 3.7% (yoy) in response to declining levels of oil and gas imports and non-oil and gas imports. In particular, non-oil and gas imports were down 8.8% (yoy), a development reflected across all categories of goods albeit led by imports of capital goods that plunged 18.6% (yoy). In response to these developments, the August balance of trade posted a 336 million US dollar surplus, a substantial gain compared to the deficit in the preceding month that reached 2.2 billion US dollars (Graph 2.16). The predicted capital and financial account surplus for Q3/ is driven by projections of sustained levels of foreign direct investment and resurgent inflows of non-resident funds at the end of Q3/. During the quarter as a whole, non-resident investors booked a net purchase of million US dollars, following a net sale in the previous quarter of 2.55 billion US dollars. Non-resident holdings in Indonesian government bonds and SBIs recorded an accumulation of million US dollars and million US dollars, in contrast to the net selling of shares that reached million US dollars. Heavy buying of Indonesian government bonds was observed mainly in September in response to the policy mix launched by Bank Indonesia and the delay in tapering off QE as announced by the US Fed on 19 September (Graph 2.17). On the other hand, non-residents offloaded stocks throughout Q3/, with the heaviest pressure recorded in August. 11

22 Recent Macroeconomic and Monetary Developments ,400 8,990 9,698 9,605 IDR/USD 10,071 10,605 Graph 2.18 Rupiah Exchange Rate Graph 2.19 Monthly Changes of Currencies in Region & Euro Graph 2.20 Inflation 11,327 IDR/USD Daily Monthly Average Quarterly Average 11,580 10, Mar-12 May Sep-12 Nop Mar-13 May Aug 13-Aug 15-Aug 19-Aug 21-Aug 23-Aug 27-Aug 29-Aug 2-Sep 4-Sep 6-Sep 10-Sep 12-Sep 16-Sep 18-Sep 20-Sep 24-Sep 26-Sep 30-Sep EUR KRW CNY point-to-point Average JPY SGD PHP THB MYR IDR INR % %, yoy CPI Core Volatile Food Administered Prices International reserves at the end of September reached 95.7 billion US dollars, in keeping with condition of the balance of payments and Bank Indonesia responses for safeguarding the stability of the rupiah. At this level, international reserves were ahead of the end-august position of 93.0 billion US dollars. The international reserves position in September was equivalent to 5.2 months of imports and servicing of official external debt, a comfortably safe level for external sector resilience and well above international standard of adequacy. RUPIAH EXCHANGE RATE The continued deficit in the current account has impacted movement in the rupiah, which maintained a downward trend during Q3/. In average value, the rupiah depreciated 8.18% (qtq) to Rp 10,652 to the US dollar from Rp 9,781 to the US dollar in the previous quarter (Graph 2.18). Measured point-to-point, the rupiah came down 14.29% (qtq) to close at Rp 11,580 to the US dollar at the end of the quarter (Graph 2.19). In addition to the influence of the current account deficit, the downturn in the rupiah was triggered by uncertainties on global financial markets related to speculation over tapering off by the Fed. Due to the influence of these global concerns, Q3/ movement in the rupiah kept pace with the majority of other Asian currencies (Graph 2.19). In daily movements, downward pressure bore quite heavily on the rupiah during August before easing towards the end of Q3/. The softening in pressure bearing down on the rupiah was influenced by the policy mix launched by Bank Indonesia and the Government in June and the positive market response to the delay in tapering off by the Fed. The easing of pressure on the rupiah was accompanied by a fall in NDF points and improvement in offshore investor perceptions of the rupiah, a condition reflected in the stronger appreciation in NDF quotations compared to quotations on the rupiah spot market. %, yoy %, yoy Exchange Rate (dep (-)/apr (-), %, yoy 60 Import Price Index (proxi imported inflation *) Core Traded Inflation (rhs) Mei Sep 2008 Mei Sep 2009 Mei Sep 2010 Mei Sep Mei Sep Mei Sep *) global price composit index-weighted average (based on imports percentage and weight in CPI basket) from food commodities (CPO, wheat, sugar, corn, and soybean), oil price (WTI), gold, iron and tissues Graph 2.21 CoreTradable Inflation, Exchange Rate and Import Price Index INFLATION Inflationary pressure in overall terms mounted significantly during Q3/ in comparison to Q2/. This is explained primarily by the impact of the Government decision to raise subsidised fuel prices at the end of June. The fuel price hike produced a sharp rise in administered prices inflation from 6.7% (yoy) in June to 15.5% (yoy) in September (Graph 2.20) that in turn boosted annual CPI inflation to 8.4% (yoy) from the June level of 5.9% (yoy). 12

23 Recent Macroeconomic and Monetary Developments % %, yoy % %, yoy Mar Jun Sep Graph 2.22 Capacity Utilization Expectation increased before policy implementation Administered Prices Inflation Expectation (3 months) Inflation Expectation (6 months) Graph 2.23 Retailer Inflation Expectation Graph 2.24 Inflation Expectation -Consensus Forecast Graph 2.25 Interbank O/N 2010 Index 180 Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Jun Sep 2006 Apr Oct 2010 Inflation Expectation - 1quarter ahead (Qt + 1) Inflation Expectation - 2quarter ahead (Qt + 2) 2007 rpuab O/N rdf O/N rlending rate rbi Rate Apr Oct 2010 Apr Oct Apr 9.30 % In monthly developments, however, inflationary pressure in the wake of the increase in subsidised fuel prices is on a downward trend. After posting a high in y of 3.3% (mtm), CPI inflation then fell back to 1.1% (mtm) in August before giving way to deflation at 0.35% (mtm) in September. Softening pressure in monthly inflation is explained by the fading of impact from decision to raise subsidised fuel prices and decline in second round effects of the fuel price hike on other goods. The return to lower inflation was also assisted by reduced pressure in volatile foods inflation. September recorded deflation at 0.35% (mtm), providing added confirmation of the easing of inflationary pressure following the increase in subsidised fuel prices. This deflation came in response to steep price corrections for staple foods in the aftermath of the religious festive season and the second round effects of the fuel price hike that ended in September. In analysis by category, the CPI deflation was strongly influenced by volatile foods deflation at 3.38% (mtm) with annualised inflation for this item reaching 13.94% (yoy). In other developments, core inflation mounted to 0.57% (mtm) or 4.72% (yoy), while inflation in administered prices returned to normal at 0.34% (mtm) or 15.47% (yoy). The September deflation in volatile foods represents the lowest level of inflation for the past 10 years. Influencing this outcome was deflation in shallots and chilli peppers that reached 0.69%. The delayed onset of the harvest due to anomalous weather conditions meant that price corrections for onions and chilli peppers did not take effect until this month. Shallots and chilli peppers were in abundant supply due to the ongoing harvest season in some horticultural centres. Falling prices for the two commodities led to a postponement in import allocations, which have been set aside as import reserves in case of any increase in prices to the reference price level. Other food commodities also experienced price corrections in the wake of the religious festive season, with demand returning to normal. Beef prices eased despite the limited output from cattle slaughtering that reached only 52%. However, difficulties in importing supplies and increases in international soy bean and CPO prices have led to upward pressure in prices of downstream products such as soy bean cake (tempe), bean curd (tofu) and cooking oil. Chicken prices continue to climb in response to increased prices for feed used for day old chicks (DOCs), most of which is imported, as well as disruption to supplies caused by Newcastle Disease. Rice prices have also escalated due to diminished paddy field productivity in some areas of rice cultivation. The administered prices category was marked by quite moderate inflationary pressure during August, due to the absence of Government decisions impacting prices for strategic commodities. After reaching a peak in y due to the effect of the hike in subsidised fuel prices, monthly administered prices inflation has returned to a moderate level. 13

24 Recent Macroeconomic and Monetary Developments % Avg Voll DF: Rp T RRT Vol PUAB : Rp 10.1 T Apr Vol DF O/N (RHS) RBI Rate rdf O/N Oct Vol PUAB O/N (RHS) rpuab O/N Apr Graph 2.26 Interbank O/N &BI Rate rpuab ; 5.05% Rp T Inflation in September arose mainly from water billing rates, the Q3/ rise in electricity billing rates and prices for filter clove filter cigarettes. Core inflation was up in September, stoked among others by the impact of rupiah depreciation, while only modestly affected by global commodity prices. The mounting level of external pressures was reflected in higher traded core inflation (Graph 2.21). Reflecting the impact from exchange rate pass through was inflation in goods with high import content, such as construction materials, electronics and automotive products. Pressure in core inflation eased in response to the downward trend in domestic demand, reflected in the 69% capacity utilisation reported in the Business Survey (SKDU) (Graph 2.22) % 2005 % Spread-rhs BI rate -13 Mar-13 May Credit Rate Graph 2.27 Interest Rate Feb-13 Apr-13 Jun-13 Aug-13 Graph 2.28 Loan Interest RateBy Usage Graph 2.29 Growth of Third Party Fund 2010 Dep. Guarantee (LPS) Rate Spread : 586bps month Deposit Rate % Working Capital Investment Consumption Weighted Average %, yoy 35 Third Party Fund (rhs) 30 Saving (Share:31.9%) Demand Deposit (Share 23.9%) Time Deposit (Share 44.2%) Apr Oct Apr Oct Apr Oct Apr 2010 As of Aug %, yoy The surge in core inflation in September is also explained by persistently high inflation expectations. The Bank Indonesia Retailer Survey (SPE) (Graph 2.23) points to an upward trend in trader expectations of inflation, spurred by increased prices for imported fuels. Consumer expectations of inflation for 3 months and 6 months forward is similarly higher in view of the Christmas and New Year festivities and work commencing in preparation for the 2014 national elections. On the financial market, escalating inflation expectations are reflected in higher numbers in the Consensus Forecast (CF) survey for Q3/, driven by expectations of currency depreciation. In the quarterly CF survey results, inflation expectations for climbed significantly from 6.4% in June to 9.0% (Graph 2.24). Softening inflationary pressure at the end of Q3/ was evident in some areas of Sulawesi, Maluku and the Nusa Tenggara island chain (Diagram 2.2). Inflation in these regions was in fact lower at the end of the quarter due to steep price corrections for fresh fishery commodities. Even so, some regions continue to post inflation of as much as 10%. Among these are West Sumatra, West Papua, North Maluku, East Kalimantan and Banten. FINANCIAL MARKET DEVELOPMENTS Interest Rates Overnight interbank rates moved upwards in Q3/ in tandem with increases in the BI Rate and the Deposit Facility (DF) rate. The weighted average overnight interbank rate climbed to 5.05% in Q3/ from the previous quarter s average of 4.23% (Graph 2.25). In keeping with the rise in the overnight interbank rate, weighted average total volume on the interbank market slipped to Rp 10.1 trillion from the previous Rp 12.7 trillion, while average overnight DF volume climbed to Rp trillion from Rp 59.7 trillion (Graph 2.26). The rise in the BI Rate was also transmitted to bank interest rates, particularly deposit rates. During Q3/ (until August ), time deposit rates climbed 29 bps while loan interest rates maintained a stable trend. As a result, 14

25 Recent Macroeconomic and Monetary Developments Inf > 8,50% 8,00% < inf < 8,50% 6,80% < inf < 8,00% inf < 6,80% Diagram 2.2 Regional Inflation Map in Quarter III %, yoy 16 Third Party Fund (rhs) 14 Saving (Share:31.9%) Demand Deposit (Share 23.9%) Time Deposit (Share 44.2%) the spread between loan and deposit rates narrowed to 586 bps from 615 bps in the preceding month (Graph 2.27). Although the trend was stable, loan interest rates showed varied movement, depending on category of use. Rates for working capital credit fell 3 bps to 11.63%, while investment credit mounted 8 bps to 11.37% and consumption credit rates slipped 1 bps to 13.05% (Graph 2.28) Apr Oct %, yoy Apr Oct Apr Oct Graph 2.30 Contribution of Third Party Fund Graph 2.31 Credit Growth by Usage As of Aug Apr August Total Working Capital Investment Consumption Apr Oct Apr Oct 2009 Apr Oct 2010 Apr Oct Apr Oct 5 - Apr Funds, Credit and the Money Supply Increases in bank deposit rates subsequently provided a boost to bank depositor funds. Depositor funds were marked by more robust growth in Q3/, recorded in August at 15.3% (yoy), compared to 14.2% (yoy) in the preceding quarter (Graph 2.29). The upbeat growth in depositor funds was spurred primarily by accelerated growth in time deposits in response to higher deposit rates. Time deposits continue to represent a substantial share of total depositor funds at 44%, ahead of savings deposits and demand deposits at 32% and 24% (Graph 2.30). Credit expansion embarked on a slowing trend in Q3/, even though maintaining more rapid growth compared to the end of June. In August, credit expansion reached 22.2% (yoy), representing a declining trend when compared to the y expansion of 22.3%. This softening trend is partly explained by the slowdown in economic growth and increases in bank interest rates. More detailed data for August points to slowing expansion mainly in 15