Jl.MH. Thamrin No.2 Jakarta Indonesia

Transcription

1 Jl.MH. Thamrin No.2 Jakarta Indonesia

2 BANK INDONESIA For further information. please contact: Short-term Outlook dan Policy Dissemination Division Monetary Policy Group Economic Research and Monetary Policy Department Telephone : Fax. : BKM_TOD@bi.go.id Website :

3 MONETARY POLICY REPORT Bank Indonesia monetary policy report QUARTER IV 2012 The Monetary Policy Report is published quarterly by Bank Indonesia after the Board of Governors Meetings in December, April, July, and October. In addition to fulfilling the mandate of article 58 of Act Number 23 of 1999 concerning Bank Indonesia, amended by Act No. 3 of 2004 and Act No. 6 of 2009, the report has two main purposes: (i) to function as a tangible product of a forward-looking working framework in which formulation of monetary policy is based on economic and inflation forecasts; and (ii) as a medium for the Board of Governors of Bank Indonesia to present to the public the various policy considerations underlying its monetary policy decisions. The Board of Governors Darmin Nasution Hartadi A. Sarwono Ardhayadi Mitroatmodjo Budi Mulya Halim Alamsyah Ronald Waas Governor Deputy Governor Deputy Governor Deputy Governor Deputy Governor Deputy Governor i

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5 MONETARY POLICY REPORT Bank Indonesia Enhanced Monetary Policy Measures Under Inflation Targeting Framework In July 2005, Bank Indonesia implemented and enhanced monetary policy measures within the Inflation Targeting Framework (ITF) which encompasses four main areas: the use of the BI rate as an operational target, enhanced decision making process, more transparent communications strategy, and strengthened policy coordination with the Government. The measures is intended to strengthen the effectiveness and to provide good governance to its monetary policy making to achieve the price stability needed to support sustainable economic growth and attain social welfare. Underlying Principles Monetary Policy Strategy Under the ITF, the inflation target is established as the overriding objective and nominal anchor for monetary policy. In this regard, Bank Indonesia has adopted a forward looking strategy by guiding the present monetary policy response for achievement of a medium-term inflation target. The application of the ITF does not mean that monetary policy disregards economic growth. The basic monetary policy paradigm of striking the optimum balance between inflation and economic growth is retained in both setting the inflation target and in the monetary policy response by focusing on achievement of low, stable inflation in the medium to longterm. The Inflation Target Government upon coordination with Bank Indonesia has set and announce an inflation target of CPI every year. Based on PMK No.143/PMK.011/2010 the inflation targets established by the Government for are 5,0%, 5,0%, and 4,5% with ±1% deviation. Monetary Instruments and Operations The BI Rate is the published policy rate reflecting the monetary policy stance adopted by Bank Indonesia. The BI Rate is a signal for achieving the medium to long-term inflation target and is announced periodically by Bank Indonesia for a specific period. To strengthen the operational framework for monetary policy, Bank Indonesia changed from use of the 1-month SBI rate as the operational target to the overnight interbank rate with effect from 9 June In monetary operations, the BI Rate is implemented through liquidity management on the money market to achieve the monetary policy operational target, reflected in movement in the overnight interbank money market rate. To enhance the effectiveness of liquidity management on the market, a set of standing facilities in combination with an interest rate corridor is employed in day-to-day monetary operations. Policymaking Process The BI Rate is determined by the Board of Governors in the Monthly Board of Governors Meeting. In unforeseen circumstances, the monetary policy stance may be adjusted in advance of the Monthly Board of Governors Meeting in a weekly Board of Governors Meeting. Changes in the BI Rate essentially depict the Bank Indonesia monetary policy response for guiding the forecasted level of inflation within the limits of the established inflation target. Transparency Monetary policy is regularly communicated to the public through customary media for communication, such as statements to the press and market actors, website postings and publication of the Monetary Policy Report (MPR). This transparency is aimed at building improved understanding and shaping public expectations of the economic and inflation outlook and the monetary response taken by Bank Indonesia. Coordination with the Government For the purpose of coordination in inflation targeting, monitoring and control, the Government and Bank Indonesia have established a team of officials representing the various relevant agencies. The task of the Team is to deliberate and recommend the necessary policy actions for the Government and Bank Indonesia in managing inflationary pressures for achievement of the established inflation target. Steps for Reinforcing Monetary Policy with the Overriding Objective of Price Stability (Inflation Targeting Framework) In July 2005, Bank Indonesia launched a reinforced monetary policy framework consistent with the Inflation Targeting Framework (ITF), encompassing four key elements: (1) use of the BI Rate as the policy reference rate, (2) anticipatory monetary policymaking process, (3) more transparent communications strategy and (4) closer policy coordination with the Government. These measures are intended to strengthen monetary policy effectiveness and governance in order to achieve the overriding objective of price stability in support of sustainable economic growth and greater public prosperity. iii

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7 MONETARY POLICY REPORT Bank Indonesia The Governor of Bank Indonesia Foreword Amid the weakened condition of the global economy and world financial markets during Q and the year to date, the Indonesian economy has maintained brisk growth accompanied by stability. The main pillars of growth are household consumption and private investment, while exports and imports have slowed in response to flagging external demand. Looking ahead, the forecast is for higher economic growth, buoyed by domestic activity and resurgent external performance as the global economy mounts a recovery. In disaggregation of GDP by sector, the leading sources of growth are manufacturing, the trade, hotels and restaurants sector and transportation and communications. The Indonesia balance of payments is forecasted to post an enlarged surplus in Q The current account deficit is in decline, although not ameliorating as quickly as expected. Meanwhile, the capital and financial account has booked a heftier surplus, strengthened by higher levels of direct investment and portfolio capital inflows. Taken together, international reserves at the end of November 2012 reached billion US dollars, equivalent to 6.1 months of imports and servicing of official external debt. In 2012, the rupiah has depreciated in value while charting subdued volatility. The pressures bearing down on the rupiah stem from both external and domestic factors. Weighing on the rupiah are the considerable uncertainties that linger over resolution of the debt and fiscal crises in Europe, sluggish performance in advanced economies, the downturn in commodity prices affecting mainstay exports and slowing pace of exports amid buoyant import performance. Nevertheless, sustained inflows of foreign capital on the domestic financial market in response to the robust condition of Indonesia s economic fundamentals have bolstered the rupiah against further decline. The CPI has marked subdued inflation throughout the year, on track for the 2012 inflation targeting range of 4.5% ±1%. In November 2012, CPI inflation was recorded at 0.07% (yoy) or 4.32% (yoy). The low rate of inflation is the result of price corrections for some food commodities, measures to safeguard adequate supply and policy measures pursued by Bank Indonesia and the Government to maintain price stability. Financial stability has held firm alongside improvement in the bank intermediation function. Healthy performance in the banking industry is reflected in the high capital adequacy ratio and subdued level of non- v

8 MONETARY POLICY REPORT Bank Indonesia performing loans. Banking intermediation activity involving provision of credit for expansion of economic capacity continues to forge ahead. In the Board of Governors Meeting convened on 11 December 2012, Bank Indonesia decided to hold the BI Rate at 5.75%. At this level, the rate is judged to be consistent with low, subdued inflationary pressure, in line with the inflation target for 2013 and 2014 set at 4.5% ± 1%. Evaluation of the achievements of 2012 and outlook for indicates that the overall economy will maintain vibrant growth alongside prudently managed stability. Looking ahead, and with a careful watch on global economic risks, Bank Indonesia will reinforce policies for bringing external balances within sustainable parameters while supporting growth in the domestic economy. Bank Indonesia is confident that the implementation of a monetary and macroprudential policy mix bolstered by coordination with the Government will safeguard macroeconomic stability and the sustainability of national economic growth. This concludes the overview of the Indonesian economy during Q and the outlook for the future. My hope is for this report to provide reference material of use and benefit for us all. The Governor of Bank Indonesia Dr. Darmin Nasution vi

9 MONETARY POLICY REPORT Bank Indonesia Contents Contents 1. Monetary Policy Response Quarter IV Economic Outlook and Risks Ahead... 3 Underlying Assumptions In The Economic Forecast... 3 Economic Growth Outlook... 4 Inflation Outlook Recent Macroeconomic and Monetary Developments Developments in the World Economy Economic Growth Indonesia Balance of Payments Rupiah Exchange Rate Inflation Disagregation of Inflation Financial Market Developments Condition of the Banking System Statistics vii

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11 Monetary Policy Response Quarter IV Monetary Policy Response Quarter IV 2012 IIn the Board of Governors Meeting convened on October , Bank Indonesia decided to hold the BI rate steady at 5.75%. The current policy rate is considered consistent with inflation forecast, which is expected to remain low and contained within its target range of 4.5%±1% in 2012 and Bank Indonesia will continue to focus on policies to maintain external balance while also providing support for domestic economic growth. Board of Governors sees that some policy measures that have been taken, have encouraged lower deficit in the current account. Meanwhile, Indonesia s economic growth remains sound, albeit lower than earlier forecast, mainly reflecting a continued slowdown in the global economy. Going forward, Bank Indonesia will continue to assess the effect of some policies that has been taken and will take further policy measures if neccessary, by also considering the dynamics of the economy. Bank Indonesia will also continue to strengthen coordination with the Government in managing domestic demand and improving Balance of Payment, so that it remains in line with the effort to maintain macroeconomic stability and sustainable economic growth. Board of Governors remains vigilant on the development of the global economy, which is weaker than expected and continue to be overshadowed by uncertainty. Recovery in the US remains tepid, while the economy in the euro area remains weak as crisis continues. In addition, China s and India s economic growth are expected to slow. Global inflation is also expected to remain moderate, indicating declining global commodity prices. Under such circumstances, some countries had opted to take more accomodative policies to boost economic recovery. Those policies have triggered positive sentiment in the global financial market, including capital inflow to emerging markets. Board of Governors sees Indonesia s economy remains sound, albeit lower than earlier forecast. In the Q3 2012, Indonesia s economy is expected to chart 6.3% growth, lower than earlier forecast, mainly reflecting a slowdown in the global economy. Although growth in domestic demand-oriented consumptions and investments remain high, declining exports have adversely affected production and investment in exports-oriented sector. Going forward, growth will remain underpinned by buoyant domestic demand and the potential increase in exports, although uncertainty in the global economy still call for caution. This is also supported by robust growth in some regions, mainly in the eastern part of Indonesia (KTI) and Java. With that condition, Indonesia s economic growth in 2012 and 2013 is expected to arrive at 6.1%-6.5% and 6.3%-6.7% respectively. Balance of Payment in the Q is expected to improve and turn to surplus, supported by better current account as well as higher surplus in capital and financial account. Current account deficit in Q is expected to be lower than that in Q This was indicated by a surplus in the trade balance in August On the other hand, surplus in the capital and financial account is expected to pick up, driven by favorable portfolio inflow and Foreign Direct Investment. At the end of September 2012, 1

12 Monetary Policy Response Quarter IV 2012 international reserves reached USD110.2 billion, or equivalent to 6.1 months of imports and government s external debt services. Rupiah in September 2012 moved according to market condition, with abated depreciating pressure. This is consistent with Bank Indonesia s policy to stabilize rupiah, as suggested by its fundamental. On point-to-point basis, rupiah depreciated by 0.37% (mtm) to Rp9,570 per USD, or on average depreciated by 0.64% (mtm) to Rp9,554 per USD. Pressure on rupiah was mainly associated with strong imports that lead to high demand for foreign currency. Pressure on rupiah was subdued as measures to boost global economy and the prospects of the Indonesia s economy have attracted more capital inflow to Indonesia. Inflation subdued and contained at a low level. CPI inflation in September 2012 was recorded at 0.01% (mtm) or on an annual basis was recorded at 4.31% (yoy). Core inflation was at a low level (4.12%, yoy) as demand soften after Eid al- Fitr festivities and correction in the global commodity prices, as well as well-anchored inflation expectation. Volatile food inflation was lower, on the back of sharp correction in the global food prices and adequate supply, coupled with intensive measures by the government to manage food prices. Administered prices inflation was also in check as there was no change in government policy on the prices of strategic commodities. Financial system stability is well-maintained with improving intermediation function to support economic financing. Banking industry shows solid performance, as indicated by secured level of capital in which capital adequacy ratio (CAR) is well above minimum level of 8%, and gross non-performing loan (NPL) below 5%. Meanwhile, banking intermediary remains sound, reflected by credit growth in August 2012 that reached 23.6% (yoy). The credit growth is lower than that in earlier month of 25.22% (yoy), driven by lower growth in working capital credit of 23.2% (yoy), while consumption credit remain stable at 19.9% (yoy). Investment credit recorded a high growth of 29.8% (yoy), and is expected to boost Indonesia s economic capacity. Going forward, Bank Indonesia remains vigilant on the dynamics of the global economy and financial market and its impact on the Indonesia s economy. Bank Indonesia will continue to focus on policies to maintain external balance while also providing support for domestic economic growth. In addition, Bank Indonesia will continue to assess the effect of some policies that has been taken and will make an adjustment align with the dynamics of the economy. Bank Indonesia will also continue to strengthen coordination with the Government in managing domestic demand and improving Balance of Payment, so that it remains in line with the effort to maintain macroeconomic stability and sustainable economic growth. 2

13 Economic Outlook and Risk Ahead 2. Economic Outlook and Risks Ahead In 2012, the Indonesian economy is predicted to chart respectable growth (6.3%), albeit down from the preceding year due to the effects of the world economic slowdown. The global economic slowdown has impacted export performance, as evident from the flagging growth in exports compared to Domestic demand is also predicted to maintain vibrant momentum, driven mainly by household demand and investment activity. In 2013, the global economy is expected to embark on gradual improvement, strengthening performance in exports. Accompanying more upbeat exports will be rising household consumption bolstered by the strength of purchasing power, steady levels of consumer confidence and the impact of the national elections in Indonesia s sizeable market potential and macroeconomic stability are key drawcards that keep investment flowing. Given the continued strength of domestic demand and current rise in exports, imports are also set to climb. In analysis by sector, economic growth is dominated by manufacturing, the trade, hotels and restaurants sector and transport and communications. Inflation remained at a subdued level in 2012, and is on track to come below mid-point of the 4.5% ± 1% inflation targeting range at year end. Key to the low rate of inflation is the adoption of a mix of monetary and macroprudential policies and coordination of policy with the Government through the Inflation Control Team (TPI) and Regional Inflation Control Teams (TPIDs). Looking forward, inflation is predicted to remain low and subdued within the established targeting range of 4.5% ± 1% for 2013 and Table 2.1 World Economic Outlook (% yoy) Projection World GDP Advanced Economies United States Euro Area Japan Other Advanced Economies Developing Economies Eastern and Central Europe Commonwealth Countries Developing Asia China India ASEAN-5* Latin America and Carribean Middle East & North Africa * Indonesia, Malaysia, Philippines, Thailand, and Vietnam Source : IMF, World Economic Outlook Update, October 2012 UNDERLYING ASSUMPTIONS IN THE ECONOMIC FORECAST Assumptions for the International Economy Following a year of limited growth in 2012, the global economy is predicted to mark gradual improvement. In 2012, global economic growth is projected to reach 3.2%, down from growth in 2011 at 3.8%. Low growth rates in advanced economies as a result of the debt crisis in Europe and the looming fiscal cliff in the US has constrained economic growth in emerging market nations through downturns in commodity prices and volume of trade. In keeping with policy actions designed to bring improvement to economies of the US and Europe, world economic growth in 2013 is forecasted to strengthen to 3.6%. Accompanying more robust performance of the global economy will be resurgent activity in international trade. This 3

14 Economic Outlook and Risk Ahead rise in international trade will in turn boost international commodity prices, as predicted by several international agencies. The IMF forecasts an increase in growth in world trade volume from 3.2% in 2012 to 4.5% in Accordingly, the commodity price index in 2013 is expected to climb more rapidly than in preceding years. Fiscal Policy Assumptions The projected budget deficit in 2013 is 1.65% of GDP, down from the preceding year in keeping with government efforts to safeguard fiscal sustainability while promoting economic growth. Deficit reduction measures pursued by the government include a cut in energy subsidies through a 15% hike in electricity billing rates. One important point of note in the 2013 Budget is the unprecedented increase in budget allocations for infrastructure development compared to previous years. In 2013, expenditure allocations for infrastructure will be used for construction of water and irrigation facilities, transportation, housing and urban facilities, communications and IT, land administration and spatial planning. The increased budget allocations for development and upgrading of infrastructure are expected to increase production capacity and in turn boost competitiveness, create more employment and bring down poverty levels. In addition to increasing capital expenditure allocations, the government s Draft 2013 Budget also raises the tax-free personal income allowance to 24 million rupiahs per annum. On one hand, this policy will diminish government revenues, but on the other it will provide a boost to public purchasing power and in turn support higher economic growth. Aside from consumption, the government has earmarked Rp 528 trillion in the 2013 State Budget for regional transfers to support regional governments in creating more equitable distribution of economic growth. ECONOMIC GROWTH OUTLOOK In 2012, economic growth is forecasted to reach 6.3%. The global economic slowdown has significantly impacted exports, as evident from the forecast for more moderate export growth in Q On the other hand, domestic demand is forecasted to remain strong, strengthened by an increased contribution of government consumption spurred by improved absorption of budgeted expenditures. Looking at 2012 overall, the business lines acting as sources of economic growth are manufacturing, the trade, hotels and restaurants sector and transport and communications. In 2013, domestic economic growth is set to improve over the level reached in 2012 in keeping with the gradual improvement forecasted in the world economy. Domestic demand is forecasted to remain the primary engine of growth in both consumption and investment. Besides this, activities related to preparations for the 2014 elections are an added factor that will spur economic activity. Higher world economic growth will bolster demand 4

15 Economic Outlook and Risk Ahead for exported products. Increased export volume with added support from more favourable prices will lead to an expanded contribution from the external sector in comparison to In analysis by line of business, the mainstay sectors of manufacturing, trade, hotels and restaurants and the transport and communications sector will continue to dominate developments in the national economy. Sectors for the most part are projected to show improved results, buoyed by the improvement in domestic and global economic condition. Bolstered by accelerated growth in the global economy and activities surrounding the national elections to be held in 2014, Indonesia s economy is forecasted to improve further in comparison to 2013 in response to strengthening domestic demand and growth in exports. Analysis by sector suggests that like before, the mainstay sectors of manufacturing, trade, hotels and restaurants and the transport and communications sector will provide the leading contribution to the national economy. For the most part, developments at the sectoral level are expected to improve in keeping with more favourable domestic and global economic conditions. Graph 2.1 Consumer Expectations Index Outlook for Aggregate Demand In 2013, household consumption is forecasted to maintain vibrant growth. Key to this will be rising private incomes and the relatively subdued level of inflation that will provide an added boost to public optimism and purchasing power. In addition, activities related to the National Election in 2014 and improvement in the global economy (which in turn will strengthen private incomes through export growth) will also foster higher levels of private consumption. Private incomes are set to benefit from increases from a number of key sources. In November 2012, some provinces had already adopted decisions for increases in the Provincial Minimum Wage during The size of these increases varies significantly, depending on the level of inflation and the assessment of Decent Living Needs (KHL) in these provinces. For the most part, increases in the 2013 Provincial Minimum Wage will surpass the increases made in Nevertheless, given improvements made in efficiency and productivity, the increases in Provincial Minimum Wage levels will not be fully passed on to selling prices. In addition to the Provincial Minimum Wage, incomes of private sector employees and state personnel are also predicted to climb. This is confirmed by survey results pointing to a rise in incomes during Furthermore, in 2013, the Government will also raise the tax-free personal income allowance to Rp 24 million per annum. This policy action will strengthen public purchasing power and encourage increased spending on consumption and investment. In 2013, the real contribution of consumption is predicted to be higher than in past years. This rise is consistent with government efforts to improve the quality of expenditures, as reflected in rising levels of capital expenditures. In addition, the 5

16 Economic Outlook and Risk Ahead election-related activities are a factor that will also spur economic growth. According to the patterns observed in , the holding of national elections has a tendency to boost economic growth. Investment growth in 2013 is predicted to be higher that the preceding year. This is based on the strengthening trend in domestic household consumption growth and the upbeat outlook for exports. Predictions of rising investment levels are also supported by the increased allocations of government capital expenditures, low levels of interest rates and improvement in the domestic business climate. In the Draft 2013 State Budget, the Government has increased its capital expenditure allocations. The infrastructure development planned in the Draft 2013 State Budget includes construction of roads and seaports, provision of infrastructure and facilities for waterway, lake and ferry transportation, airport construction and refurbishment, construction of new railway lines, construction of road transportation terminals in 24 locations, construction of 61 ferry piers and construction and management of fishing ports in 25 locations. In a further measure to boost infrastructure construction, the Government also allocated budget resources to increase power generating capacity and expand the power grid. The Government also plans to increase the capacity of roads traversing Sumatra, Java, Bali, Kalimantan, Sulawesi, West Nusa Tenggara, East Nusa Tenggara and Papua, covering a total length of 4,431 km. The agenda for accelerated infrastructure development in the Draft 2013 Budget is also supported by the issuance of Presidential Regulation 70/2012 concerning Government Procurement of Goods/Services and Presidential Regulation 71/2012 concerning Procedures for Land Expropriation for Development and the Public Interest. Both presidential regulations are expected to expedite the construction of infrastructure and thus pave the way for achievement of the twin objectives of development and equitable growth. Export growth has potential to rise in Exports of goods and services are forecasted to climb ahead of 2012, as a result of the expected improvement in world economic growth to be followed by increases in commodity prices. Export performance in Indonesia is also predicted to benefit from more robust economic growth in Asian nations such as China and India. %Y-o-Y, 2000 Base Price Table 2.2 Economic Growth Projection Demand Side 2012 C o m p o n e n t 2011 I II III IV* 2012* Private Consumption Government Consumption Gross Fixed Capital Formation Exports of Goods and Services Imports of Goods and Services GDP Source : BPS-Statistic Indonesia * Bank Indonesia Projection 6

17 Economic Outlook and Risk Ahead %Y-o-Y, 2000 Base Price Table 2.3 Economic Growth Projection Supply Side S e c t o r s I II III IV* 2012* Agriculture Mining and Quarrying Manufacturing Electricity, Gas, and Water Supply Construction Trade, Hotel & Restaurant Transportation & Communication Financial, Rental, and Business Services Services GDP Source : BPS-Statistic Indonesia * Bank Indonesia Projection More robust growth is also forecasted for imports of goods and services in Given the renewed improvement in predicted export growth, manufacturers will make more use of imported raw materials and capital goods for production of exported merchandise. Graph 2.2 Exports, Manufacturing & Consumption Growth Graph 2.3 Proportion of Investment to GDP Outlook for Aggregate Supply In analysis by line of business activity in 2013, the structure of the economy will again be dominated by manufacturing, the trade, hotels and restaurants sector and transport and communications. The combined share of these three sectors, representing the engine of economic growth, came to 63%. The dominant role of the three sectors is expected to carry forward into Improvement in global economic conditions and high levels of investment in recent years will bolster manufacturing performance in Strengthening global conditions will kindle expectations for improvement in the markets for Indonesia s exported commodities. On the demand side, the predicted improvement in exports will stimulate activity in manufacturing. Manufacturing is also bolstered on the demand side by private consumption and the brisk pace of activity in other sectors, including construction. The sustained buoyant level of private consumption has helped maintain vibrant activity in manufacturing despite the global economic malaise (Graph 2.2). On the supply side, the relatively high level of investment in recent times has enabled the manufacturing sector to respond well to increases in external and domestic demand (Graph 7

18 Economic Outlook and Risk Ahead Graph 2.4 Growth of Food, Beverages, and Tobacco Industri Subsector Graph 2.5 The proportion of food and non-food consumption automotive industry. 2.3). Given the support of factors more conducive to its expansion, the manufacturing sector is predicted to chart even higher growth compared to The food, beverages and tobacco industry subsector is forecasted to play a significant role, forging ahead with high growth in Not only is it supported by an enormous domestic market with solid purchasing power, the food and beverages subsector will also benefit from the preparations for national elections in Activities related to the 2014 elections are expected to get under way in Q3/2013 and reach a peak in Q2/2014. This projection is based on conditions during the period for preparation for the elections in At that time, the global economic crisis that quickly spread in 2008 had taken its toll on the Indonesian economy. However, the manufacturing sector still had headroom for positive growth, despite having slowed considerably. Key to this was the high growth in the food and beverages subindustry category, related to preparations for the national election in 2009 (Graph 2.4). Other industry subsectors forecasted to drive performance in the manufacturing sector in 2013 include cement, automotive manufacturing and iron and steel. The infrastructure development related to the ongoing Master Plan for Acceleration and Expansion of Economic Development (MP3EI) and flurry of property development projects (for business and residential use) has created high demand in the cement and iron and steel industries. This condition is also reflected in the outlook for the construction sector, expected to chart more robust growth compared to Similarly, the outlook for the automotive industry is as optimistic as ever. Indonesia s vast domestic market, burgeoning middle class and buoyant purchasing power have created ripe conditions for the expansion of the nation s Vibrant domestic demand is the force underpinning performance in the trade, hotels and restaurants sector. In 2013, this sector is expected to chart even higher levels of growth. The size of Indonesia s market potential and high level of purchasing power are factors stimulating activity in the trade, hotels and restaurants sector. Businesses operating in retail have seized on this potential to pursue expansion, bringing themselves closer to consumers. This is visible in the proliferation of mini-markets built near residential areas. With retail operators positioned ever closer to the public, retail sales have maintained an upward trend. The strong showing in the trade, hotels and restaurants sector is also supported by performance in the tourism sector, which has become an increasing focus of government attention because of its potential contribution to the economy. Given the 8

19 Economic Outlook and Risk Ahead growing economic strength of the population, the pattern of private consumption has begun to shift towards non-food consumption, including tourism (Graph 2.5). The growth in tourism is not only driven by domestic tourists, but also foreign tourist arrivals. The expected improvement in global economic conditions will bolster optimism for rising numbers of inbound travellers in Indonesia (Graph 2.6). Graph 2.6 Number of Foreign Visitors Graph 2.7 Number of Flight Passengers To boost numbers of inbound tourists, the Ministry of Tourism and the Creative Economy plans to develop seven forms of special interest tourism. These areas of interest are culture and history; nature and ecotourism; recreational sports such as golf, surfing, cruise liners; shopping and culinary; health and fitness; and meetings, incentives, conventions and events (MICE). This will also make provision of accommodation more attractive for business. For this reason, regions with sizeable potential as tourist destinations have embarked on aggressive expansion in accommodation services. The buoyant growth forecasted for Indonesia s economy in 2013 will promote higher passenger numbers and cargo traffic and create greater public demand for communications services. These are factors that have spurred performance in transport and communications sector. Growth in this sector is forecasted to climb ahead of that achieved last year. Several airlines have taken action to anticipate higher mobility of passengers and cargo by providing more frequent flight services and expanding their route networks, and as a result have also had to engage in fleet expansion (Graph 2.7). If Indonesia is able to attain a One rating from the Federal Aviation Administration (FAA) in 2013, the aviation industry will be able to expand its route coverage. Furthermore, there is a growing need for accurate and timely information to support the brisk pace of economic activity. This will drive the steady expansion in use of the internet and data communications. Almost all communications operators have upgraded their broadband networks and in particular launched thirdgeneration (3G) networks to improve the provision of data and information services for the public. In addition to the three leading sectors, other high-growth sector in which success will drive future performance in other sectors is construction. The drive to build connectivity between corridors of economic activity related to the implementation of the Master Plan for Acceleration and Expansion of Economic Development in Indonesia (MP3EI) has fuelled an increase in construction activity, led by infrastructure. Government support for infrastructure development is reflected in the increased budget allocations for infrastructure and various incentives and facilities. The classic obstacle that has dogged infrastructure development more than any other is the difficulty of land expropriation. 9

20 Economic Outlook and Risk Ahead In 2014, global economic recovery is expected to gain traction. This will have a positive impact on the domestic economy. Domestic economic performance will surpass that of The more upbeat performance of the economy will be supported not only by improving global conditions, but also the holding of national elections. If security conditions permit, the various activities related to organising an election, ranging from preparations to execution, will boost the growth of businesses engaged in election-related activities such as promotion/ advertising and food, beverages and cigarettes. However, on a structural level, economic growth will continue to be dominated by manufacturing, the trade, hotels and restaurants sector and transport and communications. INFLATION OUTLOOK In 2013, the forecast is for subdued inflation within the established targeting range of 4.5%+1%. Optimism for keeping inflation on track with the targeted range is based on the success in controlling inflation in 2012, as well as other factors. The ongoing strengthening of the policy mix by Bank Indonesia has proven capable of curbing inflationary pressure from both external and domestic factors while managing inflation expectations. At the same time, the Government commitment to safeguarding adequate supply and smooth distribution of food staples, including essential needs for the poor, and the operation of the Strategic Food Price Information Centre (PIHPS) has helped maintain control over volatile foods inflation during With a strengthened mix of monetary and macroprudential policies and coordination of policy with the Government, inflation in 2013 will again be curbed within the 4.5% ± 1% range. 10

21 Recent Macroeconomic and Monetary Developments 3. Recent Macroeconomic and Monetary Developments In 2012, the world economy was shrouded in uncertainty and marked by slowdown. The weakening global economy has resulted from the stubborn delays in resolution of the debt crisis in Europe, corrections in Asia s economic growth (China, Japan and India) and the still precarious condition of US growth, now overshadowed by risks related to the fiscal cliff. In 2012, world trade fell short of initial forecasts and was accompanied by a steep downturn in global commodity prices that in turn led to a weakening trend in the external sector performance of Asia s emerging markets. With the world economy in slowdown, global inflationary pressures also eased. Global financial markets came under pressure from issues surrounding the Eurozone debt crisis, particularly during the second half of The policy responses of authorities in advanced nations remain largely accommodative in order to bolster economic activity. Similar behaviour was observed in the policy responses of authorities in emerging markets, which generally maintained an accommodative trend. In Q4 2012, Indonesia is predicted to maintain solid economic growth amid the uncertain conditions of the global economy. The key sources of growth will be sustained vibrant household consumption and mounting investment. Exports have embarked on recovery, although still on only a limited scale due to the continued weakness of external demand. On the other hand, imports are comparatively high due to the sustained strength of domestic demand and improvement in exports. Pressure continued to bear down on the rupiah during Q4 2012, but with softening intensity and more subdued volatility. The weakening in the rupiah is explained primarily by persistent high demand for foreign currencies on the domestic forex market in keeping with the brisk pace of imports that contrasts with the still limited improvement in exports. However, the downward pressure on the rupiah will progressively ease in line with rising inflows of foreign portfolio investment capital. Concerning price levels, CPI inflation is well under control according to the targeting range. The sustained low level of CPI inflation is supported by all factors, including fundamentals and non-fundamentals. Core inflation remains subdued at a level that supports adequate supply-side capacity in responding to demand and mild volatility in the exchange rate. Similarly, volatile foods and administered prices recorded only mild inflation due to increases in food stuff production, comparatively minimum disruptions to distribution and the absence of government policy decisions affecting prices of strategic goods and services. On the financial market, interbank interest rates in 2012 moved generally around the lower limit of the interest rate corridor. In a similar vein, lending rates 11

22 Recent Macroeconomic and Monetary Developments and deposit rates maintained a downward trend in comparison to the preceding year. The stock market and Indonesian government bonds market charted positive growth bolstered by the robust fundamentals of the domestic economy and positive investor perceptions of Indonesia s economic outlook. Graph 3.1 ISM Survey - US PMI Manufacturing and Services DEVELOPMENTS IN THE WORLD ECONOMY In 2012, the world economy was again characterised by uncertainty with forecasts of slowing growth in comparison to previous years. Key features of the world economy in 2012 were slowing economic activity in some European nations, while growth in Asian economies, notably China, Japan and India, similarly fell short of earlier forecasts. This has led to depressed growth in volume of world trade followed by a downturn in global commodity prices. Under these conditions, world inflation has also eased. On financial markets, the Eurozone debt crisis has borne down on world financial markets, which came under especially heavy pressure during the first half of 2012.During 2012, the monetary policy responses of advanced nations and emerging markets maintained a loose and accommodative bias and were accompanied by non-conventional policy actions such as bond purchases by the European Central Bank (ECB), the Federal Reserve and the Bank of Japan (BoJ) aimed at calming financial markets and stimulating economic activity. In Asia, the central banks of China and India not only cut interest rates, but also lowered their reserve requirements with the expectation of promoting credit expansion in the real sector. In 2013, world economic growth is predicted to gain momentum. This is in spite of various risks that call for vigilance, such as the US fiscal cliff, uncertainty over resolution of the debt crisis and fallout from fiscal austerity in Europe and the discontinuation of the fiscal stimulus in Japan. Graph 3.2 Nonfarm Payroll and US Unemployment Rate Compared to the preceding year, the US economy has marked improved growth during Accommodative fiscal and monetary policy responses accompanied by an easing of turmoil in the housing sector have contributed to the US economic outlook, with growth in 2012 forecasted to improve to 2.0% (yoy). However, this growth remains fragile, as shown by indications of declining manufacturing activity in 2012 due to weakening global demand. This analysis is supported by the developments in the manufacturing PMI, currently in a contraction phase (index below 50), and the moderate growth in production indices (Graph 3.1). On the consumption side, the slow rate of job creation reflected in the non-farm payroll indicator in which growth has slipped behind 2011 (Graph 3.2) has put added downward pressure on retail sales. 12

23 Recent Macroeconomic and Monetary Developments Graph 3.3 Europe Consumer Confidence Index Graph 3.4 Asian Production Index Eurozone economies are forecasted to experience recession in 2012, followed in by comparatively stagnant growth in The fiscal austerity programmes launched by some Eurozone countries have brought downward pressure on economic activity. This in turn has led to job losses and worsening unemployment. Europe s unemployment mounted to 11.6% in September 2012, the highest ever since the establishment of the Eurozone. The rising level of unemployment has put brakes on consumption, as reflected in the deteriorating level of consumer confidence (Graph 3.3) and only moderate growth in retail sales. Alongside this, the manufacturing sector is also in decline, reflected in a manufacturing PMI still in the contractionary phase. Nevertheless, positive export growth accompanied by the weakening of the euro currency will help achieve a balance of trade surplus. Taken together, economic growth in the Eurozone during 2012 as a whole is predicted at -0.5% (yoy). Asian economies are forecasted to chart reduced growth in response to the weakening of the global economy. Industrial performance in almost all of Asia has seen decline, as indicated in the present contractionary phase in the manufacturing PMI. The downturn in industrial activity is thought to have resulted from depressed export performance in keeping with slumping global demand and falling international commodity prices. Nevertheless, the still buoyant levels of domestic demand bolstered by loose bias policies have helped fend off the slowdown in economic activity in Asia. China s economy experienced a significant slowdown in Efforts by the government of China to scale back dependence on the external sector and prevent an asset price bubble in the housing sector have resulted in a downturn in economic activity in China. China s economic growth is estimated to reach 7.7% (yoy) in 2012, down from the 9.3% growth (yoy) of the preceding year. Investment, the main pillar of economic growth in China, is on a downward trend spurred by the property sector. Production in China has also begun to slip back, as shown by the China manufacturing PMI that entered a contractionary phase. This is also consistent with the moderate growth in production indices. The pressure bearing down on China s manufacturing output is also confirmed by less vigorous performance in China s exports, due to faltering global demand. On the consumption side, retail sales have also tapered off in keeping with the deteriorating trend in consumer confidence. However, indications suggest that monetary relaxation through such actions as lowering of interest rates and reserve requirement ratios have also had positive impact, most importantly in the second half of

24 Recent Macroeconomic and Monetary Developments International commodity prices are forecasted to chart negative growth in 2012 in line with persistently weak global demand. In November 2012, the non-oil and gas Export Commodity Price Index (IHEx) recorded -11.9% growth (yoy), mainly in response to plunging agricultural commodity prices. The impact of the third round of quantitative easing (QE3) has failed to lift world commodity prices hit by falling world demand amid abundant supply. For 2012 as a whole, the IHEx is predicted to chart growth of -14.8% (yoy). On the other hand, oil prices in 2012 are predicted to stay largely unchanged in comparison to the preceding year. The combination of expanding world supply of oil following the easing of geopolitical crises in the Middle East and North Africa (MENA) and the bearish trend on international financial markets resulted in a sharp drop in world oil prices in mid At the same time, the QE3 monetary stimulus in September 2012 was insufficient to bring about a significant rise in oil prices, particularly at the end of At the beginning of 2012, global inflationary pressure was in decline. Composite global inflationary pressure peaked in January 2012 at 3.6% (yoy), but subsequently this level progressively eased to 3.1% (yoy) in October The easing of world inflationary pressure is explained by slowing activity in the world economy alongside falling world commodity prices. According to the Consensus Forecast for November 2012, world inflation for the year 2012 is set to reach 3.28% (yoy), bolstered by CPI inflation in advanced economies and emerging markets that is forecasted at 2.0% (yoy) and 4.9% (yoy). Monetary policy responses from central banks in advanced economies have maintained an accommodative stance accompanied by other non-conventional policies for stimulating economic activity. Almost all central banks in advanced economies retained an accommodative policy as marked by the very low interest rates maintained by the US Federal Reserve, the Bank of Japan (BoJ) and Bank of England (BoE). In July 2012, the European Central Bank (EC B) cut its rate to 0.75%, while the Reserve Bank of Australia (RBA) slashed its rate by 125 bps to 3.0% (yoy). Other European central banks, notably Sweden and Norway, lowered their policy rates by 50 bps and 25 bps. In addition, other major central banks in the USA, UK, Japan and Europe announced non-conventional policies, such as purchases of securities with the expectation of boosting economic activity in the real sector. On 13 September 2012, the Federal Reserve announced the third round of quantitative easing (QE3) involving the purchase of mortgage-backed securities worth 40 billion US dollars each month for an indefinite period. The Bank of England (BoE) announced a 50 billion pound expansion its Asset Purchase Programme (APP), bringing the total APP to 375 billion pounds sterling. On 6 September 2012, the ECB also announced purchasing of securities under the outright monetary transactions (OMT) mechanism, without announcing the amount of these purchases. The Bank of Japan announced a move to purchase an additional 11 trillion yen of securities, bringing total buying to 91 trillion yen with focus on government bond purchases. This policy is expected to last until the end of