Monetary Policy Review March 2009

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3 Monetary Policy Review March 2009 The Monetary Policy Review (MPR) is published monthly by Bank Indonesia after the Board of Governors Meeting each February, March, May, June, August, September, November, and December. This report is intended as a medium for the Board of Governors of Bank Indonesia to present to the public the latest evaluation of monetary conditions, assessment and forecast for the Indonesian economy, in addition to the Bank Indonesia monetary policy response published quarterly in the Monetary Policy Report in January, April, July, and October. 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 Boediono Governor Miranda S. Goeltom Senior Deputy Governor Hartadi A. Sarwono Deputy Governor Siti Ch. Fadjrijah Deputy Governor S. Budi Rochadi Deputy Governor Muliaman D. Hadad Deputy Governor Ardhayadi Mitroatmodjo Deputy Governor Budi Mulya Deputy Governor 1

4 Table of Contens I. Monetary Policy Statement...3 II. Monetary Policy and Indicators...5 I n f l a t i o n...5 Rupiah Exchange Rate...7 Monetary Policy...9 Policy Strategy...9 Interest Rates...9 Funds, Credit, and the Money Supply...11 The Capital Market...12 Condition of the Banking System...14 III. Monetary Policy Response

5 I. MONETARY POLICY STATEMENT The global economic slowdown has taken a more severe turn, reflected in forecasts of economic decline in developed countries beyond earlier predictions. Global financial markets remain in precarious condition with losses reported by growing numbers of world financial institutions. This has adversely impacted economies in the region, and particularly countries relying on exports to developed markets. Indonesia is no exception. At the same time, the global liquidity crunch persists, and is being followed by escalating perceptions of emerging market risks. The slowing export performance is putting pressure on Indonesia s balance of payments, which nevertheless remains within safe limits. International reserves currently stand at billion US dollars, still adequate for 5.4 months of imports and servicing of official external debt. These reserves will be reinforced by 3 billion US dollars in proceeds from the sale of Government global bonds. The pressure on the domestic economy augurs for reduced economic growth in Bank Indonesia forecasts Indonesia s economic growth in 2009 at about 4%. This growth may be biased downwards if the global economy takes a further turn for the worse. In 2009, the leading factor in faltering economic growth will be export performance, which depends to a great extent on global conditions. However, the main support for economic growth come from the domestic economy, with momentum boosted by a relaxed monetary policy, Government policies designed to improve public purchasing power and a range of fiscal stimuli to sustain momentum in key economic sectors. The weakening in the global economy and prolonged period of low commodity prices on international markets has contributed to a downward trend in future inflation in Indonesia. On the domestic front, inflationary pressure is reined in by adequate supplies of staple goods and minimum pressure from administered prices. Inflation was remarkably subdued in February 2009 at 0.21% (mtm), well below the historical average. With these developments, the inflation forecast for 2009 is near the lower limit of the 5%-7% projected range. On the other hand, the rupiah measured against the US dollar came under pressure during February 2009 as a whole. Fuelling this was negative 3

6 sentiment over adverse developments in external factors, such as sharply reduced global economic growth and mounting losses announced by international financial institutions. Domestically, the relatively stable course of the economy and condition of fundamentals continued to bolster the currency. Responding to these developments, Bank Indonesia will stay the course with a range of stabilisation measures to safeguard the rupiah from excessive fluctuation. Amid the steady deterioration in global economic conditions and weakening inflationary pressure, Bank Indonesia is maintaining a progrowth focus. The various monetary policy actions pursued by Bank Indonesia are designed to revitalise the real sector in support of economic growth. These policies are being implemented alongside continued actions to maintain price and macroeconomic stability and financial system stability in the medium-term. On 4 March 2009, the Board of Governors Meeting at Bank Indonesia decided to lower the BI Rate by 50 basis points from 8.25% to 7.75%, marking the fourth consecutive rate cut since December Bank Indonesia will maintain optimum use of all monetary policy instruments at its disposal to safeguard price and exchange rate stability in support of the economy. The relaxation in the monetary policy stance met with positive response from the interbank money market, which moves at about the level of the BI Rate. In January 2009, time deposit rates began to ease, tracking the movement in the BI Rate in keeping with improving perceptions of risk. This monetary policy is expected to encourage banks to lend to productive sectors, while maintaining a primary emphasis on prudence. Through these actions, the Indonesian economy will be able to weather the global crisis. The Indonesian banking system remains in stable condition reflected in developments in a range of bank financial and soundness indicators. The condition of banking liquidity, including liquidity flows on the interbank money market, has begun to show improvement in comparison to recent months. Even so, Bank Indonesia is still closely monitoring an upward trend in credit risk that may potentially lead to mounting NPLs in the banking industry. Looking forward, Bank Indonesia will maintain a steady course with pro-growth policies while maintaining emphasis on macroeconomic and financial system stability. If inflationary pressure stays on a downward trend, more room will be created for monetary policy relaxation. Supporting 4

7 the monetary policy relaxation will be other measures for strengthening the financial sector, including a revamped system for bank supervision and an effective, efficient payment system. These actions are expected to foster business optimism, which in turn will promote economic growth. II. MONETARY POLICY AND INDICATORS Macroeconomic stability showed an improving trend throughout February 2009, amid the weakening of the domestic economy. Inflationary pressures eased further in keeping with improving expectations of inflation. The rupiah exchange rate showed less volatility compared to end-2008, despite the ongoing deterioration of the global economy. On the money market, the BI Rate cut was followed by easing in the interbank money market rates for various tenors. The variation among tenors also narrowed due to improving perceptions of liquidity conditions. At the same time, the weakening of the domestic economy and caution on the part of banks caused bank lending to diminish 2.1% during January Under these conditions, Bank Indonesia is closely monitoring credit risk in view of the potential for mounting NPLs in the banking industry. Inflation In February 2009, CPI inflationary pressure showed further decline. A downward trend in inflation has been under way since the last quarter of Inflation dropped to 8.60% (yoy) in February from the January 2009 level of 9.17% (yoy). At this level, inflation is well below the peak level recorded in September 2008 at 12.14% (yoy). Monthly inflation in February 2008 similarly registered 0.21% (mtm), down considerably from the same month one year earlier when inflation reached 0.65% (mtm). This reduction in inflation is explained by improving inflation expectations, adequate supply of staple goods and lower fuel prices. Also contributing to the softening inflationary pressure was reduced imported inflation as a result of falling international commodity prices. Analysed by category, inflationary pressure eased across almost all commodities, except in the clothing and housing categories. Prices in the foodstuffs and transportation categories fell more steeply compared to other categories. Foodstuff prices moved lower in line with the downward 5

8 trend in world food commodity prices, while domestic market supply held firm. Added to this, the decision to reduce subsidised fuel prices prompted renewed transportation deflation in February Deflation in the transportation category reached 2.43% (mtm). This is explained largely by cuts in subsidised fuel prices in preceding months with first round effects and second round effects in lower transport fares that carried over into February On the other hand, the relative surge in inflationary pressure in the clothing category was closely linked to the approximately 12% rise in gold prices (mtm). Inflationary pressure in the volatile foods category showed further decline. In February 2009, volatile foods inflation reached 12.90% (yoy), down from 14.21% in the preceding month (yoy). At this level, volatile foods inflation is down substantially from the peak of 21.1% (yoy) recorded in August This decline has much to do with the downward trend in world food commodity prices (such as palm oil, wheat, soy beans and corn). Reduced pressure from imported inflation in this category was also visible in the softening trend in inflationary pressure from imported food commodities, mainly since October Domestic conditions, marked by adequate levels of supply, also helped to curb inflationary pressure in the volatile foods category. Inflation in administered prices has fallen considerably since December Like in earlier months, this decline came in response to decisions to cut subsidised fuel prices (premium gasoline and automotive diesel) during the December 2008-January 2009 period, with first round and second round effects carrying forward into February. Additionally, the 3%-4% reduction in prices for the Pertamax and Pertamax Plus fuels produced a minimum contribution to inflation. Taken together, the lower fuel prices have produced first round effects and second round effects, the latter through reductions in transport fares. Problems arising from supply disruptions in the kerosene to bottled gas conversion programme last year that contributed significantly to inflation were resolved in early The improvement in LPG supplies has helped to lower prices for this commodity. On the other hand, shortages persisted in kerosene, although limited to a few regions due to cutbacks in supply quotas. In overall terms, however, household fuels produced a deflationary contribution of 0.01%. A decision to raise cigarette excise in February 2009 has had minimal impact on administered prices, not being accompanied by an increase in official cigarette retail prices. Graph 2.1 Inflation Graph 2.2 Inflation and Contribution of Inflation by Group (February m-t-m) 6

9 Graph 2.3 Exchange Rate & Trading Partner Inflation Graph 2.4 Consumer Price Expectations Graph 2.5 Trader Price Expectations Pressure from core inflation showed no significant change in February 2009, following some easing in January In February, core inflation reached 7.42% (yoy), relatively stable when compared to the January level of 7.39% (yoy). Monthly core inflation in February 2009 reached 0.68% (mtm). This compares to the 0.44% (mtm) recorded in January. Developments in supply-demand interaction point to minimum pressure from the output gap. At the same time, external pressure has maintained a prevailing downward trend since August 2008 in keeping with falling world commodity prices, especially for food and oil. The domestic and external developments, all of which support this softening trend in core inflation, have contributed to lower inflation expectations. However, the latest developments in February 2009 indicate the resurgence of external pressures from imported inflation due to corrections in pricing of some world market commodities (mainly gold and sugar) reflected in domestic prices. Gold produced the highest contribution to inflation at 0.19%, after prices climbed 12% over January levels. The rise in domestic gold prices was spurred by higher international gold prices, up about 10% in comparison to January The escalation in gold prices is closely linked to fears of global recession that has seen investors flock to gold as a safe haven. Inflation expectations have eased with increasing momentum since the announcement of reduced fuel prices. Healthier expectations of inflation are confirmed by the various surveys conducted by Bank Indonesia, such as the Consumer Survey (Graph 2.4), the Retail Survey (Graph 2.5) and the Market Perceptions Survey. The various external and domestic factors pointing towards more subdued inflation have contributed to lower public inflation expectations. The main external factor is the steady decline in pressure from imported inflation. Domestic factors, on the other hand, include weakening domestic demand amid adequate supply and the government decision to reduce fuel prices in January Overall, public inflation expectations are currently far below the level that prevailed before the cut in fuel prices. Rupiah Exchange Rate During February 2009, pressure bore down on the rupiah from outflows of foreign portfolio capital. Measured in average value, the rupiah depreciated 6.08% to close the period at Rp 11,980/USD. At this level, the 7

10 rupiah was down 5.01% from the beginning of the month (ptp, Graph 2.6). Accompanying this depreciation was increased fluctuation compared to the preceding month. Heightened fluctuation was reflected in the rise in volatility from 1.3% one month earlier to 3.17% in February 2009 (Graph 2.7). The deterioration in the global economy, mounting losses of financial institutions and corporations and polemic over the United States fiscal stimulus have brought on negative sentiment towards emerging markets, including Indonesia. In addition to the role of external factors, negative sentiment has also arisen from concerns over the adequacy of international reserves and Indonesia s external debt obligations, especially in view of the escalation in private debt. The weakening in the rupiah has taken place in tandem with exchange rate depreciation in the region (Graph 2.9). Global market investors have become increasingly pessimistic over the global economic contraction with no end in sight. During Q4/2008, the United States, German and United Kingdom economies contracted by 6.2% (qtq), 1.7% (yoy) and 1.9% (yoy). This downturn has impacted economies in the region. Falling global demand has dented the economic performance of export-dependent countries, such as Japan, Hong Kong, Taiwan and Singapore. This in turn has weighed down on Asian currencies. The global financial market turmoil has heightened the risk aversion to emerging market assets, including the rupiah. Reflecting this is the increased EMBIG spread and halt in the decline in CDS instruments. The EMBIG spread widened to 677 (25 February 2009) from the earlier level of 658 (end-january 2009), as global stock markets sustained further pressure. Indonesian CDS deteriorated slightly in February 2009, climbing from 539 at end-january to a level of 643. At the same time, the swap premium, which serves as one indicator of expected direction of movement in the rupiah, showed renewed fluctuation in all tenors (1, 3, 6 and 12 months) (Graph 2.10). Increased risk was also reflected in the spread between Indonesia Global Bonds and US T-Notes, which widened from 754 bps in January 2009 to 809 bps in February 2009 (Graph 2.11). Despite the gloomier outlook for the world economy and financial system, the balance of payments is forecasted to chart a lower Q1/2009 deficit compared to the preceding quarter. This outlook is reinforced by the successful flotation of Government foreign currency bonds during a time of ongoing foreign portfolio adjustments in rupiah assets and escalating Graph 2.6 Average Rupiah Exchange Rate Graph 2.7 Rupiah Exchange Rate Volatility Graph 2.8 Appreciation/Depreciation Exchange Rate Average in February 2009 compare to January

11 Graph 2.9 Movement in Major World and Regional Currencies Graph 2.10 Swap Premium Graph 2.11 Yield Spread and Exchange Rate burden of servicing private sector external debt. International reserves remain at a comfortable level for safeguarding the stability of the rupiah. The reserves position at end-february 2009 stood at USD50.6 billion, equivalent to 5.4 months of imports and servicing of official foreign debt. These international reserves are forecasted to mount higher on the back of the USD3 billion proceeds from the sale of Government global bonds. Monetary Policy Policy Strategy On 4 February 2009, the Board of Governors Meeting at Bank Indonesia decided to lower the BI Rate by 50 basis points to 8.25%. This cut in the BI Rate took into account the need for a pro-growth monetary policy stance while retaining adequate control over inflation and financial sector stability in the medium and long-term. The latest indicators show that the global economy faces considerably harder times than predicted a few months previously. In Indonesia, the impact is bearing down with increasing severity, most importantly in the tradable sectors. The outlook for the future is further easing of inflationary pressure below the earlier projection. In 2009, inflation is predicted to reach the lower limit of the Bank Indonesia forecasted range of 5%-7%. The reduced inflationary pressure is explained by weakening domestic demand and subdued inflation expectations supported by adequate supplies of staple goods and lower fuel prices. Even so, it remains necessary to keep a close watch on inflation risk from depreciation in the rupiah and commodity price increases on the global market. Bank Indonesia is working consistently to optimise the deployment of all monetary policy instruments at its disposal. At the same time, it is maintaining close coordination with the Government in monitoring developments and outlook in the global, regional and domestic economy with the aim of safeguarding medium-term economic stability. Interest Rates Overnight interbank rates maintained stable movement at about the level of the BI Rate. During February 2009, the average overnight 9

12 rate eased 41 bps from 8.80% to 8.39%. Average interbank rates for longer tenors moved symmetrically lower, responding significantly to the cut in the BI Rate. The steepest decline was recorded in the 8-26 day and day tenors at 103 and 112 bps. The weighted average interbank rate for over 30 day tenors came to 9.71%, slightly below the average 6-month SBI rate at end-february 2009 (9.80%). This points to a downward trend in risk on the interbank money market. Lower interbank market risk was also reflected in the 91 bps decline in the interbank money market term premium to 1.20%. During January 2009, the BI Rate cut was followed by reductions in time deposit rates alongside improving perceptions of risk. The weighted average 1-month deposit rate fell 23 bps, in contrast to the 35 bps rise during December Rates for longer tenor deposits 3, 6 and 12 months continued to climb by 18, 22 and 25 bps. During February 2009, early indicators for time deposit rates across all tenors at all banks began to ease. Foreign banks recorded the steepest decline at 50 bps. State-owned banks have been slower to bring down their time deposit rates in their drive to retain depositors. Graph 2.12 Comparison of Some Regional Countries Yield Spread Lag persists in the transmission of the BI Rate to lending rates. Consistent with historical behaviour, investment and working capital rates were quicker to respond to change in the BI Rate than rates for consumption credit. In January 2009, the average lending rate showed thin movement compared to the preceding month. Upward movement in consumption credit and working capital rates tapered off. Alongside this, investment credit rates started to move lower, easing by 3 bps. Early indicators for loan interest rates in February 2009 point to modest declines Interest Rate (%) Table 2.1 Development of Various Interest Rates Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan BI Rate Deposit Guarentee month Deposit (Weighted Average) month Deposit (Counter Rate) Base Lending Rate Working Capital Credit Invesment Credit Consumption Credit

13 Graph 2.13 Comparison of Some Interest Rate Graph 2.14 Growth of Credit, Deposits, & Interest rate Graph 2.15 Growth & Credit Share of Type in aggregated rates of working capital credit and investment credit. Rates for these loans fell by 10 bps and 4 bps in contrast to the upward movement in consumption credit rates. Funds, Credit and the Money Supply Aggregate growth of funds was down in keeping with the beginning of year seasonal trend. During January 2009, depositor funds edged Rp 7.7 trillion lower from the preceding month to Rp 1,746 trillion. The decline in depositor funds took place mainly in rupiah demand deposits and savings deposits, reflecting the drop in transaction activity as the economy weakens further. Also explaining this pattern is a shift to time deposits as a measure for precautionary saving amid the uncertainties in the economy. Credit expansion showed a slowing trend in response to demand-side and supply-side factors. On the demand side, falling domestic economic activity accompanied by high loan interest rates converged to put brakes on demand for credit. On the supply side, reduced credit expansion also resulted from slowing supply of credit by banks related to persistently high business risks reflected in mounting NPLs. Credit growth also tapered off (in annual calculations) in the twin areas of investment credit and consumption credit. In contrast, working capital credit grew more vigorously compared to preceding month, with expansion rising from 28.4% (yoy) to 29.2% (yoy). With economic activity in decline, economic liquidity underwent contraction in January 2009 compared to the preceding month. The tightening liquidity was also consistent with downward seasonal trend at the beginning of the year. In January 2009, M1 and M2 contracted by Rp 18.9 trillion and Rp 24.0 trillion. However, when analysed by annual performance (yoy), M1 and M2 growth was up in January 2009 compared to the preceding month. M1 and M2 expansion reached 6.5% (yoy) and 17.1% (yoy), ahead of 1.2% (yoy) and 14.6% (yoy) growth recorded one month earlier. Similarly, real M1 and M2 growth reached -2.7% (yoy) and 7.9% (yoy), buoyed by declining inflation that fell from 11.06% in December 2008 to 9.17% in January This growth was ahead of the preceding month, when real M1 and M2 expansion was recorded at -9.9% (yoy) and 3.6% (yoy). 11

14 Nominal M1 showed an improving trend, indicating low risk of inflation from the money supply. Nominal M1 growth is also a leading indicator of future inflation. The pattern in M1 growth points to a sustained downward trend in inflation risk over the coming 18 months. This is also supported by the excess money indicator, 1 which suggests that inflation will continue to ease over the next seven quarters. Despite predictions of relatively muted potential for future inflationary pressure, policy formulation must still take careful account of future developments in liquidity. Analysed by level, almost all M2 components recorded decline, with the exception of time deposits. Contraction was especially noticeable in cash outside banks and private savings. While Government-related demand deposits held by provincial and regency-level administrations mounted by 45.7% (yoy), contraction in private demand deposits at 10.3% (yoy) resulted in an overall decline in demand deposit funds. The Capital Market The stock market showed no improvement during February Correction in the IDX Composite was driven more by external factors, while domestic factors remained under relative control. On the external side, index performance was influenced by: (i) persistent high risks on the global financial market, reflected in the continued weakening in global stock market performance, and (ii) market jitters over the continued deterioration in economic fundamentals. Nevertheless, IDX performance remained ahead of several other markets, such as Vietnam, Singapore and the United States, although still lagging behind that of China. In response to these developments, the IDX Composite closed at 1,290.3, having weakened 3.2%. Market capitalisation was also down Rp 34 trillion, closing at Rp 1,037 trillion. Stock market conditions in February 2009 reflected the ongoing deterioration in market liquidity. Daily average trading in February 2009 reached only Rp 1.23 trillion per day, down from the January 2009 average at Rp 1.69 trillion per day. Compared to the lively market in 2008, this represents enormous decline. During 2008, stock trading averaged Rp 4.41 trillion per day. 1 In terminological use, excess money is calculated from nominal M1 growth subtracted by real private consumption growth. It indicates the extent of M1 used solely for funding economic spending in household consumption, while the remainder has inflationary potential Graph 2.16 M1 Inflation Leading Indicators (lead 18 months) Graph 2.17 Excess Money Inflation Leading Indicators (lead 7 quarters) Graph 2.18 Money in Circulation (Real) 12

15 Graph 2.19 Money in Circulation (Nominal) Graph 2.20 JSX and Trade Value Graph 2.21 JSX and Net Foreign Buy/Sale Market actors have still not regained confidence. Instead, they are taking a wait and see stance in response to the global financial market turmoil. Foreign investors again booked a net sale at Rp 627 billion during the month under review. This selling reflects the foreigner response to uncertainties on the global financial markets. Even so, foreigners offloading shares were mainly limited to non-strategic foreign investors. In contrast, strategic foreign investors are believed to be holding on in view of their long-term horizon and the still adequate results published by listed companies in their financial statements. The Government Securities market came under further pressure in February 2009, despite an upturn near the end of the month. Reflecting this was the rise in monthly average yield spread equally across all tenors. The high volume of portfolio adjustments by foreign investors, switching from emerging market assets to US corporate and government bonds was the primary factor in the increased yield on Government Securities. Near the end of February 2009, yields subsided in keeping with expectations of a cut in the BI Rate and fading of external risks. Despite this, over the month as a whole, average yield on Government Securities mounted 174 bps over all tenors. However, if only long-term Government Securities are taken into account, yield widened by an even greater margin of 202 bps. Conditions on the Government Securities market were consistent with liquidity, as reflected in the prevailing stability in average trading volume. Government Securities trading was recorded at Rp 2.8 trillion in February, stable when compared to the January 2009 position of Rp 2.7 trillion. However, daily frequency of trading averaged 47 transactions in February, down from the January 2009 average of 53 transactions. This is an indication of a continued wait-and-see stance among market actors in responding to volatility on global financial markets. Relatively subdued domestic factors, with inflation expectations easing in response to the second round effect of cuts in subsidised fuel prices and early signs of improved market perceptions of the outlook for financing the 2009 Budget, failed to arrest deteriorating performance in Government Securities. Added to this, decline in foreign holdings of Government Securities dealt a blow to recovering market confidence, which ultimately impacted liquidity on the market. Due to the ongoing turmoil on global financial markets, foreign investors booked a net sale of Rp 5.1 trillion in February Nevertheless, this was offset by excess liquidity in the 13

16 banking system early in the year alongside purchase of Government Securities by Bank Indonesia, which provided a lift for the performance of Indonesia s Government Securities at the end of February Recapitalised banks and mutual funds stepped in as counterparties to selling by foreigners and on the primary market, recording net purchases of Rp 9.1 trillion and Rp 1.7 trillion. At the same time, Bank Indonesia engaged in a relatively minimum level of buying, but the carefully timed deals were adequate to boost market confidence in the Central Bank role in stabilising prices for these instruments. Mutual funds were relatively stable during February Reflecting this was the January 2009 Net Asset Value (NAV) at Rp 74.3 trillion, up about Rp 300 billion from the December 2008 position. This improvement was supported mainly by the performance of protected funds, which still have considerable headroom for growth. Another factor expected to shore up investment funds is the decision to reduce tax on bond coupon and discounts to a final rate of 0%, effective for bond interest and discounts earned in Graph 2.22 Government Secutiries Yield Movements Condition of the Banking System Overall banking system performance in January 2009 was again comparatively sound, as reflected in a quite strong capital adequacy ratio (CAR) at 17.6%. At this level, the CAR was up from the December 2008 position, recorded at 16.2%. One reason for the increased CAR was the decline in lending during January Alongside this, Return on Assets (ROA) climbed to 2.7%. The latest data indicates a steady upward trend Main Indicators Table 2.2 Main Indicators of Banking System Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Total Asset (T Rp) 1, , , , , , , , , , , , ,307.1 Deposits (T Rp) 1, , , , , , , , , , , , ,745.6 Credit (T Rp) 1, , , , , , , , , , , , ,325.3 LDR (%) NPLs Gross (%) NPLs Net (%) CAR (%) NIM (%)

17 Graph 2.23 Volume and Frequency Government Securities Transaction in the total assets held in the banking system. Banking assets mounted to Rp 2,307.1 trillion in January, representing annual growth at 18.9% (yoy). Other banking indicators point to relatively stable conditions. Net Interest Income (NIM) edged lower from the preceding month, slipping in January 2009 from Rp 10.8 trillion to Rp 10.4 trillion. In spite of this, the banking intermediary function saw some decline during the month, reflected in reduced lending. Outstanding credit in January 2009 came to Rp 1,325.3 trillion, down from the December 2008 position at Rp 2,170.9 trillion. This brings the annual rate of credit expansion in January 2009 to 28.5%. III. MONETARY POLICY RESPONSE On 4 March 2009, the Board of Governors Meeting at Bank Indonesia decided to lower the BI Rate by 50 basis points to 7.75%. This decision was taken after in-depth analysis and comprehensive evaluation of economic and financial developments in Indonesia and worldwide, with particular attention to the ongoing global financial crisis. According to the latest indicators, the global economic slowdown has taken a turn for the worse. In developed countries, the economic downturn has surpassed earlier forecasts. Global financial markets are also jittery over the growing numbers of world financial institutions reporting losses. The economic slowdown in developed nations has led to decline in Indonesia s export performance that will ultimately impact the economy as a whole. The worsening condition of global financial markets has rekindled negative sentiment over emerging market countries that may potentially bear down on the economies of some nations, including Indonesia. Inflation was remarkably low in February at 0.21% (mtm), down considerably from the historical average. As a result, annual inflation eased from January 2009 to 8.6% (yoy). Key to the mild inflationary pressure in February were improving inflation expectations bolstered by adequate supplies of staple goods and lower fuel prices. Also contributing to the subdued inflationary pressure was reduced imported inflation in keeping with lower international commodity prices. The Indonesian banking system remains in stable condition reflected in developments in a range of bank financial and soundness indicators. The condition of banking liquidity, including liquidity flows on the interbank money market, has begun to show improvement in comparison to recent months. However, lending contracted 2.1% in January 2009 due to the 15

18 weakening of the economy and cautious lending by banks. Even so, Bank Indonesia continues to monitor the upward trend in credit risk in view of the potential for mounting NPLs in the banking industry. Bank Indonesia forecasts economic growth at 4% in 2009, with considerable downside risk if global economic growth deteriorates even more than expected. Indications of the economic slowdown are also borne out in slowing household consumption brought on by falling public purchasing power, as well as the stagnating trend in M1 growth. Nevertheless, this will also ease future inflationary pressure and keep inflation on a trend towards the lower limit of the 5%-7% range. Bank Indonesia will maintain a close watch on economic and financial developments and take the necessary measures to bolster the domestic economy and reinforce macroeconomic and financial system stability. 16

19 Latest Indicators FINANCIAL SECTOR INTEREST RATE & STOCK One month SBI 1) Three month SBI 1) One month Deposit 2) Three month Deposit 2) One week JIBOR 2) JSX Indices 3) MONETARY AGGREGATES (billions Rp) Base Money M1(C+D) Currency (C) Demand Deposit (D) Broad Money (M2 = C+D+T) Quasi Money (T) Quasi Money (Rupiah) Time Deposit Saving Deposit Foreign Currency Deposit Broad Money Rupiah Claim on Business Sector Credit by DMBs Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb ,627 2,722 2,447 2,305 2,444 2,349 2,305 2,166 1,833 1,257 1,242 1,355 1,333 1, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,288-1,588,962 1,596,090 1,586,795 1,608,874 1,636,383 1,699,480 1,679,020 1,675,430 1,768,250 1,802,932 1,841,163 1,883,851 1,863,018-1,168,664 1,184,763 1,167,049 1,181,846 1,197,839 1,232,772 1,220,641 1,222,985 1,276,521 1,331,578 1,366,110 1,417,472 1,415, , , , , , , , ,949 1,033,846 1,050,558 1,069,619 1,136,979 1,133, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,023-1,370,986 1,362,167 1,359,971 1,381,500 1,401,752 1,448,725 1,424,303 1,425,394 1,525,575 1,521,912 1,544,673 1,603,358 1,580,994-1,026,218 1,040,616 1,075,500 1,102,596 1,137,143 1,189,100 1,206,458 1,246,282 1,286,682 1,337,099 1,366,089 1,348,827 1,331, , ,323 1,029,172 1,054,747 1,089,268 1,142,120 1,159,983 1,198,991 1,239,501 1,289,412 1,315,728 1,300,179 1,281,772 - P R I C E S CPI - monthly (%, mtm) CPI - 1 year (%, yoy) EXTERNAL SECTOR Rp/USD (endperiod,midrate) Non oil/gas Export (f.o.b, million USD) 4) Non oil/gas Import (c$f, million USD) 4) Net International Reserve (million USD) QUARTERLY INDICATOR Real GDP Growth (% y-o-y) Consumption Investment Changes in Stocks Export Import Incremental Capital Output Ratio (ICOR, %) External Debt Outstanding (millions of USD) 9,291 9,051 9,217 9,234 9,318 9,225 9,118 9,153 9,378 10,995 12,151 10,950 11,355 11,980 8,957 8,356 9,091 8,572 9,589 9,719 9,469 9,145 10,182 9,203 8,051 7, ,826 7,419 7,980 8,983 8,362 8,474 9,305 9,175 8,770 9,369 7,402 7, ,06 48,93 50,27 50,21 48,98 50,22 51,53 52, Q.I Q.II Q.III Q.IV Total , , , ,070 * Provisional Figures * Using 2000 base year (BPS-Statistic Indonesia) 1) 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) 17