MONTHLY REPORT REVIEW ON ECONOMY, MONETARY, AND BANKING

Transcription

1 MONTHLY REPORT REVIEW ON ECONOMY, MONETARY, AND BANKING M A Y 2000 I. II. III. IV. BANK INDONESIA

2 I. SUMMARY Monetary conditions required closer and more careful attention inflation rose as a result of government policies and exchange rate weakening the exchange rate weakened as a result of unfavorable external forces and political uncertainties inside the country... while economic growth turned lower than that in the earlier quarter... Monetary conditions up to the month of May 2000 appeared increasingly requiring closer and more careful attention. Several disturbing economic events that initially seemed to be of transient phenomena proved persistent and began to transmit adverse ripples to Indonesia s monetary stability. Prices of goods and services started to rise. Price and incomes policies placed by the government and the corresponding public expectations that arose from the employment of those policies led to an increase of underlying inflation. Meanwhile, the weakening of exchange rate had given rise to a burst of inflationary pressure on traded goods. Month-to-month inflation in May was 0.84%, up from 0.56% in the month before. Accordingly, the cumulative inflation of the first fivemonths of 2000 stood at 2.35%. Just like in the previous month, price increases in May emerged as a consequence of price and incomes policies set off by the government and exchange rate depreciation. By group of commodities, the driving forces behind the May inflation were price increases in the group of transportation and communication due to a rise of basic tariff and the housing group because of an escalation of electricity basic tariff and price of construction materials. The rupiah exchange rate has persistently weakened since the beginning of the year In addition to unfavorable external factor, propelled by concerns over the likely hikes in Fed Fund Rate by the US Fedres, the rupiah s persisted weakening during the month of May was attributed to a series of disheartening political events inside the country. In a bid to stabilize the rupiah with a view to achieving inflation target, Bank Indonesia has endeavored to mop up liquidity in the money market, in addition to occasionally intervening in the foreign exchange market. Meanwhile, in contrast with the preceding months, the rupiah depreciation in the month under review coincided with a surge of swap premium that underpinned the strong expectations of market players on the sustained weakening trend of the rupiah in the months ahead. The y-o-y growth of the economy in the first quarter of 2000 was 3.21%, down from 5.01% in the quarter before. In contrast to the earlier quarters, the economic growth was not built solely on consumption and export. It began to gain support from investment. Investment growth (y-o-y) turned positive even though its level remained below pre-crisis levels. Meanwhile, by sectors, all sectors but agriculture and mining contributed positively to the overall economic growth. The slower growth in the agriculture sector resulted from low growth in the sub-sectors of staple food and forestry, while slower growth in the mining sector was attributed to sluggish demand for Indonesian products in the international market. Directorate of Economic Research and Monetary Policy 1

3 ... and the banking sector continued to proceed with the recapitalization program. The banking sector continued to record a good deal of progress, notably in the area of credit restructuring. The amount of restructured credit rose by Rp1.3 trillion to Rp56.6 trillion with the number of participated borrowers increasing by 1,135 to 14,008. The bank re-capitalization program recorded a marked progress with the re-capitalizing of Bank Niaga amounting to Rp9.4 trillion. As such, the total value of bonds issued by the government for the bank re-capitalization program reached Rp318.6 trillion. Meanwhile, in stimulating banks to extend credits in pursuit of reviving real sector activity, Bank Indonesia plans to revise the ATMR (risk weighted assets) conditions in the near term by relaxing the CAR criteria as they were viewed as being too tight, extend the time limit to resolve legal-lending-limit case, and adjust the time limit of bank s capital withdrawal from debtor companies. II. THE ECONOMIC, MONETARY, BANKING DEVELOPMENTS INFLATION, INTEREST RATE, EXCHANGE RATE, MONEY MARKET, AND CAPITAL MARKET Inflation rate rose... Price developments during the month of May 2000 recorded an inflation of 0.84%, up from 0.56% in the month before (Graph 1). It brought the cumulative inflation of the first five-months of 2000 reaching a level of 2.35%. The higher monthly inflation rate was attributed to stronger inflationary pressure stemming from the groups of housing and transportation/communication, each contributing by 0.42% and 0.29%. The increase in housing prices originated from higher prices of construction materials and higher basic tariffs of electricity, while the rise in the group of transportation and communication stemmed from a rise in transportation fees in line with the government policy- especially in the capital city of Jakarta to raise urban transportation fares by 30% on average. Meanwhile, the groups of staple food and processed food continued to register deflation. The deflation in staple food appeared to narrow down and such deflation reflected price correction that had been at work since the beginning of Directorate of Economic Research and Monetary Policy 2

4 Graphic 1 Movement of Consumer Price Index The rupiah exchange rate depreciation led to a rise in general price. Specifically, traded goods suffered 0.33% inflation from the exchange rate weakening (Graph 2). Graphic 2 Monthly Inflation Rates of Traded and Non-traded Goods...underlying inflation continued to rise although at a slower pace than last month... The general prices trend, as measured in underlying inflation, exhibited an inflation of 0.59%, lower than 0.76% in the month of April (Graph 3). The lower underlying inflation rate reflected a slide in public expectations on price increases given the absence of significant inflation-igniting policies from the government in the reporting month. The increase in prices from the demand side underlined the higher demand that had been bolstered by stronger consumption and investment. Meanwhile, a positive noise of 0.25% came from a hike in administered prices. Directorate of Economic Research and Monetary Policy 3

5 Graphic 3 Underlying and Noise Inflation... meanwhile, the group of food recorded another deflation... Food prices closed the reporting month with another deflation of 0.06%. This deflation was seen as a part of continuous correction over prices of most food items, especially foodstuffs. This natural process that has been at work since the start of 1999 acted to correct the exorbitant upsurge of food prices at the end of 1998 (Graph. 4). The smooth flow of goods supply allowed the correction process to take place. Meanwhile, the prices of nonfood items ended with significant inflation of 1.55%, mostly contributed by the housing group and the group of transportation and communication. Graphic 4 Food and Non-food Inflation SBI rates began to hike... One-month SBI rate increased 19 bps from 10.88% to 11.07%. At the SBI auction throughout the month of May 2000, demands for SBIs by banks, though remained large, began to drift down. This downward trend was obvious as the amount of SBI biddings was Directorate of Economic Research and Monetary Policy 4

6 lower than the amount of SBIs falling due falling due in the last two auctions (Graph 5). The said development was followed by an upward shift of the SBI bidding range from 10.5%-11% to 11%- 11.5%, indicating market expectations of likely SBI rate hikes in response to current fluctuations of exchange rate. Graphic 5 SBI Bidding, Matured SBI, and Bank Excess Reserves... but other interest rates have yet to follow suit... The significant increase in SBI rates, however, had yet triggered other interest rates to rise. Evidently, deposit rates and JIBOR remained firm (Graph 6). The steady deposit rates indicate vigorous efforts by banks to restrain any hike of interest expense. Graphic 6 One-Month Interest Rates... money market remained liquid... In terms of liquidity, the money market remained liquid as indicated by the stability of excess reserves held by banks. Interbank money market also stayed unperturbed as depicted by the stable and narrowing spread between the highest and the lowest interbank rates of interest (Graph 7). Directorate of Economic Research and Monetary Policy 5

7 Graphic 7 The Highest and Lowest Interbank Rates of Interest... banks tended to place their funds in short-term portfolio investment alternatives In tandem with the decline in SBI buying since the last couple of week in May 2000, banks opted for short-term investment options, particularly rupiah intervention. There were possibly three factors that accounted for the selection of short-term fund placement. First, there were strong expectations on the likely rise of interest rates in the near future in the face of the rupiah s persistent depreciation. Second, banks had been waiting for the right time to purchase foreign exchange for interest payments of their external debts worth of USD131.7 million that would fall due in June 2000 as agreed under the Exchange Offer framework. Third, domestic interest rates began to look less attractive than interest rates outside the country. Graph 8 Interest Rate Differential On May 15, 2000, IRSOR happened to soar to 17.42% as a consequence of a drastic fall of confidence toward the rupiah in the international market, especially in the Singapore market. Directorate of Economic Research and Monetary Policy 6

8 Nevertheless, by the end of the reporting month, the IRSOR dropped to 11.97% (Graph 8). The lofty surge of IRSOR relative to the rise in SBIs caused covered interest rate differential to be negative in spite of the fact that it returned to positive territory by the end of the month. Graphic 9 Composite Stock Price Index (JCI) and Market Capitalization in the Jakarta Stock Exchange (JSX) The Jakarta Composite Index (JCI) weakened as a result of a hike in international interest rates and political uncertainties inside the country... In the stock market, a combination of adverse external and internal factors dragged down the Jakarta Composite Index (JCI) to , the lowest level in the last five months (Graph 9). The external factor originated from global interest rate hikes, while the internal factor took form of negative sentiment sparked by political volatility inside the country. The value of stocks traded in terms of daily average capitalization fell from Rp billion in April to Rp billion. Albeit the plunging JCI, foreign players ended with net buying (Graph 10). This net buying by offshore players appeared to rule, especially on pummeled blue chips that perceived under-priced. Graphic 10 Net Foreign Buying in the JSX Directorate of Economic Research and Monetary Policy 7

9 The rupiah exchange rate weakened... The exchange rate of the rupiah during the month of May 2000 weakened further to reach Rp8,680 per US dollar, even alongside managing to cross the level of 8,750 rupiah to the dollar (Graph 11). Daily average rate of exchange weakened from Rp7,800 in April 2000 to Rp8,200 per US dollar in May (Graph 12). In addition to external factor in the form of strong expectations over the likely further hikes of Fed Fund Rates by the Fed in the aftermath of the 50 bps rise on May 16, 2000, the weakened rupiah s exchange rate was also attributable to a series of disturbing political events. The rupiah managed to strengthen in the middle of the month following signing of the first draft of the LOI, but it suffered sharp depreciation from disdainful political events following the LOI signing. Graphic 11 Movement of the Rupiah Exchange Rate Graphic 12 Average Exchange Rate of the Rupiah... and the weakening has been persistent since the start of the year In a longer-term perspective, the rupiah has in fact depreciated gradually and persistently since the beginning of this year from Rp7,055 in the beginning of 2000 to Rp7,615 per US dollar at the end of March 2000, or about 8% depreciation, and even at a faster Directorate of Economic Research and Monetary Policy 8

10 ... in dealing with this weakening, Bank Indonesian on a temporary basis initiated foreign exchange sterilization measures in addition, to contain speculation, the government has set rules to limit the amount of rupiah that can be brought in and out of the country the volume of interbank foreign exchange dealings rose... pace of around 12% from the end of March 2000 up to the end of May Since the rupiah exchange rate weakening has been persistent and potential to disrupt monetary stability, Bank Indonesia has initiated sterilization measures in the foreign exchange market on a gradual basis. The amount of foreign exchange sterilized during the month reached USD284 million (equivalent to Rp2.5 trillion), or about USD13 million per day. In order to minimize any abuse of the rupiah for speculative purposes that may erode the stability of rupiah, earlier in 1998 the government has regulated the amount of the physical rupiah currency that can be physically brought inside and outside the country 1. In addition, relative to several Asian countries such as Malaysia, Thailand, China, and South Korea with regard to regulations on foreign exchange earnings from export, capital transaction and foreign exchange ownership, the prevailing regulations in Indonesia appeared to be the least stringent. As such, the government moved to adopt reports on foreign exchange flows which will serve as sources of research and lay ground work for the formulation of foreign-exchange-related regulations. Interbank foreign exchange dealings in the domestic market appeared to be exuberant with the transaction volume on the rise. Initially, such dealings aimed at meeting transaction purposes such as payments of external debts, both private and interbank debts. Nonetheless, when exchange rate volatility ruled, the aim shifted from transaction to precaution and even to speculation. The emergence of precautionary and even speculative motives was chiefly prompted by expectations on the rupiah s extended weakening in a couple of months ahead. A clear pattern of foreign exchange dealings, both in the interbank and exchange markets, is observable. The pattern asserts that spot transactions would be on the rise when the rupiah weakens against the US dollar (Graph 13). 1 Decree of Board of Directors of Bank Indonesia No. 30/271A/KEP/DIR dated 6 March 1998 concerning Changes in Decree of Board of Directors of Bank Indonesia No.30/191A/KEP/DIR about Inflow or Outflow of the Rupiah Currency inside or outside the Boundary of the Republic of Indonesia. Directorate of Economic Research and Monetary Policy 9

11 Graphic 13 Foreign Exchange Dealings in the Interbank Money Market... swap premia increased following the rupiah depreciation... The weakened rate of exchange of the rupiah had pushed swap premia up. This rise of swap premia underscores the erosion of investor confidence in the rupiah and its bleak outlook in several months ahead. One-month and three-month SWAP premia rose from 3.3% and 3.3% in the preceding month to 4.2% and 4.2% respectively (Graph 14). In tandem with this development, yield spread of Indonesia Yankee Bond that reflects risk of fund placement in Indonesia also rose by 123 points to 629 (Graph 15). Graphic 14 One-Month and Three-Month SWAP Premia Directorate of Economic Research and Monetary Policy 10

12 Graphic 15 Indonesia s Risk Premium The outstanding of base money increased... MONEY SUPPLY The outstanding of base money in the month of May increased by Rp3.0 trillion to Rp91.1 trillion, bringing the test date position of base money into Rp90.1 trillion 2. With such an amount of base money at the test date, the actual outstanding of base money stood well above its given indicative target at Rp86.8 trillion (Graph 16). Graphic 16 Monthly Base Money in Trillions of Rupiah... as a result of the increase in currency... The increase in base money, viewed from its components, originated from a rise of Rp1.4 trillion in currency and the positive balance of commercial bank demand deposit at Bank Indonesia that amounted to Rp1.1 trillion. Public demand for holding 2 Test date of base money is the average position of base money at the end of the working days plus 4 working days prior to the date and plus 5 working days in the following month. Directorate of Economic Research and Monetary Policy 11

13 currency has tended to rise since the end of March 2000, even though not as high as during the last turn of the year from 1999 to The outstanding of currency in circulation at the end of May 2000 amounted to Rp52.6 trillion, the highest level over the last five months but remained lower than that in December 1999 (toward the Y2k) that managed to reach Rp58.4 trillion. This higher currency position is envisaged to come from higher currency demand by people to meet greater transaction value as indicated by the positive growth of GDP in the first quarter of In addition to transaction motives, this increase in issued currency was also fueled by precautionary and speculative motives in light of heightened political tensions and domestic security issues as well as exchange rate volatility. Graphic 17 Net Domestic Assets in Trillions of Rupiah... thereby reduced banks liquidity to purchase instruments of Open Market Operation... On the back of the rise in base money outstanding, by factors affecting its size, was an increase in the outstanding of Net Domestic Assets (NDA) (Graph 17), notably that went through open market operations (OMO). The expanded OMO that reflected a decrease in buying of OMO instruments such as SBIs and rupiah intervention by people particularly banks was a direct consequence of higher public demand for currency for various reasons as mentioned above. Meanwhile, the position of Net International Reserves (NIR) at the end of May 2000 shrank by USD2.26 billion (Graph 18). The biggest factor that caused a fall in NIR was the reclassification of NIR components in compliance with the concept of Special Data Dissemination Standard (SDDS). Several components that were not liquid such as export draft and share holding of Bank Indonesia at Indover were no longer included as components of NIR. Consequently, the indicative target of NIR was also lowered from USD16.2 billion to USD14.2 billion. However, the change in defining the NIR concept and computing the amount of NIR only resulted in marginal change on deviation of the actual NIR from its Directorate of Economic Research and Monetary Policy 12

14 indicative target, namely from USD2.85 billion in term of the old concept to USD2.80 billion with the new concept. Graphic 18 Net International Reserves in Billions of USD The outstanding of money supply also increased... The outstanding of rupiah M2 in the end of May 2000 rose by Rp6.6 trillion (1.2%) to Rp553.2 trillion (Graph 19). By components, the increase in rupiah M2 originated from M1 as well as rupiah quasi money. The increase in M1 stemmed from a higher outstanding of demand deposit that mainly owed to transfers of fund from the central government to local governments in respect of distribution of central government revenues from land and building taxes and oil and gas taxes (Graph 20). Meanwhile, the rise in rupiah quasi money originated from capitalization of interest income and transfers of foreign exchange savings to rupiah savings. Graphic 19 Rupiah-M2 in Trillions of Rupiah... originating from an increase in NOI. By factors affecting M2, the rise in M2 stemmed from an increase of Rp17.2 trillion (based on a constant exchange rate at the end of March 2000) in NOI (Table 1: Factors Affecting Money Supply in Directorate of Economic Research and Monetary Policy 13

15 Billions of Rupiah). This increase exceeded decreases in NFA of Rp2.4 trillion, NCG of Rp9.1 trillion, and Claims to the Business Sector (CBS) of Rp1.5 trillion. The increase in NOI took place at both Bank Indonesia and commercial banks. In the BI s NOI, the increase was originating from the payments of arrears in connection with subsidies for fuel, electricity, and food. In the commercial bank s NOI, the increase was attributed to an increase of bank losses, especially for the group of state banks following the write-off of productive assets held by those banks. Graph 20 Movement of M1 in Trillions of Rupiah Table 1 Factors Affecting Money Supply in Billions of Rupiah (billion Rp) Mar 2000 monthly Apr changes current constant current constant M2 656, , ,625 9,200 4,174 M2 Rp 546, , ,176 6,613 6,613 M1 124, , ,367 2,704 2,704 NFA 137, , ,464 7,958 (2,438) (billion USD) BI 133, , ,197 6,565 (3,584) (billion USD) Bank 4,121 5,514 5,268 1,393 1,147 (billion USD) NDA 518, , ,161 1,242 6,612 NCG 459, , ,061 (9,099) (9,099) CBS 254, , ,663 3,372 (1,504) NOI (194,778) (187,809) (177,563) 6,969 17,215 Exchange rate 7,590 7,945 7,590 Directorate of Economic Research and Monetary Policy 14

16 Trade surplus declined THE EXTERNAL SECTOR Indonesia s non-oil/gas trade account in April recorded a surplus of USD1.6 billion, down from USD2.3 billion in the preceding month. The declined surplus originated from a drop in the non-oil/gas export value that far exceeded a decrease in the non-oil/gas import value. In April, Indonesian non-oil/gas export value amounted to USD3.3 billion, down by USD0.77 billion (19.1%) from last month s export value. Accordingly, the year-todate cumulative value of non-oil/gas export during the period of January-April 2000 reached USD13.8 billion, or growing by 17.4% as compared to the same period in the year Meanwhile, the growth of cumulative non-oil/gas import over the same period as above was 4.2% with the cumulative value of USD6.6 billion (Table 2). Table 2 Monthly Development of Non-oil/gas Export and Import in Millions of USD 2000 Jan Feb Mar Apr Export Total (fob) 3,374 3,079 4,042 3,272 Agriculture Mining Industry 2,346 2,477 3,373 2,555 Import Total (c&f) 1,284 1,933 1,707 1,678 Consumption Raw Material 1,017 1,306 1,342 1,209 Capital on account of declining export of manufacturing commodities... however, the fall in export remained in line with its seasonal pattern... By group of commodities, the decrease in the non-oil/gas export value primarily originated from manufacturing products. A number of leading commodities that posted a sharp increase in the preceding month, such as textile, crude palm oil, electrical appliances, machinery, and foot-ware in the month of April fell. Meanwhile, the drop in imports stemmed from the group of raw materials, specifically semi-processed raw materials for manufactures. By and large, the fall in non-oil/gas export was attributable to seasonal pattern (Graph 21). Other factors that accounted for the fall included the following. First, scarcity of raw materials for manufactures mainly reflected in the drop of imported raw materials as a result of widespread concerns by offshore suppliers over the unfavorable socio-political and security conditions inside the country. Second, difficulty encountered by 3 Data are from the closed file. Directorate of Economic Research and Monetary Policy 15

17 exporters including product-manufacturing exporters in obtaining space inside the ships for loading export commodities bounding for European countries, the US, and Japan due to a build-up of cargo containers at the Tanjung Priok port. The average yard occupancy ratio (YOR) as a yardstick for measuring the use of space for piling up goods reached 92%, way above the ceiling of 70%. Such density of space occupation came up as an impact of new policy employed by the Director General of Excise Duty that raised the number of goods that have to go through the red lane by 40% for inspection of imported commodities. Graphic 21 Non-Oil/Gas Export and Its Seasonal Patter Meanwhile, the value of Indonesian oil/gas export throughout the month of March remained broadly unchanged relative to last month, from USD1.26 billion to USD1.27 billion (Graph 22), although the international price of Minas oil rose from USD25.93/barrel to USD26.81 per barrel. Graphic 22 Indonesian Export and Oil Price The outstanding of external debt slightly declined... The stock of Indonesian external debt up to the end of February 2000 stood at USD144.8 billion, down by USD0.1 billion from the outstanding in January The outstanding of sovereign debt Directorate of Economic Research and Monetary Policy 16

18 declined USD1.2 billion, while the position of private debt, on the contrary, rose by USD1.1 billion (Table 3). Table 3 The Outstanding of Indonesian External Debt in Billions of USD (billion USD) Dec'99 Jan'00 Feb'00 Government Private Bank Non-bank Total in the months ahead, the payments of external debts under the Exchange Offer Framework would be falling due. Interest payments of external debts by banks under the umbrella of Exchange Offer Program (EO I & II) will take place in June, August, and December 2000, while principal payments of EO I will occur in August 2000 (Table 4). The total amount of foreign exchange needed by banks to meet the obligations from the period of June up to December 2000 is estimated to reach USD1.1 billion. Table 4 Interest and Principal Payments of Debts under the EO I & II Programs in the Year 2000 (million USD) Month Interest Principal Total June August December T o t a l 1,135.5 To make better assessment on the extent of the progress in corporate external debt restructuring, a survey was conducted by distributing questionnaires in Responses to those questionnaires were obtained from 333 companies, representing 46% of the total questionnaires given out. The outcome showed that 37% of the respondents claimed to be able to meet interest and principal payments as scheduled and 14% of the respondents had already restructured their external debts outside the INDRA scheme. Of the overall restructured debts, 67% of the debts took the form of rescheduling, while the rest cut a deal to make changes in terms and conditions of the respective debt agreements. Directorate of Economic Research and Monetary Policy 17

19 THE REAL SECTOR Economic growth in the first quarter of 2000 is positive although lower than that in the earlier quarter... GDP in the first quarter of 2000 recorded an annual growth of 3.21%, or grew by 1.98% in comparison to that in the fourth quarter of 1999 (Table 5). All sectors except agriculture and mining recorded positive growths. Construction recorded the highest growth of 12.94%, while, by expenditures, investment registered the highest growth of 11.68%. In contrast, agriculture booked the lowest growth and this sector even shank by 8.49%. The sharp decline in the agriculture sector was not commensurate with its seasonal norm as a result of the low production of staple food and a fall in the production of forestry. Meanwhile, the contraction in mining is envisaged to stem from the sluggish world demand. Table 5 Growth of Gross Domestic Product (percent) Items I II III IV T O T A L I* By Sectors 1. Agriculture Mining Manufacturing Electricity, Gas and Water supply Construction Commerce Transportation Banking Services By Expenditure 1. Household Consumption Government Consumption Investment Export Import Gross Domestic Product * preliminary figures Increased productivity in the non-agriculture sector centered on manufacturing that contributed 26% to total GDP. Meanwhile, construction, notwithstanding its highest growth, had only a 6% share of GDP. Manufacturing products that grew appreciably if compared with the same quarter of last year included transportation vehicles, machines and their parts (67.8%), cement and non-metal excavated objects (12.1%), and basic metals (7.2%). The shrink in the agriculture sector in addition to sharp contractions in forestry and plantation was also attributed to the low production of staple food (Graph 23). The low production of staple food was inconsistent with its seasonal pattern that ordinarily yields the highest production outcome during the first quarter of the year. The actual output was comparably even lower than during the worst season in 1998 when the adverse influence of El-Nino peaked. Directorate of Economic Research and Monetary Policy 18

20 Graphic 23 Production Value of Staple Food... by expenditures, investment and export appeared to rise remarkably... By expenditures, investment and export grew by 11.68% and 9.07% respectively, both surpassing the growth of household consumption that reached 1.76%. The significant growth of investment and export lessened the dominant role of household consumption in the formation of GDP. The positive growth of investment has been at work since GDP touched its bottom in the fourth quarter of The investment share in GDP formation has been on an upward course since the last two quarters and stood at 21% in the quarter under review (Graph 24). Just like in the earlier periods, most of the investment activities took place in the form of construction. Graphic 24 Investment Value in GDP The growth of household consumption in the first quarter of 2000 remained positive, while its contribution to GDP continued to be large, standing at 70% (Graph 25). Like in the months before, public demand for consumption goods, both durable and retail goods, such as cement, electricity, and vehicles, either Directorate of Economic Research and Monetary Policy 19

21 commercial or non-commercial vehicles, continued to display their upward trends. Graphic 25 Consumption Value in GDP The banking sector conditions continued to improve... BANKING SECTOR CONDITIONS The banking sector highlighted notable progress in the area of recapitalization and credit restructuring given. In addition, the public confidence could be maintained as indicated in the higher level of fund mobilization. Meanwhile, banks intermediary role in extending credits only progressed slightly. Graphic 26 Sources of Fund Mobilization of funds by banks made moderate progress, particularly that originated from a rise in demand deposits (Graph 26). The increase in funds gathered by banks underscores the maintenance public confidence in the national banking system. However, the large amount of funds held by banks was not fully Directorate of Economic Research and Monetary Policy 20

22 used to extend credits, as the bulk of funds went onto low-risk portfolio investment, mostly SBIs (Graph 27). Graphic 27 Ratio of Total SBI to M2 Meanwhile, banks loan book (new credit creation and extension of credits from 15 large-size banks) up to May 2000 pointed to Rp5.68 trillion, a figure that was equivalent to 70% of the credit ceiling determined. Out of Rp5.68 trillion, Rp3.16 trillion represented rupiah credit, and Rp1.4 trillion constituted foreigncurrency denominated credit. The bank re-capitalization program also recorded further progress with the re-capitalizing of Bank Niaga worth Rp9.46 trillion. Up to the end of June 2000, following banks are scheduled to be recapitalized: three State Banks, BCA, and the new bank resulted from the merger between Bank Danamon and other BTO banks. Besides progress in the re-capitalization program, the creditrestructuring program also appeared to come up with heartening progress. The amount of restructured credit up to the month of April 2000 reached Rp56.6 trillion, encompassing 14,008 debtors (Table 6: Progress in Credit Restructuring). This accomplishment reduces the amount of NPL and helps ease pressures on bank s balance sheets. With the accomplishment of credit restructuring, banks NPLs tended to drift downward (Graph 28). By sectors, the decline in NPLs took place mostly in the sectors of trade and business services. With lower levels of NPLs, banks can be expected to perform better that in turn will enhance their capacity to lend. Directorate of Economic Research and Monetary Policy 21

23 Graphic 28 Non Performing Loans The fall in NPLs led to a reduction of banks operating expense through a decrease in the loan loss provision. Accordingly, Net Interest Margin (NIM) increased albeit its small magnitude (Graph 29: Net Interest Margin in Trillions of rupiah). In addition, the positive NIM mainly owed to interest income primarily in the form of coupon from government bonds due to bank re-capitalization and the large spread between deposit rates and lending rates. Graphic 29 Net Interest Margin in Trillions of rupiah In activating the real and banking sectors, Bank Indonesia reviews several regulations in the banking industry, including the following: a. Lengthening of the settlement period with regard to the violation of Legal Lending Limit conditions. With this longer period of settlement, banks and debtors have more time to settle their bad loans and banks are in a better position to finance debtors businesses. On the whole, this measure is expected to support the restructuring program undertaken by the Jakarta Initiative Task Force (JITF) and Bank Indonesia Credit Restructuring Task Force. Directorate of Economic Research and Monetary Policy 22

24 b. Relaxing the criteria for measuring risk weighted assets which would bring higher CAR. With higher CAR, banks are expected to be more capable of extending loans to the real sector, thereby normalizing bank intermediation function. c. Allowing more time for banks to unload their temporary stock holding in the borrowing companies in the context of credit restructuring. With the revised regulations in place, banks have more flexibility to dilute their share participation in the borrowing companies. III. THE ECONOMIC OUTLOOK The inflation rate ahead is projected to rise in step with the narrowing of output gap and the upward trend of leading indicators of inflation. In addition, it is confirmed by consumer survey in May 2000 which points to the high expectations on price hike during the period of 6 to 12 months ahead. The net result of respondents with expectations on price increases stands at 76.2%, down from 77.7% in the earlier month (Graph 30). The highest increase in prices is expected to come from transportation and communication expenses as well as housing and building prices. Out of the respondents claiming higher prices ahead, 44.0% stated that the escalation will primarily originate from fuel price hike and 27.3% from the unstable socio-political and security situations. Graphic 30 Survey of Consumer Expectations (net result) The economic prospect up to the end of the year 2000 is forecast to improve. Leading economic indicators continued to stay inside the boundary of economic expansion. Meanwhile, the result of business survey in the first quarter of 2000 points to a rise in respondents investment plans; 31.4% of the respondents revealed their plans to invest in the second quarter of 2000, Directorate of Economic Research and Monetary Policy 23

25 particularly in the manufacturing sector. This 31.4% share is higher than last quarter s share of 30.8% (Graph 31: Survey of Investment Plans and Realization). Graphic 31 Survey of Investment Plans and Realization Jakarta, June 2000 Directorate of Economic Research and Monetary Policy 24

26 SELECTED MONETARY INDICATORS FINANCIAL SECTOR Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Mar-00 Apr-00 May-00 INTEREST RATE & STOCK One month SBI 1) Three month SBI 1) One month Deposit 2) Three month Deposit 2) One week JIBOR 2) JKSE Indices 3) r) MONETARY AGGREGATES (billions Rp) Base Money 77,351 77,247 78,988 81,257 82,843 81, ,790 87,717 87,108 88,920 88, Currency (C) 43,530 43,644 44,364 46,424 47,584 47,320 58,353 49,676 49,436 51,197 51, M1(C+D) 105, , , , , , , , , , na Demand Deposit (D) 62,434 62,431 65,200 71,700 68,731 69,972 66,280 72,741 72,724 73, na Broad Money (M2 = C+D+T) 615, , , , , , , , , , na Quasy Money (T) 509, , , , , , , , , , na Quasy Money (Rupiah) 401, , , , , , , , , , na Time Deposit 312, , , , , , , , , , na Saving Deposit 88,963 97, , , , , , , , , na Foreign Currency Deposit 108, , , , , , , , , , na Broad Money Rupiah 507, , , , , , , , , , na Claim on Business Sector 287, , , , , , , , , , na Credit by DMBs 251, , , , , , , , , , na - PRICES - CPI- monthly (%) (0.34) (1.05) (0.93) (0.68) (0.45) y-y % (0.84) (1.10) CPI-Food monthly (%) (0.70) (2.22) (2.36) (2.14) (0.47) (0.19) (1.43) CPI-Nonfood monthly (%) (0.02) (0.06) (0.83) EXTERNAL SECTOR - Rp/USD (end period, mid rate) 6,700 6,975 7,700 8,375 6,905 7,275 7,050 7,425 7,410 7, Non oil/gas Export (f.o.b, million USD) 4) 3,895 2,922 3,860 3,732 3,388 3,031 3,165 3,374 3,079 4, na Non oil/gas Import (c$f, million USD) 4) 1,936 1,370 1,608 1,846 1,685 1,815 1,664 1,284 1,933 1, na Gross Foreign Assets (billion USD) na Net International Reserve (million USD) 16,414 16,120 15,820 16,010 16,230 16,550 16,350 17,060 16,860 18,510 18, QUARTERLY INDICATOR Q.3 98* Q.4 98* Q.1 99** Q.2 99** Q.3 99** Q.4 99** Q.1 00** Real GDP Growth (% yoy) (14.58) (18.63) (7.89) Consumption (8.37) (11.87) (3.03) (0.72) Investment (36.94) (41.71) (28.93) (20.98) (22.51) (8.06) Changes of Stock (271.64) (96.59) (49.62) Export (40.38) (43.66) (37.28) (38.26) 9.58 Import (46.42) - (51.58) - (43.13) (43.68) (13.96) Current Account (million USD) 1, , ,562 1,234 Capital Account (million USD) (400) 1, (785) (2,068) (948) * preliminary figure ** very preliminary figure *** there is an adjusted data because of credit transfer from Frozen Bank, Take Over Bank and Non Performing Loan to the Asset Management Unit in IBRA r revise 1) end of week 2) weighted average 3) end period closing 4) closed file Sources : Bank Indonesia, except stock market data (BAPEPAM), CPI and GDP (BPS) Directorate of Economic Research and Monetary Policy 25