Jl.MH. Thamrin No.2 Jakarta Indonesia

Transcription

1 Jl.MH. Thamrin No.2 Jakarta Indonesia

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 III-2011 The Monetary Policy Report is published quarterly by Bank Indonesia after the Board of Governors Meetings in December, 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 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 Darmin Nasution Hartadi A. Sarwono Governor Deputy Governor S. Budi Rochadi Deputy Governor Muliaman D. Hadad Ardhayadi Mitroatmodjo Budi Mulya Halim Alamsyah Deputy Governor Deputy Governor Deputy Governor Deputy Governor Monetary Policy Report - Quarter II-2011 i

4 MONETARY POLICY REPORT Bank Indonesia ii Monetary Policy Report - Quarter II-2011

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 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 long-term. 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 are 5,0%, 5,0%, and 4,5% with ±1% deviation. 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. Monetary Policy Report - Quarter II-2011 iii

6 MONETARY POLICY REPORT Bank Indonesia iv Monetary Policy Report - Quarter II-2011

7 MONETARY POLICY REPORT Bank Indonesia The Governor of Bank Indonesia Foreword The domestic economy continues to show considerable resilience amid the slowdown in the global economy and strain on financial markets. Exports are forecasted to maintain brisk growth. Accompanying this is rising consumption, with household consumption bolstered by consumer optimism and a surge in spending during the recent festive season. In keeping with these developments, investment is also showing an upward trend. On the other hand, the brisk pace of economic activity has increased the need for imports, including oil imports spurred by high consumption of oil-based fuels. Heightened uncertainty in the global economy put added pressure on Indonesia s balance of payments during the quarter, although for 2011 overall, the balance of payments is still set to deliver a hefty surplus. Key to this is the expanding surplus in the capital and financial account from both portfolio investment and direct investment. As a result, there has also been steady growth in international reserves. Also reflecting pressure on the balance of payments during the quarter was the exchange rate. In Q3/2011, the rupiah weakened in value while charting increased volatility. Pressure on the rupiah came largely from growing fears over the worsening debt crisis in Europe and slowdown demonstrated in a number of US economic indicators. However, the downturn in the rupiah was consistent with movement in other currencies in the region. Inflationary pressure eased further during Q3/2011. This has been achieved partly from secure supply of goods and a drop in global food commodity prices. Administered prices also recorded only limited inflation in the absence of Government policy decisions related to strategic goods and services. Prudently managed inflation expectations also helped to minimise the impact of soaring gold prices and exchange rate depreciation at the end of the third quarter. Stability in the banking system remained firm, accompanied by improvement in the bank intermediation function. Reflecting the stable condition of the banking industry is the high capital adequacy ratio and low level of non-performing loans gross. Alongside this, there has been steady expansion in lending to finance economic activity. Bank Indonesia is working untiringly to safeguard the stability of the banking system and promote the intermediation function while upholding prudential principles. This involves steering credit growth towards productive uses so v

8 MONETARY POLICY REPORT Bank Indonesia that the nation s economy can continue to chart optimum growth amid global economic conditions fraught with uncertainty. A comprehensive assessment of the condition and outlook of the economy and associated risks formed the basis for the decision by the Bank Indonesia Board of Governors Meeting to lower the BI rate 25 bps to 6.50% on 11 October This decision was taken in line with Bank Indonesia s confidence that inflation at year end will come below 5%. Bank Indonesia will also pursue actions to stabilise the rupiah exchange rate in the face of global financial market turmoil. Looking forward, Bank Indonesia will keep a close watch on global economic and financial developments and manage interest rate response and the mix of monetary and other macroprudential policies to mitigate potential for a downturn in the Indonesian economy. To do so, Bank Indonesia will continue pursuing the overriding objective of achieving the inflation target, set at 5%±1% in 2011 and 4.5%±1% in This concludes the overview of the Indonesian economy during Q3/2011 and the outlook for the future. May this report serve as a useful reference for us all. Jakarta, October 2011 The Governor of Bank Indonesia Dr. Darmin Nasution vi

9 MONETARY POLICY REPORT Bank Indonesia Contents Contents 1. Monetary Policy Response Quarter III Economic Outlook and Risks Ahead... 3 Underlying Assumptions In Economic Projections... 4 Economic Growth Outlook... 5 Inflation Outlook Recent Macroeconomic and Monetary Developments Developments in the World Economy Economic Growth Indonesia Balance of Payments Rupiah Exchange Rate Inflation Financial Market Developments BOX 1: Secondary Impact of the Global Crisis in Indonesia BOX 2: Export Foreign Exchange Statistics vii

10 MONETARY POLICY REPORT Bank Indonesia Contents viii

11 Monetary Policy Response Quarter III Monetary Policy Response Quarter III-2011 In the Board of Governors Meeting convened on 11 October 2011, Bank Indonesia decided to decrease BI Rate by 25 bps to become 6.50%. Bank Indonesia will make good efforts on exchange rate stabilization, especially from impacts of global financial market instability. The decision has been taken in line with confident that the inflation rate in 2011 and also in the year of 2012 will be below 5%. In addition, steps taken by Bank Indonesia will be directed as anticipation to mitigate the impacts of declining global economic and financial performance on Indonesian economic performance. In the near future, Board of Governors will closely monitor the global economic and financial situation and will consistently make adjustment on interest rate response and other monetary and macroprudential policy mix to mitigate the potential slowdown in the domestic economic performance without jeopardizing the priority to keep inflation within its target, that is, 5+1% in 2011 and 4.5%+1% in Board of Governors continue to be vigilant on the high risk and uncertainty in global financial markets and a tendency of slowing down global economy due to debt and fiscal problems in Euro area and the US. The attention is primarily aimed at the short-term impacts through financial channel in the form of weakening capital market, increasing credit risk, and portfolio capital reversal pressure from emerging markets. Meanwhile, global economic performance is indicated to be weakening as reflected by slowing down in global production activities and retail sales coupled with weakening consumers confidence in advanced countries and the correction of some international commodity prices. On the other hand, inflationary pressures started to decline, although inflation in emerging markets remains relatively high, such that there is shifting in monetary policy response towards neutral or accommodative. Going forward, overall the Boards of Governors see the continuing slowdown of economic growth in the advanced countries, decelerating world trade volume and global commodity prices. Meanwhile, the large excess liquidity and investor risk perception in the global financial markets will continue to push the capital inflows to emerging economies, including Indonesia, in the forms of FDI as well as portfolio inflows. Board of Governors view that Indonesian fundamental economic and banking will remain strong amidst increasing concern on the prospect of global economy. Economic growth in Q4/2011 is predicted to be higher, particularly supported by consumption and investment, and therefore the growth for overall 2011 is forecasted to reach 6.6%. So far, the impacts of global economic turmoil are mostly in financial markets, while the impacts on riel sectors have not been observed. Nevertheless, the weakening global economy is predicted to affect domestic economic performance in 2012, both through financial markets as well as international trade. Domestic economic growth in 2012 is forecasted to reach 6.5%. Domestic growth in 2012 is supported by strong consumption and increasing investment, while exports will face pressures. By production sector, the growth will be 1

12 Monetary Policy Response Quarter III-2011 led by manufacturing sector; trade, hotels and restaurant sector; and transportation and communication sector. Indonesia s balance of payment in Q4/2011 is projected to regain surplus after experiencing a pressure due to capital outflows in the previous quarter. For overall 2011, Indonesia s balance of payment is forecasted to continue charting considerable surplus. This surplus is predicted to continue in 2012, particularly supported by increasing surplus in capital and financial account from portfolio inflows as well as from FDI inflows. In line with that development, international reserves at the end of September 2011 reached USD billion, or equivalent to 6.5 months of imports and external debt services of the Government. This amount of international reserves is predicted to be enough to support the stability of Rupiah exchange rate. Rupiah exchange rate in Q3/2011 was under pressure, especially on September In Q3/2011, Rupiah depreciated by 2.42% (ptp) to Rp 8,790 per USD with higher volatility. Nevertheless, the depreciation of Rupiah is still in line with other countries exchange rates in the region. Pressure on Rupiah is mainly driven by global risks due to concern on the global economic prospect. In addition, larger demand for foreign exchange to finance imports also put pressures on Rupiah. Going forward, Bank Indonesia is determined to continue maintaining the stability of Rupiah exchange rate that is needed to secure macroeconomic stability. Inflationary pressure tend to decrease. The CPI inflation in Q3/2011 is recorded at 1.89% (qtq) or 4.61% (yoy), lower than the inflation rate in the third quarter of the previous year. The decrease in inflation is driven by the subdued volatile food and administered prices inflation as supply improves, international food commodity prices decrease, and there is no Government policy on the prices of strategic commodities. Meanwhile, pressure on core inflation aside from increasing gold prices is also manageable due to exchange rate appreciation policy in the previous period and adequate supply in responding the demand. With such developments, inflation for overall 2011 is projected to be below 5%. On the year 2012, inflation is projected to remain under control and is projected to be under 5% in line with global commodity prices decrease and global economic weakening. Banking system stability is under control with improvement in the banking intermediation despite financial market turmoil on the impact of global economic condition. The stable condition of banking industry is marked by secure level of capital and liquidity, with capital adequacy ratio (CAR) above the minimum level 8% and gross non-performing loans (NPLs) managed at comfortably safe level below 5%. Improvement in banking intermediation is also reflected in rising credit growth that reached 23.8% (yoy) in September Bank Indonesia continues to maintain banking system stability and boost the improvement of banking intermediation such that national economy can reach optimal growth amidst continuing global economic uncertainty. 2

13 Economic Outlook and Risks Ahead 2. Economic Outlook and Risks Ahead The Indonesian economy is predicted to chart further improvement in 2011 with Q4/2011 growth at 6.7%, bringing overall growth for the year to 6.6%. Accompanying this is greater equilibrium in sources of growth brought about by the expanding role of exports and investment. Household consumption is forecasted to maintain vigorous expansion in line with improvement in income levels bolstered in part by upbeat export revenues. This performance in household consumption and exports will in turn promote investment growth. Under conditions of strengthening demand from external and domestic sources, imports are predicted to chart even more rapid growth. In analysis by business sector, manufacturing will provide more robust support for economic growth in line with buoyant performance in exports, household consumption and investment. In 2012, economic growth is predicted to moderate in response to the crises in the Eurozone and the United States. Exports will enter a period of slackening growth, which will in turn bear down on growth in household consumption. On the other hand, investment growth will accelerate further, given Indonesia s still considerable market potential and strength of economic fundamentals, improvement in the investment climate and potential for upgrading of the nation s sovereign credit rating. In 2012, economic growth is forecasted in the 6.2%- 6.7% range. Movement in prices of goods and services remained well subdued during Q3/2011. Annual inflation in September 2011 reached 4.61% (year on year), while cumulative inflation for the calendar year came to 2.97% (year to date). This owes much to the measures pursued by Bank Indonesia and the Government to control overall price movements in goods and services. The monetary and macroprudential policy mix implemented by Bank Indonesia and strengthened coordination with the Government have succeeded in maintaining supplydemand equilibrium and mitigating adverse impacts from rising international commodity prices. For the future, inflationary pressure is expected to remain subdued, on course with the established inflation target at 5%±1% in 2011 and 4.5%±1% in However, inflationary pressure may well surpass predicted levels, if the Government launches policy actions affecting administered prices, most importantly the strategic items of fuel prices and electricity billing rates. Looking forward, Bank Indonesia will keep a close watch on the impact of the global economic and financial slowdown on Indonesia s future economic performance. In this regard, Bank Indonesia will respond with interest rates and a mix of monetary and other macroprudential policies to mitigate potential for declining performance in the Indonesia economy while maintaining the overriding objective of achieving the inflation target. Bank Indonesia will also build closer policy coordination with the Government in order to anticipate the impact of this global economic and financial downturn. 3

14 Economic Outlook and Risks Ahead Table 2.1 World GDP Outlook (%y-o-y) Projection World GDP Advanced Economies United States Euro Area Japan Other Advanced Economies Developing Economies Eastern and Central Europe Commonwealth Countries Developing Asia China India ASEAN-5* Latin America & Caribbean Middle East & North Africa * Indonesia, Malaysia, Philippines, Thailand, and Vietnam Source: IMF, World Economic Outlook, Sept 2011 UNDERLYING ASSUMPTIONS IN ECONOMIC PROJECTIONS Assumptions for the International Economy Compared to earlier predictions, more modest growth is forecasted for the world economy at 4% in both 2011 and These estimates are commensurate with the worsening crises in Europe and the United States. The weakening economic growth during the second half of 2011 is explained primarily by flagging growth in advanced economies. However, the impact of declining growth in developed nations will also be visible in emerging markets, albeit in lesser magnitude. China and India are also expected to chart slightly less growth compared to earlier predictions. Even so, they will still manage a respectable 9.5% and 7.8% in World trade volume is forecasted to chart reduced growth in 2011 and 2012, in keeping with the pace of global economic activity. Projected growth in world trade volume (WTV) during 2011 is 7.5%, down from earlier estimates. In 2012, volume of world trade is expected to slow further with growth at 7.1%. In view of this development, the upward trend in oil prices is not expected to last. A similar trend is also predicted in international non-oil and gas commodity prices. The remaining months of 2011 are likely to see modest increases in international prices of non-oil and gas commodities, followed by prevailing decline in Fiscal Policy Assumptions The Government has set the fiscal deficit at 2.1% of GDP in the Revised Budget for 2011 and 1.5% of GDP in the Draft 2012 Budget. At this level, the 2011 budget deficit is larger than the original assumption of 1.8% of GDP. The added deficit will be financed entirely from non-debt sources, drawing on the Excess Budget Balance. In 2012, appropriation of the fiscal deficit will be prioritised for rural and urban infrastructure construction in a number of sectors. This infrastructure development will take place in the energy and electricity sector, transportation and communications, health, education and clean water utilities. To finance infrastructure construction in these different sectors, the Government will seek additional sources of financing. Regarding improvements in the condition of infrastructure, construction in 2012 will prioritise improvement in the quality of infrastructure networks for more effective and efficient domestic connectivity and ensure that goods can be supplied to all remote areas of Indonesia. Infrastructure development will also be energy sector-oriented, with focus on power generation and utilisation of renewable energy sources. Besides this, the government is likely to begin trimming the burden of energy subsidies, among others in a planned 10% hike in electricity billing rates. 4

15 Economic Outlook and Risks Ahead ECONOMIC GROWTH OUTLOOK Vibrant performance is again forecasted for Indonesia s economy in 2011 with growth at 6.6% and an expanding role for exports and investment. In 2012, the global economic slowdown brought on by the crises in Europe and the United States is expected to bear down on export growth, which will be followed by weakened growth in consumption. On the other hand, investment growth will accelerate further, given Indonesia s still considerable market potential and strength of economic fundamentals, improvement in the investment climate and potential for upgrading of the nation s sovereign credit rating. In 2012, economic growth is forecasted somewhat lower in the 6.2%-6.7% range. In analysis by business sector, the key sectors driving improvement in economic growth during 2011 will again be manufacturing, trade, hotels and restaurants and the transport and communications sector. The more robust manufacturing growth is explained by growth in exports and investment alongside buoyant household consumption. Performance in the trade, hotels and restaurants sector is not only linked to the high levels of household consumption, but also to brisk import activity. Added to this, the transport and communications sector is expected to maintain solid performance in keeping with the rising pace of economic activity. In 2012, some slowdown is also predicted for these key sectors, in line with weakening growth in exports and consumption. Outlook for Aggregate Demand Household consumption is forecasted to maintain vigorous expansion during 2011 in tandem with improvement in private incomes. The rise in income levels comes mainly in response to higher export revenues achieved on the brisk growth in exports throughout An added factor contributing to real income growth is low inflation, recorded at only 4.61% (yoy) for September These two factors are expected to encourage households to indulge in consumption. Other sources of improved income include the increase in the Provincial Minimum Wage (UMP), higher remuneration for government officials and bearers of state office, wage increases for company employees and strong financing support extended by the banking system. A number of indicators point to the continued strength of household consumption during Q3/2011. The consumer survey %Y-o-Y, 2000 Price Table 2.2 GDP Forecasts by Expenditure * 2012* I II III* III* Private Consumption Expenditures Government Expenditure Gross Fixed Capital Formation Export of Goods and Services Import of Goods and Services Gross Domestic Product * Bank Indonesia s Projection 5

16 Economic Outlook and Risks Ahead conducted by Bank Indonesia indicates a rising trend in consumer confidence levels (Graph 2.1) and expectations of incomes 6 months forward. In other developments, car sales and retail sales in data as of August 2011 also suggest a buoyant trend. Graph 2.1 Consumer Confidence Index BI Consumer Survey The deficit in the Revised 2011 Budget is set at 2.1% of GDP. This deficit augurs for an increased fiscal contribution to the real sector in Brisk growth is forecasted in government consumption, bolstered by increases in procurement and social assistance, higher fund allocations for education in line with the stance of the Revised 2011 Budget and additional funds made available through optimisation of expenditures by line ministries and government agencies. At the same time, increased capital expenditure allocations are also expected to boost to government investment. In 2012, the Government envisages a fiscal deficit at 1.5% of GDP in order to strike a balance between medium-term fiscal sustainability and the concurrent delivery of a stimulus to the economy. In regard to Government expenditures, budget allocations in 2012 focus on construction of infrastructure, as reflected in the significant rise in capital expenditures and increased transfers to the regions in part aimed at narrowing the gap between the central and regional levels in quality of public services. The upbeat 17.4% (yoy) growth in exports during Q2/2011 offers reassurance for continued robust export performance during 2011 amid adverse external conditions. This also explains the resilience of export growth projections in 2011, which remain strong amid the slowing trend in external conditions. Exports are forecasted to maintain vigorous growth at 14.3% (yoy) in It is not only strong demand that underpins these predictions, but also commodity prices set to remain high for the rest of The slowdown in external conditions brought about by the crises in the United States and Europe will impact exports during Export growth is predicted to ease to 10.8%-11.3% (yoy) in 2012 in keeping with sagging growth in the world economy and world trade volume (Graph 2.2) and predictions of softening international commodity prices. However, no steep decline in export growth is predicted in view of the still robust performance expected from Indonesia s trading partners, led by China and India. Graph 2.2 World Trade Volume (% yoy) Despite the adverse turn in external conditions, investment growth is predicted to forge ahead, driven by buoyant growth in household consumption and exports. Furthermore, investors perceptions of Indonesia s economic fundamentals are expected to remain favourable amid the turbulence of uncertainties in the global economy, as demonstrated by the high volume of 6

17 Economic Outlook and Risks Ahead Graph 2.3 Investment Value long-term investment (Graph 2.3). Factors supporting this include: (i) the improving investment climate, (ii) improvements in government administration achieved through bureaucratic reforms, (iii) potential for upgrading of Indonesia s sovereign rating by some international rating agencies to investment grade in 2011, following the positive outlook assessed by some rating agencies, and (iv) market potential in Indonesia given the nation s large population compared to other parts of Southeast Asia. The introduction of a tax holiday to benefit business in five areas - basic metals industry, petroleum refining and/or basic organic chemicals derived from petroleum and natural gas, machinery production, the renewable energy sources industry and telecommunications equipment manufacturing - is expected to spur future investment growth. Robust domestic demand and brisk export growth will boost growth in imports of goods and services to 18% in However, slowing performance in exports and domestic demand in 2012 will see import growth drop back to 11.9%-12.4% (yoy). Weakening external demand for exports will depress demand for production inputs while demand for imports will slide from weakening domestic demand. Nevertheless, with investment growth projected to mount higher amid the global economic slowdown, capital goods imports are forecasted to remain strong. S e c t o r * Bank Indonesia s Projection Outlook for Aggregate Supply Upbeat manufacturing performance in figures for Q2/2011 is predicted to carry forward to the end of the year. The high rate of investment growth since early 2010 is expected to boost industry capacity in response to rising external and domestic demand. The textile machinery revitalisation programme launched by the Government has brought heartening results. Textiles and textile products have begun to chart an increasing share in non-oil and gas exports. Furthermore, the introduction of a tax holiday for the basic 2010 Table 2.3 GDP Forecasts by Industry I II III* IV* Agriculture Mining and Quarrying Manufacturing Industries Electricity. Gas and Water Supply Construction Trade. Hotel & Restaurant Transport and Communication Financial. Ownership and Business Services Gross Domestic Product %Y-o-Y, 2000 Price 2011* 2012* 7

18 Economic Outlook and Risks Ahead Graph 2.4 Retail Sales Index BI Consumer Survey Graph 2.5 Air Transport Passenger, Cargo, and Celullar Subscribers metals industry, petroleum refining and/or basic organic chemicals derived from petroleum and natural gas, machinery production, the renewable energy sources industry and telecommunications equipment manufacturing - is expected to bolster future manufacturing growth. In early 2012, manufacturing growth is predicted to taper off in keeping with the slowdown in the world economy. Movement in the trade, hotels and restaurants sector is generally consistent with developments in private incomes, as reflected in private consumption, import activity and activity in the manufacturing sector. The three factors influencing activity in trade, hotels and restaurants are predicted to stay upbeat for several years to come. In keeping with developments in these factors, growth in trade, hotels and restaurants sector is projected at a healthy 8.7%-9.2% (yoy) in 2012, despite some slowing compared to 2011 due to the effects of the global economic slowdown. Confirming the outlook for brisk activity in the trade, hotels and restaurants sector is the accelerating growth trend in the retail index (Graph 2.4). The transport and communications sector will maintain vigorous growth for the next few years. Steady improvement in the domestic economic outlook is spurring further expansion in economic activity, while mounting economic activity will generally be accompanied by increased flows of goods, passengers and information. In 2011, more modest growth is forecasted for the transport and communications sector, despite maintaining a brisk pace compared to other sectors. Following this in 2012, the transport and communications sector is predicted to decelerate slightly to 10.5%-11.0%. In analysis of sources of growth, the transportation subsector is expected to contribute an expanding role (Graph 2.5). Regarding the agriculture sector, weather conditions in 2012 are not expected to produce the same disruptions that have occurred in This will have a positive effect on agricultural production. In addition to favourable weather conditions, government measures to strengthen national food resilience will be among the factors bolstering agriculture sector growth. Government actions to strengthen the agriculture sector are reflected partly in plans for improvement of agricultural infrastructure and domestic connectivity. In addition, the Government plans to improve the production and quality of other agricultural products, such as fruit and vegetables, under the Good Agriculture Practice (GAP) policy. The GAP policy envisages improvements in agricultural crops through streamline of distribution, use of superior seeds and proper cultivation processes. 8

19 Economic Outlook and Risks Ahead Construction sector activity is undergoing a boom, with infrastructure and property sector developments spurring construction sector performance with an upward growth trend. Construction sector growth in 2011 is projected to reach 7.1% before strengthening further in 2012 to 7.6%-8.1%. The government is extending policy and financial support for implementation of projects. To accelerate work on infrastructure projects, the government has confirmed that tendering and construction work may proceed without waiting for 100% completion of land expropriation. In addition, the government also extends guarantees for work on infrastructure projects through such institutions as PT. Penjaminan Infrastruktur Indonesia (PII). Government support for infrastructure projects is also apparent in the increased capital expenditure allocations envisaged for the 2012 fiscal year. The largest share of these budget allocations for capital expenditures is earmarked for infrastructure construction. INFLATION OUTLOOK Movement in prices of goods and services was generally subdued during Q3/2011. Annual inflation in September 2011 reached 4.61% (year on year), while cumulative inflation for the calendar year came to 2.97% (year to date). This owes much to the measures pursued by Bank Indonesia and the Government to control overall price movements in goods and services. The monetary and macroprudential policy mix introduced by Bank Indonesia and redoubled coordination with the Government have succeeded in maintaining supply-demand equilibrium and mitigating adverse impacts from rising international commodity prices. Looking forward, inflationary pressure is expected to stay mild in line with the established target at 5%±1% in More moderate inflationary pressure is forecasted for 2012 in keeping with the expected global and domestic economic slowdown. Accordingly, the inflation projection is on track for the target set at 4.5%±1% for However, higher than predicted inflationary pressure is possible, particularly if the Government launches policy actions affecting prices of strategic goods and services. Graph 2.6 Traders Inflation Expectation BI Retail Sales Survey External inflationary pressure fuelled by the upward trend in commodity prices during 2011 has been countered by appreciation in the rupiah exchange rate. Among the many different commodities traded on the international market, gold has contributed significantly to inflation during In the coming year, inflationary pressure from externals is predicted to ease, as suggested by the forecast for world economic slowdown followed by lower commodity prices. Demand-side inflationary pressure is projected to remain strong for the rest of 2011, in keeping with the brisk pace of economic growth. Vigorous investment growth since early 2010 has expanded the capacity of the national economy, and 9

20 Economic Outlook and Risks Ahead Grafik 2.7 Consumers Inflation Expectation BI Consumer Survey thus rising demand has generated only mild upward pressure on prices of goods and services as a whole. Looking forward, demandside inflationary pressure is forecasted to moderate further due to slackening growth in the global and domestic economy. In view of these conditions and subdued inflation in figures for September 2011, inflation expectations among economic actors are in decline (Graphs 2.6 and 2.7). Regarding volatile foods inflation, foodstuff prices are predicted to hold at moderate levels. While prices have benefited from improved supply at home, the supply of imported foodstuffs has also contributed to generally modest food prices. Looking ahead, the expectation is to maintain volatile foods inflation at a moderate level with support from Government policies and conducive weather conditions. While weather is expected to benefit production, Government plans to improve agricultural infrastructure and interregional transportation links are expected to keep volatile foods inflation at a moderate level. Graph 2.8 Fan Chart Inflation Forecast Administered prices are generally predicted not to undergo any significant increases. The Government plan to raise official electricity billing rates (TTL) in 2012 is not expected to have any direct or indirect impact prompting a significant rise in inflation during Nevertheless, inflation may exceed forecasted levels if the Government decides to pursue the policy option of limiting use of subsidised fuels or to raise prices for these fuels. Although this policy will promote efficiency in economic activities in the long-term, it can also generate direct and indirect impacts resulting in a short-term price increases for general goods and services. 10

21 Perkembangan Makroekonomi dan Moneter Terkini 3. Recent Macroeconomic and Monetary Developments The latest economic data from various parts of the world reinforces indications of slowdown in the global economy. The debt crisis besetting the economies in the Eurozone and the fiscal problems confronting the United States are factors in the reduced global economic expansion and have stirred turmoil on global financial markets. In Asia, economic conditions remain generally positive despite potential for slowing. Strong indications of global economic slowdown have quelled inflationary pressure. Faced with the escalating risk of global economic slowdown, emerging market economies have begun to throttle back their monetary tightening measures, while monetary policy in advanced economies maintains an accommodative stance to boost economic activity. Domestic economic performance remains strong amid growing indications of a global economic slowdown. Exports are predicted to maintain healthy growth alongside buoyant levels of consumption. Responding to brisk performance in exports and consumption, investment is also on an upward trend. Strong economic activity has boosted demand for imports, including oil imports to keep pace with heavy consumption of oil-based fuels. With global risk on the rise, the rupiah has undergone depreciation. While rallying briefly in early Q3/2011, the rupiah began to decline from mid-august until the end of the quarter, in keeping with the trend in currency movements for most countries in the region. Movement in prices of goods and services remained well subdued during Q3/2011. Annual inflation in September 2011 reached 4.61% (year on year), while cumulative inflation for the calendar year came to 2.97% (year to date). This owes much to the measures pursued by Bank Indonesia and the Government to control overall price movements in goods and services. The monetary and macroprudential policy mix introduced by Bank Indonesia and redoubled coordination with the Government have succeeded in maintaining supplydemand equilibrium and mitigating adverse impacts from rising international commodity prices. Looking forward, inflationary pressure is expected to remain subdued with inflation on track for the established target at 5%±1% in On the financial market, interbank rates showed a downward trend in line with the Bank Indonesia decision to widen the overnight interbank rate corridor. Deposit and lending rates are also in decline, while credit expansion forges ahead with investment lending in the lead. On the stock market and government securities market, foreign investors have engaged in portfolio rebalancing by selling off holdings in response to negative sentiment triggered by the global crisis. 11

22 Perkembangan Makroekonomi dan Moneter Terkini Graph 3.1 US Regional Manufacturing Surveys Graph 3.2 US Consumer Confidence Survey DEVELOPMENTS IN THE WORLD ECONOMY The latest economic data from various parts of the world reinforces indications of slowdown in the global economy. The debt crisis besetting the economies in the Eurozone and the fiscal problems confronting the United States are factors in the reduced global economic expansion and have stirred turmoil on global financial markets. Strong indications of global economic slowdown have quelled inflationary pressure. Faced with the escalating risk of global economic slowdown, emerging market economies have begun to throttle back their monetary tightening measures, while monetary policy in advanced economies maintains an accommodative stance to boost economic activity. US economic performance points to a slowdown. The manufacturing sector, which represents the backbone of the US economy, marked an upbeat period during However, conditions now suggest that performance is in decline. Reflecting this are US regional manufacturing indices in a survey conducted by the Fed, which indicate significant loss of ground. Reinforcing this are depressed consumer expectations for the US economic outlook, with US unemployment running high at 9%. This drop in consumer expectations augurs for weakened expansion in US household consumption (Graph 3.2). In response to these developments, some international agencies have revised downwards their projections for US economic growth. The Consensus Forecast in September 2011 lowered the US economic growth projection to 1.6% (yoy) from the previous 1.8% (yoy). In the WEO September 2011, the IMF also revised the US economic growth projection to 1.5% for 2011 and 1.8% for 2012, well below the WEO June 2011 projection at 2.5% (2011) and 2.7% (2012). The prolonged debt crisis in the Eurozone has started bearing down on European economies. Major economies in Europe have entered a slowing phase reflected in weakening economic indicators for the region during Q3/2011. Manufacturing, the backbone of the European economy, underwent contraction as reflected in the below 50 level of the composite PMI (manufacturing and services). Household consumption in Europe is also under pressure, as evident in the deteriorating trend in consumer confidence with unemployment running at 9.9% and the impact of fiscal tightening taking hold in the region (Graph 3.3). The complexity of the European debt crisis heightens the challenges daunting the regions economy. In view of these conditions, the IMF revised downwards the Eurozone growth forecast in the WEO September 2011 to 1.6% (2011) and 1.1% (2012) with Germany providing the leading contribution to economic growth. The IMF predicts that Germany s economy will grow by 2.7% (2011) and 1.3% (2012), down from the forecasts in the WEO June

23 Perkembangan Makroekonomi dan Moneter Terkini Graph 3.3 Economic Growth in European Countries Graph 3.4 Export Performance of Asian Countries In Asia, economic conditions remain generally positive despite potential for slowing. The recovery in the global supply chain for Japanese industry and sustained high global commodity prices have worked to the advantage of manufacturing and exports in Asia. Manufacturing performance in some Asian nations continues to rise, as reflected in positive growth in industrial output. During Q3/2011 (July-August), Asian exports posted above 20% growth (yoy). Asia s household consumption also remains solid, as reflected in sustained positive growth in retain trade figures for Asian economies. However, given the strong potential for a world economic slowdown triggered by the European debt crisis and faltering economic recovery in advanced nations, risks are mounting for Asian economies and particularly for export-dependent nations (Graph 3.4). In view of these conditions, ADB has lowered its 2011 growth forecast for non-japan Asia from 7.8% to 7.5%. This mirrors the IMF projection released in WEO September 2011, in which growth for developing Asia during 2011 is revised downward from 8.4% to 8.2%. In Q3/2011, commodity prices began to ease. The combination of plentiful global supply and the weaker outlook for the global economy has prompted this decline in global commodity prices. Downward movement in global commodity prices is also borne out in the decline in Indonesia s export commodity price index (IHEx) during Q3/2011. Added confirmation of falling global commodity prices is visible in decline in the IMF commodity prices index, and most notably in the indices for crop, metals and energy prices. Furthermore, oil prices are also in retreat. The downturn in oil prices comes in response to the unabated turmoil on global financial markets and mounting expectations of slowing performance in the world economy. With the global economy in slowdown, global inflationary pressure, while comparatively high, has begun to ease. In figures for August 2011, global inflationary pressure remained comparatively high due to the continued strength of international commodity prices during that month. Early in September, inflationary pressure subsided following a drop in global commodity prices. In Asia, inflation is easing in China, Indonesia, Philippines, Malaysia and India consistent with the tight monetary bias applied by these nations. Despite this, inflationary pressure in advanced economies such as the US, Europe and Japan continues to rise. Monetary policy responses have been marked by differences between advanced economies and emerging markets that relate to current developments in economic conditions and projections for the individual nations. Flagging economic activity and the gloomy outlook for the world economy has prompted some central banks in advanced 13

24 Perkembangan Makroekonomi dan Moneter Terkini economies to keep interest rates low. However, faced with relatively strong inflationary pressure, central banks in emerging markets have tended to hold policy rates at existing levels, even though pressure has begun to ease. Added to this are other policies applied by monetary authorities to safeguard economic stability. These include intervention on forex markets to stabilise exchange rate movement amid heightened uncertainty on global financial markets and buying of securities. The buying of these securities is intended to stimulate economies and provide funds to protect exporters from losses caused by currency appreciation, as Japan has done. ECONOMIC GROWTH Aggregate Demand In Q3 and Q4/2011, the Indonesian economy is forecasted to grow by 6.6% (yoy) and 6.7% (yoy). Like before, growth is driven by exports and domestic demand. Positive factors contributing to buoyant export growth include the steady strong demand from China and India, particularly for resource-based commodities. Added to this, domestic demand is predicted to remain strong, bolstered mainly by household consumption and investment. The rise in household consumption is explained by consumer optimism and a surge in buying during the religious festive season. On the Government side, budget expenditure outcomes are estimated to climb sharply early in the second half of the year, taking Government consumption to higher levels compared to the preceding quarter. Investment growth is set to gather momentum in line with higher government capital expenditures and current levels of capacity utilisation in the corporate world. In similar developments, imports are forecasted to maintain brisk growth fuelled by strong domestic demand. Exports are predicted to maintain vigorous growth during Q3 and Q4/2011, despite slowing in comparison to Q2/2011. Increased demand for exports, led by non-oil and gas commodities, has come mainly from Asian economies such as China and India, where strong economic growth has fuelled demand for primary commodities (Graph 3.5). Export performance will also be supported by stronger absorption capacity %Y-o-Y, 2000 Price Table 3.1 GDP Forecast by Expenditure * I II III* IV* Private Consumption Expenditures Government Expenditure Gross Fixed Capital Formation Export of Goods and Services Import of Goods and Services Gross Domestic Product * Bank Indonesia s Projection 14