Monetary Policy Review February 2013

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3 Monetary Policy Review February 2013 The Monetary Policy Review (MPR) is published monthly by Bank Indonesia after the Board of Governors Meeting each January, February, March, May, June, August, September, and November. This report is intended as a medium for the Board of Governors of Bank Indonesia to present to the public the latest evaluation of monetary conditions, assessment and forecast for the Indonesian economy, in addition to the Bank Indonesia monetary policy response published quarterly in the Monetary Policy Report in April, July, October and December. Specifically, the MPR presents an evaluation of the latest developments in inflation, the exchange rate, and monetary conditions during the reporting month and decisions concerning the monetary policy response adopted by Bank Indonesia. Board of Governors Darmin Nasution Hartadi A. Sarwono Halim Alamsyah Ronald Waas Governor Deputy Governor Deputy Governor Deputy Governor 1

4 Table of Content I. Monetary Policy Statement...3 II. The Economy And Monetary Policy...5 Economic Growth in Indonesia...5 Indonesia Balance of Payments...8 Inflation...10 Rupiah Exchange Rate...12 Monetary, Banking And Financial System Developments...13 Monetary Affairs...13 Bank Performance...16 Financial Markets...18 The Stock Market...18 Government Bonds Market...19 III. Monetary Policy Response

5 I. MONETARY POLICY STATEMENT In the Board of Governors Meeting convened on February 12 th, 2013, Bank Indonesia decided to hold the BI Rate at 5.75%. The current policy rate is considered consistent with the contained inflationary pressure in accordance with its target range of 4.5%+1% in 2013 and Bank Indonesia assessed that Indonesia s economy is still showing a strong performance, but remains wary of the high pressure on the external balance as imports remained strong amid a global economic downturn. In the future, Bank Indonesia will strengthen the policy mix to promote the external balance adjustment so that the current account deficit would be at a sustainable level. Bank Indonesia will continue to maintain the stability of rupiah exchange rate consistent with its economic fundamentals and encourage the realization of a more efficient foreign exchange market. In addition to that, Bank Indonesia will strengthen its policy coordination with the government in managing domestic demand, in order to maintain macroeconomic stability and a sustainable economic growth. Indonesia s economy grows quite strong supported by domestic demand, albeit slightly slower than the previous period. Economic growth in the Q reached 6.11%, reaching 6.23% for the whole year of Consumption and investment in the Q remained buoyant, although slightly moderated compared to the previous quarter. On the other hand, exports began to improve in line with the economic recovery in some major trading partners such as China. However, the import growth is still high due to the buoyant domestic demand. In the Q1 2013, economic growth is forecasted at 6.2%, mainly supported by domestic demand. For the whole year of 2013, after taking into account the economic activity in Q3 and Q including spending related with the preparation for general election in 2014, Indonesia s economic growth is forecasted to reach 6.3%-6.8%. On the external side, the balance of payment (BOP) in Q has improved as shown by increasing surplus despite the fact that the current account deficit was higher than expected. The improvement of BoP was mainly due to the performance of capital and financial transactions supported by the global financial market liquidity. Meanwhile, the rising current account deficits occured mainly due to the decreasing non oil trade balance surplus and the increasing oil trade balance deficit. 3

6 In the future, the current account in Q is expected to improve, mainly driven by an amelioration in the export performance in line with the economic recovery in some major trading partners such as China and USA. At the end of January 2013, international reserves reached USD billion, or equivalent to 5.9 months of imports and government s external debt services, above the adequacy level of international standards. On January 2013, rupiah depreciated by 0.22% (mtm) to Rp9.654 per USD, with a contained volatility. In the future, Bank Indonesia will continue to maintain the stability of rupiah exchange rate consistent with its economic fundamentals. Furthermore, Bank Indonesia will support the formation of a reference to rupiah exchange rate in the domestic spot market. This reference is expected to promote foreign exchange market efficiency, deepening the domestic financial market. CPI inflation went up in January 2013, but is expected to remain contained in the target range. CPI inflation in January 2013 reached 1.03% (mtm) or 4.57% (yoy) due to a high rainfall that induced disruption of distribution and production. The interrupted supply caused a quite high increase in the volatile food inflation, compared to the previous period. Meanwhile, core inflation remained stable (4.32%, yoy) supported by well-contained inflation expectations, managed demand in line with the production capacity, as well as maintained exchange rate. Looking ahead, there are a number of risk factors that needs to be observed that may increase inflationary pressures, such as weather factors that can interfere with the production and distribution of food as well as increases in some administered prices. The financial system stability and banking intermediation function are properly maintained. A solid banking industry performance is reflected in the high capital adequacy ratio (CAR), which is well above the minimum 8% and the maintained ratio of non-performing loans (NPL) gross below 5%. Meanwhile, credit growth to the end of December 2012 reached 23.1% (yoy), increased from 22.3% (yoy) in the previous month. Working capital credit grew quite high at 23.2% (yoy) and investment credit recorded stable growth at a high level of 27.4% (yoy), and is expected to boost Indonesia s economic capacity. Meanwhile, consumer credit grew by 20.0% (yoy). Going forward, Bank Indonesia believes that the financial stability will be maintained with improvement in the banking intermediary function in line with the increase in Indonesia s economic performance. 4

7 II. THE ECONOMY AND MONETARY POLICY Economic Growth in Indonesia In Q4 2012, the Indonesian economy charted 6.11% growth (yoy), a modest decline compared to the previous quarter s level of 6.16% (yoy). The slowdown in the GDP is explained by more modest expansion in domestic demand and disruption to food crop production from monsoon rains. Despite reduced growth, household consumption has maintained brisk momentum driven by heavy buying of motor vehicles, electronic goods, communications services and air transportation. Government consumption was marked by steep contraction in comparison to the previous quarter, due to the low rate of expenditure absorption that impacted procurement in particular. Investment performance slackened in the area of non-construction investment, in line with slowing imports of capital goods and shrinking manufacturing capacity utilisation. On the external side, recovery in exports during Q exceeded earlier forecasts. The positive performance in exports was bolstered by the improving fortunes of some major trading partners, notably China, and gains in international commodity prices at the end of the year. Responding to the persistent strength of household consumption, the brisk pace of manufacturing growth, led by transportation equipment, electronics, machinery and tools, coupled with strong growth in construction investment boosted import growth to a higher level compared to the preceding quarter. In analysis by sector, GDP growth, like before was driven by the three leading sectors of manufacturing, the trade, hotels and restaurants sector, and transport and communications. Manufacturing growth was up following the onset of recovery in exports and resurgent growth in consumption of transportation equipment and electronics. The trade, hotels and restaurants sector also charted higher growth fuelled largely by performance in the wholesale and retail subsectors in keeping with rising imports of commercial goods, improvement in exports and accelerated manufacturing growth led by automotive production. The transportation and communications sector was marked by slowing growth as a result of muted growth in the maritime transportation subsector and contraction in rail transport. 5

8 Indonesia s vibrant economic performance is expected to continue in Q The sustained strength of domestic demand is forecasted to carry forward as backbone of economic growth, supported also by progressive recovery in exports. Household consumption is projected to maintain brisk expansion, despite a slight downturn in consumer optimism. Government consumption is forecasted to expand in line with historical trends. Investment is projected to maintain buoyant momentum in keeping with business optimism and a conducive business climate amid vibrant domestic demand and recovery in external performance. The outlook for exports is upbeat as economic recovery gains traction in major trading partners such as China and the US and with added boost from rising international commodity prices and faster than expected recovery in mining exports. With exports on the rise, imports have potential to respond with increased growth. In Q1 2013, household consumption is predicted to maintain vibrant expansion, despite potential for slipping behind forecasted levels. The Bank Indonesia Consumer Confidence Index (CCI) dropped slightly during Q This is explained by a downturn in the component of confidence in current conditions, and in particular the index for timing of durable goods purchases (Graph 2.1). Car sales were up in Q in keeping with sales promotion programmes at the end of the year. Similarly, motorcycle sales booked positive growth during December 2012 (Graph 2.2). However, the growth rate for Q retail sales is expected to drop slightly from pressure in the categories of food and beverages, household goods, communications and other goods (Graph 2.3). The slowing pace of retail sales was commensurate with the downturn in the index for timing of durable goods sales in January The sustained upbeat growth in household consumption is also bolstered by the continued strength of consumer purchasing power fuelled by potential for future increases in incomes. The outlook for rising purchasing power is also bolstered by real increases in provincial minimum wage levels in 2013, with increases averaging 18.32%. The government decision to raise the income tax free band to Rp 24 million per annum, effective from January 2013, has provided an added boost to consumer purchasing power. Regarding financing, real consumption credit extended by the banking system, one of the key sources of consumer financing, maintained stable growth. Similarly, consumer financing extended by non bank financial institutions also maintained stable growth. Graph 2.1 Index of Buying Condition for Durable Goods Graph 2.2 Retail Sales Index Graph 2.3 Retail and Vehicle Sales 6

9 Graph 2.4 Investment Value Business Survey Graph 2.5 Business Tendency Index - BPS Investment in Q is forecasted to chart brisk expansion on the strength of business optimism in a conducive business climate. This confidence in investment performance was also consistent with the continued strength of household consumption and onset of recovery in exports. The Business Survey points to a high level of investment value in the forecast for the first half of 2013 (Graph 2.4), with this investment dominated by new ventures. However, the business activity component in the Business Survey is predicted to weaken slightly during Q According to the Business Tendency Index issued by Statistics Indonesia (BPS) for Q1 2013, business optimism is predicted to edge lower (Graph 2.5). Positive perspectives of investment are also supported by the upgrading in Indonesia s sovereign rating to investment grade by the Rating & Investment (R&I) rating agency in October Confirmation of these perspectives is provided by anecdotal information of companies flocking to launch investment plans in a range of sectors. Some companies operating in transportation and manufacturing have announced plans for expanded procurement. Investment performance, like before, is spurred by expansion in construction and non-construction investment. Construction investment is up in keeping with the buoyant pace of domestic economic activity, reflected in property sales led by commercial property during Q Cement sales and imports of construction materials also recorded strong growth. Potential exists for rising property investment in 2013 following Jakarta s rating as Asia-Pacific s leading investment destination in the Emerging Trends in Real Estate Asia Pacific 2013 survey 1. In non construction investment, investment in machinery has potential to chart reduced growth, as indicated by diminished Q imports of capital goods led by machinery and transportation equipment for industrial use. Downward movement is also visible in other indicators, notably industrial electricity consumption and the manufacturing production index for machinery. Nevertheless, growth remains strong in investment in transportation equipment, as indicated by imports of passenger vehicles (for investment), more rapid growth in imports of vehicle spare parts and stable commercial vehicle sales. Exports are predicted to show improvement in Q1 2013, bolstered by the onset of recovery in the world economy. Recovery in exports was also strengthened by increases in export commodity prices at the end 1 Issued by Price Waterhouse Coopers and the Urban Land Institute. 7

10 of 2012 (Graph 2.6). The renewed growth in non oil and gas exports, most importantly in mining commodities, augurs for stronger exports in Q However, the contraction in oil and natural gas exports due to failure to meet oil lifting targets is expected to carry forward in early Oil lifting is below target due to declining output at ageing wells and disruptions to production. Imports have potential for resumption in growth given the onset of improvement in exports and continued strength of domestic demand. At the end of 2012, a turnaround became visible in the moderating trend in imports of raw materials, particularly in the category of food and beverages for industry. A similar indication was visible in the rise in consumer goods imports. Alongside this, oil and gas imports have considerable upside potential due to the government plan to hold back from raising fuel prices and the less than optimum levels of domestic oil production. In disaggregation by sector, economic performance is predicted to maintain buoyant expansion in Q Further improvement is expected in manufacturing growth, bolstered by the strength of domestic demand and recovery in exports. The agriculture sector will mark stronger growth with the onset of the harvest season. However, performance in the agriculture sector continues to be overshadowed by risk of flooding that may prevent growth reaching forecasted levels. More rapid growth is expected in the trade, hotels and restaurants sector, with the outlook bolstered by strong domestic economic activity and the beginnings of recovery in exports. In similar developments, the high growth performance in the transport and communications sector is supported by sustained robust performance in aviation and potential in data communications. Upbeat growth is also forecasted in the construction sector, consistent with the brisk place of construction investment. The mining sector is showing potential for positive growth, bolstered by improvement in exports following earlier predictions of contraction. Graph 2.6 Non Oil & Gas Export Commodity Price Indices Graph 2.7 Real Value of Non Oil & Gas Import Indonesia Balance of Payments Indonesia s external balances improved in Q During the quarter, the balance of payments booked a US$3.2 billion surplus, higher than previous quarter surplus of 0.8 billion US dollars. The improvement in the balance of payments performance resulted from increase in the capital 8

11 and financial account surplus that surpassed rising current account deficit. For the whole year of 2012, the balance of payments recorded a surplus of 0.2 billion US dollars. In response, international reserves at the end of December 2012 strengthened to billion US dollars, equivalent to 6.1 months of imports and government s external debt services. The capital and financial account recorded an increased surplus to 11.4 billion US dollars in Q The surplus in capital and financial account was driven from sustained investor confidence and the additional liquidity in the global financial markets resulting from monetary expansion in developed countries. Surplus among others derived from increased inflows of foreign portfolio investment in the form of the purchase of government securities, both denominated in rupiah or foreign currency. Inflows also occur in the form of withdrawal of funds belonging to domestic banks stored outside the country in response to the growing need for foreign exchange in the country. In addition, the foreign funds in the form of foreign direct investment (FDI), which still flowing in to the country, also contributed to the increase of capital and financial account performance. On the other hand, the current account recorded an increase in deficit. The increase in the current account deficit is a result of the slow economic recovery amid robust domestic demand. In the fourth quarter of 2012 the current account deficit reached 7.8 billion US dollars, higher than the previous quarter, primarily due to the decline in non oil trade surplus and rising oil trade deficit. The increase in exports that occurred during the quarter could not offset the increase in imports, which mainly come from consumer goods and fuel oil, in line with the increasing fuel consumption. Accordingly, for the whole year of 2012, the balance of payments recorded a surplus of 0.2 billion US dollars. In Q1 2013, the current account is expected to show improvement, mainly from more robust export performance in tandem with the economic recovery under way in major trading partners, including China and the US. At the end of January 2013, international reserves stood at billion US dollars, equivalent to 5.9 months of imports and servicing of official external debt. 9

12 Inflation CPI inflation mounted sharply in January 2013 compared to one month before. CPI inflation in January was recorded at 1.03% (mtm) or 4.57% (yoy) (Graph 2.8). This increase was spurred by high inflation in the volatile foods category at 3.76% (mtm), ahead of historical figures. High rainfall in almost all of Indonesia has led to crop losses and disruptions in distribution, with vegetables, fruits and perishable seasonings most affected. Core inflation was comparatively stable at 4.32% (yoy). Key to this achievement was an increase in supply side capacity for responding to increased demand, as well as subdued inflation expectations, stability in the rupiah and relative stability in global commodity prices. The floods that struck during the month under review have not had a major impact on core inflation, as evident from the largely stable level of core food inflation. Alongside this, administered prices inflation remained at a mild 2.42% (yoy), a development attributable to the delayed impact of the hike in electricity billing rates announced during the month. The volatile foods category experienced a significant rise in inflation due to the effects of the rainy season under way in most of Indonesia. The sheer intensity of the rains has caused flooding in some regions, which in turn has led to crop losses and disruptions in distribution of commodities such as meat, seasonings, vegetables and fruits. In consequence, volatile foods inflation mounted to 3.76% (mtm), up from 1.82% (mtm) in the preceding month. The annual measure of inflation in volatile foods mounted to 7.48% (yoy) from 5.68% (yoy) in December The major contributors to volatile foods inflation are meat and livestock products, including commercially-bred chicken, fresh fish and eggs; seasonings such as red chilli peppers, shallots and garlic; vegetables such as spinach and potatoes; and fruit led by apple and oranges (Table 2.1).The rise in seasonings prices is thought to be related to tight supply brought on by seasonal factors and adverse weather conditions, particularly in Sumatra and Java, as well as limited supply through imports. Increases in meat prices were triggered by rising prices for animal feeds, with supply hit by adverse weather conditions. Rough seas brought on by extreme weather at sea are expected to result in significant price increases for fish. At the same time, rice inflation January 2013 was recorded at 0.96% (mtm), below historical levels during times of extreme weather conditions such as in 2002 and 2007, and under the average for the past three years (Graph 2.9). The subdued level of rice prices was supported Graph 2.8 Inflation Graph 2.9 Rice Inflation (2013 & Historical) Table 2.1 Volatile Food Inflation Contributors Commodities Pb. Chicken Meat Red Chili Pb. Chicken Egg Shallot Rice Garlic Birds Eye Chili Potato Beef Source : BPS Inflation (%, mtm) January 2013 Contribution (%, mtm)

13 Graph 2.10 Non-Tradable Core Inflation Graph 2.11 Consensus Forecast Inflation Expectation Graph 2.12 Consumers Inflation Expectation by the rice market operations conducted by the National Logistics Agency (BULOG) and distribution of rice for the poor (Raskin) during January Rice imports in 2012 also helped maintain stability in rice prices in advance of the harvest season expected in March. In addition, price corrections in domestically-sold cooking oil eased the level of volatile foods inflation in January Core inflation was low and largely stable in January 2013 at 0.36% (mtm) or 4.32% (yoy). The stable level of core inflation is explained by comparatively subdued inflation expectations, management of demand in line with production capacity and the absence of significant external side pressures. The flooding that hit most of the greater Jakarta region has not resulted in significant impact in core inflation, as reflected in the stable level of core food inflation (5.51%, yoy). The extended holiday period at the beginning of the year did not stoke inflationary pressures, but instead generated a deflationary contribution in line with correction in air fares. In addition, supply side capacity for response to demand, reflected in the stable level of industry inflation and inflation in non-tradables, contributed to an overall mild level of low core inflation (Graph 2.10). The subdued level of inflation developments is reflected in the Consensus Forecast survey results of expectations and a retail trader and consumer survey conducted by Bank Indonesia (Graphs 2.11 and 2.12). On the external side, inflationary pressure was again minimal, due to the stability maintained in the rupiah and largely stable level of global commodity prices. At the same time, core inflation was driven primarily by seasonal factors in the housing category, marked by increases in costs of housing (Graph 2.13) and Wages of non foreman construction workers. Administered prices inflation was negligible in January 2013, due to the absence of an increase in electricity billing rates during the month. Inflation in the administered prices category reached 0.20% (mtm), or in annual terms 2.42% (yoy). The increase in electricity billing rates is expected to impact bills paid by consumers only in February Government policy decisions regarding commodity prices in January 2013 involved an average 8.5% hike in cigarette excise. This increase in cigarette excise is less than the average 15% increase of the previous year. Graph 2.13 Housing Rental Inflation 11

14 Rupiah Exchange Rate During January 2013, the rupiah maintained a downward trend, albeit with relatively stable volatility. The average value of the rupiah slipped 0.22% to Rp9,654 to the US dollar from Rp9,633 to the US dollar in the previous month. Measured point-to-point (ptp), the rupiah weakened 0.62% to Rp9,698 to the US dollar from the previous end-month position of Rp9,638 to the US dollar (Graph 2.14). Rupiah depreciation was also fuelled by high corporate and customer demand for foreign currency on the domestic market amid conditions of limited supply. This demand has also exacerbated disequilibrium on the domestic forex market. An added factor in the weakening of the rupiah was mounting pressure in the current account that has resulted from limited growth in exports alongside sustained rapid growth in imports driven by buoyant domestic demand. Although the rupiah edged lower, exchange rate volatility was mild in keeping with the stabilisation measures pursued by Bank Indonesia. Movement in the rupiah was also influenced by external factors that stirred negative sentiment. Fears over the fiscal policy outlook in the United States, the sustainability of the economic stimulus programme launched by the Fed, lingering uncertainties over the outlook for resolution of the crisis in Europe and the weak macroeconomic conditions of Europe all contributed to the fragility of global economic recovery. In addition, the persistently low prices for international commodities that form the mainstay of Indonesia s exports created adverse conditions for movement in the rupiah during the period under review. Nevertheless, the accommodative policy stance pursued by central banks in advanced economies, the Quantitative Easing 3 announced by the Fed and other stimulus measures from the European Central Bank (ECB) will engender flows of capital to countries like Indonesia that have resilient domestic fundamentals and offer attractive returns. In this way, the rupiah was kept from further depreciation by inflows of funds from these advanced economies. Besides the negative sentiment, external developments also engendered positive sentiment that also influenced movement in the rupiah. Positive sentiment emerged in response to the moderating level of global risks following positive developments in the latest reports from the US and the agreement reached for averting the fiscal cliff. The amelioration in global risks is reflected in the easing in the Volatility Index Graph 2.14 Rupiah Exchange Rate Graph 2.15 Global Risk Indices (VIX, MSCI World) 12

15 Graph 2.16 Indonesia s CDS and Yield Spread Graph 2.17 Uncovered Interest Parity (UIP) Graph 2.18 Covered Interest Parity (CIP) Graph 2.19 PUAB O/N Rate & DF O/N Volume (VIX) and MCSI World (Morgan Stanley Capital International) index during January 2013 (Graph 2.15). The VIX experienced a renewed surge midway during the month under review, due to the approaching deadline for increase in the US debt ceiling that fuelled jitters on global financial markets. Domestic risks escalated in January Triggering this were fears of continued deficit pressure in the current account and the dynamics of global uncertainties. The rise in domestic risks was reflected in an increase in credit default swaps (CDS) and higher yields, which point to mounting investor concerns over the Indonesian economy (Graph 2.16). However, the more competitive investment returns on rupiah-denominated assets compared to other countries in the region offer attraction for foreign investors, with the effect of halting further decline in the rupiah. Like before, yields reflected in uncovered interest parity (UIP) were superior to those for other countries in the region (Graph 2.17). This indicates that investment in rupiah-denominated financial assets generates higher returns. Even after factoring in the risk premium, investment in rupiahdenominated assets retains greater attraction compared to Korea, Malaysia and the Philippines (Graph 2.18). Monetary, Banking And Financial System Developments Monetary Affairs Interest rates on the interbank money market were comparatively stable. Overnight interbank rates remained stable at the lower limit of the interest rate corridor, averaging 4.17% (17 bps over the Deposit Facility or DF Overnight rate) as in the preceding month. This development is closely linked to the Bank Indonesia strategy for monetary operations involving frequent auctioning of Term Deposits/Reverse Repos of short-term government securities (less than 1 month). The relative spread between the overnight interbank rate and the BI Rate was stable in January 2013 at 90.5%, little changed from 90.0% one month earlier. Interbank rates in longer tenors also moved downwards in tandem with the overnight interbank rate, accompanied by slightly increased volatility as a result of limited transaction volume (Graph 2.19). 13

16 Risk perceptions on the interbank market were largely subdued, remaining below the average threshold under normal conditions. Reflecting this was the 8 bps average spread between the high and low overnight rates in January 2013, almost unchanged from 9 bps one month earlier and below the average 32 bps threshold under normal conditions. Alongside this, interbank transaction volume was relatively stable in January 2013 compared to December 2012, but below levels recorded in January one year earlier. On the monetary operations side, Bank Indonesia has worked tirelessly strengthen monetary operations for short term inflation control and stabilisation of the rupiah exchange rate. During the month, Bank Indonesia implemented a monetary strategy of more frequent auctions of Term Deposits (TDs) and reverse repos (RR) of government bonds in short tenors, less than one month. This strategy helped to shape an improved interest rate structure in January 2013 reflected in a positive and smoother interest rate curve compared to one month before. This reinforcement of monetary operations has also helped to shape more subdued inflation expectations and a flattening yield curve on Indonesian government bonds, while contributing to stabilisation of the rupiah. Bank Indonesia not only manages rupiah liquidity, but also forex liquidity to safeguard the stability of the rupiah. Management of forex liquidity is carried out with the use of the Forex Term Deposit (Forex TD) instrument, introduced in Q In January 2013, Bank Indonesia held 5 (five) auctions of Forex TDs in tenors of 7 days, 14 days and 30/31 days. Through these TD auctions, Bank Indonesia was able to absorb a total of 30 billion US dollars. At the same time, in keeping with the downward trend in money market rates outside Indonesia, rates for the forex TD instruments eased across all tenors. During January 2013, the weighted average forex TD rates for 7-day and 14-day tenors were recorded at 0.12% and 0.13%. These rates were unchanged from the preceding month. Concerning bank interest rates, deposit rates moved upwards in December 2012 while loan interest rates were relatively stable, a developed that narrowed the interest rate spread. The 1-month deposit rate edged 16 bps over the previous month to 5.58%, while the average level of lending rates was stable at 12.1% (Graph 2.20). In response to these developments, the spread between 1-month loan and deposit rates eased from the preceding month to 6.53%. Despite some Graph 2.20 Banks Interest Rate 14

17 Graph 2.21 Credit Interest Rate by Type of Use narrowing on a monthly scale, the interest rate spread in December 2012 at 6.53% in fact had widened from the December 2011 spread of 6.43%. The still broad spread offers potential for easing in loan interest rates as banks improve the efficiency of their operations (narrowing of bank margins) and channelling of bank funds. Although the average for loan interest rates was stable, rates for working capital credit were marked by decline. Interest rates on working capital credit slipped 12 bps to 11.5% from 11.6% one month earlier. On the other hand, rates for investment credit and consumption credit edged up slightly by 3 bps and 5 bps to 11.3% and 13.6% from the previous month s levels of 11.2% and 13.5% (Graph 2.21 and Table 2.2). Table 2.2 Interest Rate Development Interest Rate (%) Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan BI Rate Deposit Guarantee 1-month Deposit (Weighted Average) Base Lending Rate Working Capital Credit Investment Credit n.a n.a n.a n.a Graph 2.22 Money Supply Accompanying the tapering growth in the domestic economy was reduced expansion in economic liquidity. In December 2012, M2 growth eased to 14.9% (yoy) from 16.4% (yoy) in December 2011 and the November 2012 level of 17.4% (yoy). Like with M2, growth in M1 eased to 16.4% (yoy) from 19.4% (yoy) in December 2011 and the November 2012 level of 20.0% (yoy). The tapering growth in economic liquidity (M2 and M1) resulted from a declining contribution from rupiah demand deposits caused by slowed credit expansion consistent with the decline in economic growth from 6.5% in the preceding year to 6.2% in A further reason for tapering in M2 was the mandated increase in capital for commercial banks and rural banks, a development reflected in the reduced contribution of Net Domestic Assets (NDA) in contrast to stable Net Claims on Central Government (NGC) in economic liquidity. 15

18 Bank Performance Financial system stability and the banking intermediation function remained sound. Reflecting the solid performance of the banking industry performance is the resilience of the banking system indicated by the high capital adequacy ratio (CAR), well above the 8% minimum, and subdued level of non performing loans (NPLs) gross at below 5%. Credit growth reached 23.1% (yoy) at end-december 2012, ahead of 22.3% (yoy) one month earlier. Other ratios, such as Loan to Deposits (LDR) and Return on Assets (ROA), were up from the preceding year. Regarding profitability, NIM remains on the high side compared to the average margin for 20 nations, despite some decline from the previous year. Looking ahead, Bank Indonesia is confident of sustained financial system stability alongside improvement in the bank intermediation function in keeping with upbeat performance in the national economy (Table 2.3). Main Indicators Total Asset (T Rp) Third Party Funds (T Rp) Credit * (T Rp) LDR* (%) NPLs Gross* (%) CAR (%) NIM (%) ROA (%) 2011 Table 2.3 Banking Indicators Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 3,652,8 3,598,7 3,628,1 3,708,7 3,745,1 3,827,5 3,891,1 3,902,5 3,923,8 4,009,4 4, , , ,784,9 2,742,3 2,763,9 2,826,0 2,841,4 2,909,0 2,955,8 2,961,4 2,984,1 3,050,0 3, , , ,200,1 2,160,2 2,203,0 2,266,2 2,317,2 2,386,1 2,452,9 2,470,1 2,510,6 2,555,9 2, , , * without channeling Bank lending maintained brisk expansion in December consistent with the steady vibrant growth in domestic demand amid the slowdown in the external sector. Credit growth, excluding channelling, was recorded at 23.1%, up from expansion one month earlier at 22.3% (yoy) (Graph 2.23). In response, the level of credit expansion in 2012 reached Rp trillion. Compared to the preceding year, credit expansion slowed during 2012, mainly in response to reduced growth in consumer lending. This slowdown in consumption credit resulted from a downturn in credit for purchases of cars, motorcycles and homes measuring less than 21 Graph 2.23 BI Rate, Credit, and Deposit 16

19 Graph 2.24 Credit Growth by Usage square metres 2. Expansion in credit for cars and motorcycles and under 21 square metre home mortgages was recorded in December 2012 at 4.5%, -27.7% and -32.5% (yoy), in contrast to growth in December 2011 at 62.3%, 4.7% and 57.2% (yoy). Nevertheless, in the above 70 square metre category, home mortgages and apartment mortgages forged ahead with expansion at 47.2% and 67.9% (yoy). 3 Working capital credit and investment credit maintained robust expansion during In December 2012, growth in working capital credit and investment credit reached 23.2% and 27.4% (yoy), representing buoyant performance when compared to the December 2011 rates of 21.4% and 33.2% (yoy) and the corresponding expansion in November 2012 at 26.1% and 19.8% (yoy). In the accumulated lending growth during 2012, expansion in working capital credit and investment credit reached Rp trillion and Rp trillion, up from the 2011 levels of Rp trillion and Rp trillion (Graph 2.24). In sectoral analysis, credit expansion showed signs of easing in December Key to this was faltering expansion in credit to other sectors 4 (consumption credit), where expansion reached only 13.7% compared to the December 2011 expansion recorded at 24.3%. In addition to credit to other sectors, growth in credit for mining, social services and business services also slowed to 18.7%, 7.45% and 23.8% (yoy) compared to December In contrast, growth contributed by credit for construction, manufacturing and trade strengthened to 27.2%, 29.4% and 34.2% (yoy) from the December 2011 levels of 18.7%, 25.1% and 19.3% (yoy). Concerning credit supply, the source of bank funding for credit, namely depositor funds, charted reduced growth. In December 2012, growth in depositor funds slipped to 15.8% (yoy) from 19.0% (yoy) in December 2011 and the November 2012 expansion of 18.4% (yoy). The slackening growth in depositor funds is explained by weaker growth in all components of bank funding, namely time deposits, demand deposits and savings deposits. This development is consistent with slower lending to some productive sectors 5 and the surge in personal expenditures (currency trend) related to the Christmas and New Year holiday season. Although depositor 2 Due to a regulatory change increasing the minimum home size to 36 m2 and lending unaffected by the Loan to Value (LTV) policy. 3 Loans targeted by the Loan to Value (LTV) policy. 4 Credit to other sectors consists of loans to non-business activities. 5 The credit extended to productive sectors will return as funds placed in the banking system, mainly in the form of demand deposits. 17

20 funds recorded slower expansion, the supply side potential for lending remains considerable. This is confirmed by the widening trend in the gap between depositor funds and credit, in addition to the positive Rp 18 trillion difference between funding growth and credit expansion. Financial Markets The Stock Market Amid the lingering uncertainty over global economic recovery, Indonesia s stock market was again marked by positive growth in January The JCI charted gains in keeping with prudently managed macroeconomic stability and positive results reported in corporate financial statements. On 18 January 2012, the JCI reached an all-time high of 4, However, Indonesia s stock market performance lagged behind other countries in the region, notably Vietnam, the Philippines and Thailand. The more sluggish performance compared to regional markets is explained by the fragile recovery under way in commodity-based sectors, the main driving force for the Indonesian stock market, in addition to sentiment over the merchandise trade balance and weakening of the rupiah 6. In January 2013, the JCI closed at 4, points (31 January 2013), having gained 3.2% over December 2012 (Graph 2.25). Domestic index gains were spurred by movement in sectoral indices. During January 2013, most sectoral indices charted gains, with agriculture, multivarious industry and trade comprising exceptions to this trend. Leading in gains was the property sector at 11.4%, followed by the financial sector at 8.0%. In other sectors, gains were in the 0.4%- 4.5% range. The positive outlook for the property sector and bank profits stimulated keen investor interest in the two sectors. In contrast, agriculture underwent the steepest decline of all sectors in the wake of falling prices for some agricultural commodity prices (Graph 2.26). The strength of domestic fundamentals led to a sharp rise in foreign ownership on the domestic stock market. Foreign investors booked a net purchase in January 2013 of Rp 5.70 trillion, representing buoyant growth over the December 2012 net purchase of only Rp 0.12 trillion. Graph 2.25 JCI and BI Rate 6 Most affected were stocks issued by companies with high dollar exposures in their operations. Graph 2.26 JCI and Sectoral Indices 18

21 Graph 2.27 Monthly Changes in Government Bond Yield Foreign investors embarked on selective buying in undervalued stocks, characterised by high growth companies that have seen only limited share price gains in recent months. Government Bonds Market Indonesian government bonds posted varied performance over the range of tenors. Yields on Indonesian government bonds were up in medium and long tenors, but narrowed in short tenors. Overall movement in bond yields during January 2013 was comparatively stable, given the modest 4.20 bps increase to 5.20% from the December 2012 level of 5.16%. When disaggregated further, yields on government bonds in medium and long tenors mounted by 8.03 bps and 8.63 bps to 5.13% and 5.26%, while short term yields eased 4.8 bps to 4.51%. Yields on 10-year Indonesian government bonds widened by bps to 5.33% from 5.19% in December 2012 (Graph 2.27). The rise in yields on medium and long tenors has been triggered by market fears over depreciation in the rupiah and the rise in inflation and the current account deficit, that continue to weigh down on markets. Nevertheless, when compared to other countries in the region, yields on Indonesian government bonds retained considerable attractiveness (Graph 2.28). Graph 2.28 Government Bond Yield among Regional Countries Foreign investor buying on the government bonds market was marked by a preference for a shortening duration strategy. Foreigners engaged in more intense buying of short-term governments while off loading limited quantities of long term government bonds. The heavy foreigner buying was spurred by prudently managed domestic economic fundamentals and fiscal sustainability despite the persistence of considerable risk of external imbalances. Similarly, holdings of Indonesian government bonds by banks, insurance companies and pension funds were also up in January In response to these developments, foreign investors booked a net purchase of Rp2.66 trillion in January 2013, up from the December 2012 net purchase of Rp0.66 trillion. 19

22 III. MONETARY POLICY RESPONSE In the Board of Governors Meeting convened on February 12 th, 2013, Bank Indonesia decided to hold the BI Rate at 5.75%. The current policy rate is considered consistent with the contained inflationary pressure in accordance with its target range of 4.5%+1% in 2013 and Bank Indonesia assessed that Indonesia s economy is still showing a strong performance, but remains wary of the high pressure on the external balance as imports remained strong amid a global economic downturn. In the future, Bank Indonesia will strengthen the policy mix to promote the external balance adjustment so that the current account deficit would be at a sustainable level. Bank Indonesia will continue to maintain the stability of rupiah exchange rate consistent with its economic fundamentals and encourage the realization of a more efficient foreign exchange market. In addition to that, Bank Indonesia will strengthen its policy coordination with the Government in managing domestic demand, in order to maintain macroeconomic stability and a sustainable economic growth. 20

23 Latest Indicators FINANCIAL SECTOR INTEREST RATE & STOCK One month SBI Rate 1) One month Deposit Rate 2) Three month Deposit Rate 2) One week JIBOR 2) JCI Indices 3) MONETARY AGGREGATES (billion IDR) Base Money M1(C+D) Currency (C) Demand Deposit (D) Broad Money (M2 = C+D+T+S) Quasi Money (T) Quasi Money (Rupiah) Time Deposit Saving Deposit (Total) Foreign Currency Time Deposit Foreign Currency Demand Deposits Securities Other Than Shares (S) Broad Money - IDR Claims on Other Sectors Claims on Business Sectors Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan ,942 3,985 4,122 4,181 3,833 3,956 4,142 4,060 4,263 4,350 4,276 4,317 4, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,755-2,854,978 2,849,796 2,911,920 2,927,259 2,992,057 3,050,355 3,054,534 3,089,011 3,125,533 3,161,726 3,205,129 3,304,041-2,145,246 2,150,808 2,182,891 2,190,885 2,227,527 2,254,329 2,269,809 2,304,474 2,318,559 2,376,102 2,393,320 2,451,835-1,842,815 1,848,124 1,875,257 1,887,124 1,900,824 1,915,625 1,926,046 1,960,339 1,968,062 2,009,812 2,022,975 2,091, , ,643 1,022,038 1,020,792 1,027,151 1,016,060 1,017,021 1,030,262 1,030,830 1,060,357 1,058,871 1,066, , , , , , , , , , , ,105 1,025, , , , , , , , , , , , , , , , , , , , , , , , ,341-13,409 15,735 14,771 15,450 15,081 16,610 12,932 12,108 11,457 10,640 10,406 10,420-2,854,978 2,849,796 2,911,920 2,927,259 2,992,057 3,050,355 3,054,534 3,089,011 3,125,533 3,161,726 3,205,129 3,304,041-2,374,862 2,403,464 2,464,483 2,519,946 2,586,786 2,653,871 2,668,447 2,696,876 2,758,170 2,791,363 2,833,571 2,920,718-2,106,449 2,138,727 2,189,236 2,230,960 2,289,504 2,361,812 2,378,914 2,406,188 2,471,071 2,504,939 2,504,347 2,584,602 - P R I C E S CPI - monthly (%, mtm) CPI - 1 yearly (%, yoy) EXTERNAL SECTOR IDR/USD (end of period, mid rate) Non oil/gas Export (f.o.b, million USD) 4) Non oil/gas Import (c$f, million USD) 4) 9,000 9,085 9,180 9,190 9,565 9,480 9,485 9,560 9,588 9,615 9,605 9,670 9,698 12,414 12,594 13,565 12,698 13,315 12,420 13,257 10,594 13,623 12,636 13, ,715 11,894 12,296 12,381 13,363 12,918 13,249 10,337 11,824 13,053 12, QUARTERLY INDICATOR GDP Growth (%, yoy) Consumption Investment Changes in Stocks Export Import 2012 Q. I Q. II Q. III Q. IV ) end of week 2) weighted average 3) end period closing 4) closed file Sources : Bank Indonesia, except stock market data (BAPEPAM), CPI, export/import and GDP (BPS) 21