Monetary Policy Review September 2012

Monetary Policy Review September 2012 The Monetary Policy Review (MPR) is published monthly by Bank Indonesia after the Board of Governors Meeting each January, February, March, May, June, August, September, and November. This report is intended as a medium for the Board of Governors of Bank Indonesia to present to the public the latest evaluation of monetary conditions, assessment and forecast for the Indonesian economy, in addition to the Bank Indonesia monetary policy response published quarterly in the Monetary Policy Report in April, July, October and December. Specifically, the MPR presents an evaluation of the latest developments in inflation, the exchange rate, and monetary conditions during the reporting month and decisions concerning the monetary policy response adopted by Bank Indonesia. Board of Governors Darmin Nasution Hartadi A. Sarwono Muliaman D. Hadad Ardhayadi Mitroatmodjo Budi Mulya Halim Alamsyah Ronald Waas Governor Deputy Governor Deputy Governor Deputy Governor Deputy Governor Deputy Governor Deputy Governor 1

Table of Content I. Monetary Policy Statement...3 II. The Economy and Monetary Policy...5 Economic Growth in Indonesia...5 Indonesia Balance of Payments...7 Inflation...8 Rupiah Exchange Rate...10 Financial Sector Developments...12 International Financial Markets...12 Interest Rates...12 Credit...14 The Money Supply...15 The Stock Market...16 Government Bonds Market...16 Mutual Funds Market...17 Condition of the Banking System...18 III. Monetary Policy Response...19 2

I. MONETARY POLICY STATEMENT In the Board of Governors Meeting convened on September 13 th, 2012, 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 2013. Bank Indonesia sees that recent developments in the external balance have pointed toward improved current account deficit in Q3 2012, as expected earlier. However, Bank Indonesia remains vigilant on some risks, mainly worsening global economic growth, that may put pressure on the current account balance. 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. Bank Indonesia will also continue to strengthen coordination with the Government in managing domestic demand and improving current account deficit, so that it remains supportive to the effort to maintain macroeconomic stability and sustainable economic growth. Board of Governors sees Indonesia s economy in the Q3 2012 remains in line with economic capacity. Solid economic growth in Q3 2012 is mainly underpinned by buoyant consumption and investment. Strong growth in private consumption is supported by consumer s confidence on the prospect of Indonesia s economy, as well as contained inflation. The pace of investment also remains strong, reflecting business confidence on the economic outlook, strong consumption, and supportive investment financing, both from the banking system and Foreign Direct Investment (FDI). In addition, exports is also expected to advance modestly in line with better prospect in some of Indonesia s main trading partner, although risks from global economic slowdown will remain a source of concern. Balance of Payment (BoP) in the Q3 2012 is expected to improve, although some risks still call for caution. Current account deficit is expected to be lower than that in Q2 2012, in line with earlier forecast. This was indicated by improvement in the trade balance in July 2012. On the other hand, rising surplus in the capital and financial account, driven mainly by FDI, is expected to balance the deficit in the current account. This condition had pointed towards foreign investor s confidence on Indonesia s economic prospect. Going forward, Indonesia s Balance of 3

Payment is expected to improve on account of expectation on better global economy and exports commodity prices, as well as support from effective policy responses. At the end of August 2012, international reserves reached 109 billion US dollars, or equivalent to 5.9 months of imports and government s external debt services. Pressure on rupiah continued in August 2012, albeit with less intensity. On point-to-point basis, rupiah depreciated by 0.94% (mtm) to Rp9,535 per USD, or on average depreciated by 0.63% (mtm) to Rp9,493 per USD. Pressure on rupiah was associated with tepid global economic recovery and uncertainty in the global financial market. In addition, strong imports growth amid weaker exports performance also affected supplydemand condition of foreign exchange. In that regard, Bank Indonesia will continue to monitor condition in the foreign exchange market to facilitate exchange rate adjustment towards the rate consistent with its fundamental. Inflation remained benign, although went up, triggered by seasonal factor (Idul Fitri) and pressures on food prices. CPI inflation in August 2012 was recorded at 0.95% (mtm) or on an annual basis was recorded at 4.58% (yoy). Rising inflation in August was driven by higher prices in some food commodities, triggered by seasonal factor (Eid-ul-Fitr), volatility in the global food prices, and lack of adequate supply. Those factors accounted for higher core inflation in August 2012, albeit remained relatively low at 4.16% (yoy). Pressure on core inflation is expected to be temporary, while from fundamental aspect, core inflation remained in check. Going forward, inflation is expected to remain contained and stay within its target range of 4.5%±1% in 2012 and 2013. 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 also continues to improve, reflected by credit growth in July 2012 that reached 25.2% (yoy). Investment credit recorded a high growth of 29.6% (yoy), and is expected to boost Indonesia s economic capacity. Meanwhile, working capital credit and consumption credit grew by 27.3% (yoy) and 18.9% (yoy), respectively. Going forward, Board of Governors will continue to attain external balance in a gradual manner and remain focus on containing 4

Graph 2.1 Consumer Confidence Index Graph 2.2 Future Employment 6 months ahead Index Graph 2.3 Retail Sales Index inflation. In this regard, Bank Indonesia will continue to strengthen the existing monetary and macroprudential policy mix, including measures to manage domestic demand. BI rate policy response is continued to be directed to control fundamental inflationary pressure, in line with macroeconomic outlook. In addition, coordination with the government to reduce pressure on external balance will also be strengthened. II. THE ECONOMY AND MONETARY POLICY Economic Growth in Indonesia In Q3 2012, the Indonesian economy is predicted to maintain high growth amid uncertain conditions in the global economy. Like before, economic growth will still be dominated by household consumption and investment. Rising consumer confidence and sustained public purchasing power have kept household consumption on a robust growth track. Alongside this, the conducive business climate together with strong optimism has spurred growth in investment. Exports now show signs of potential for improved growth following upward revisions in the economic outlook for several major trading partners. Imports are predicted to maintain vigorous growth in keeping with vibrant domestic demand. Brisk growth in household consumption is again predicted for Q3 2012 in line with sustained public purchasing power and buoyant consumer confidence. The robust condition of public purchasing power is supported by subdued inflation, a downward trend in deposit and lending rates and potential for improvement in export proceeds. The continued strength of consumer confidence is reflected in the upbeat consumer confidence index, collected from various surveys (Graph 2.1). In the BI Consumer Survey (SK BI) for August 2012, the current income and employment index as well as the future employment and incomes index both charted gains (Graph 2.2), indicating potential for continued buoyant performance in household consumption. Another supporting indicator of consumption is the retail sales index. During July 2012, this index climbed in response to the seasonal factor of the Eid-ul-Fitr festivities (Graph 2.3). However, car sales slowed somewhat in August, despite maintaining high growth. This slowdown is thought to have resulted from the recent introduction of a loan to value (LTV) policy for car loans. 5

The persistently high levels of consumption have not resulted in a significant impact on inflation. This is also supported by fairly robust projections of investment growth in the coming quarter. A brisk pace of investment growth is forecasted for Q3 2012 in view of buoyant consumption and potential for recovery in exports. The more conducive business climate and high business optimism have also provided a boost to investment growth. Rising optimism is reflected in the upturn in the business tendency index and predictions of sustained high levels of investment during the second half of 2012 (Graphs 2.4 and 2.5). Investment growth has also benefited from increases in government capital expenditures. Several leading indicators for investment, such as the high cement sales and imports of construction materials, provide confirmation for potentially strong investment growth going forward. Regarding financing, the progressive decline in loan interest rates has provided an added boost to bank lending to productive activities in the real sector. The easing of deposit rates (the real 1-month time deposit rate) will also provide a boost to investment activity. Although performance remains weak, exports show potential for more robust growth in Q3 2012 in line with potential for renewed improvement in the economic performance in Indonesia s leading trading partners. The upward revision in the outlook for US and Japanese household consumption offers support for strengthening exports. Alongside this, commodity prices recorded incremental gains at the beginning of Q3 2012. In response to these developments, non-oil and gas exports have potential to bounce back with positive growth (Graph 2.6). Growth in non-oil and gas exports is led by performance in agricultural and manufactured goods. However, mining products including coal, copper and nickel are forecasted to chart negative growth. These mining exports have potential to diminish in the short-term in response to a more restrictive policy on mineral exports. Besides policy, an added factor in the decline in coal exports is weakening demand from China and India. Imports are forecasted to maintain high growth during the present quarter, in line with vibrant domestic demand and potential for recovery in exports. This forecast is based on the trend in imports until July 2012, in which growth continues at a brisk pace despite a modest dip (Graph 2.7). Raw material imports, which account for the largest share of the total (about 66%), are set to rise in tandem with growth in manufactured exports. However, growth in imports of transportation Graph 2.4 Business Tendency Index - BPS Graph 2.5 Investment Value Graph 2.6 Real Export of Oil & Gas and Non Oil & Gas 6

Graph 2.7 Real Import of Oil & Gas and Non Oil & Gas equipment and passenger vehicles has tapered off due to the slackening pace of car sales on the domestic market. In other developments, imports of goods excluding transportation equipment are comparatively stable, bolstered by steady expansion in imports of durable consumer goods in response to vibrant demand for these goods. At the sectoral level, predictions again point to buoyant growth in Q3 2012, driven by the main economic sectors of manufacturing; trade, hotels and restaurants; and transport and communications. The sustained pace of domestic demand and potential for recovery in exports are the key factors driving growth in the manufacturing sector. The potential for improvement in domestic and external demand will boost new orders, which in turn will spur growth in production. The trade, hotels and restaurants sector is forecasted to grow at a brisk pace, bolstered by vibrant domestic activity and heavy imports. Alongside this, the transport and communications sector is predicted to maintain stable growth at a fairly high level in tandem with positive performance in the aviations and communications subsectors. Even so, the risk of deterioration in European economies and the slow pace of recovery in China may impact performance in tradable sectors, most importantly manufacturing, agriculture and mining. Indonesia Balance of Payments In Q3 2012, Indonesia s balance of payments is forecasted to improve over the preceding quarter. Although the current account remains in deficit, the capital and financial account is projected to chart an increased surplus, bolstered by high levels of portfolio capital inflows. This is expected to bring the balance of payments for the present quarter into surplus. The current account deficit is predicted to carry forward into Q3 2012. Despite potential for improvement, exports remain susceptible to downturns related to the flagging performance of major trading partners, such as Europe, the United States and Japan, despite initial signs of improvement. Even so, the upswing in global commodity prices towards the end of the quarter, depreciating trend in the rupiah and growing diversification of Indonesia s export destinations helped to counter the pressures bearing down on Indonesia s export performance. Imports are predicted to ease in part due to the depreciating trend in the rupiah that 7

is driving up prices for imported goods. On the other hand, a reduction in the services deficit is expected as a result of more restrained imports and the consequent savings in costs of freight on imported goods. However, the income deficit is set to remain high due to the sizeable income (dividends, interest and profit margins) payable to foreign investors. In other developments, inflows from worker remittances are forecasted to decline after reaching a peak during the Lebaran festive season. In Q3 2012, capital and financial account remains the key driver supporting the balance of payments performance. During this quarter, the capital and financial account is forecasted to book an increased surplus bolstered by sustained levels of foreign capital inflows for portfolio investments. Like before, the overall structure of capital inflows during the quarter will be dominated by foreign direct investment (FDI). Foreign investors again booked a net purchase during August 2012, with foreign investors expanding their holdings of government debt instruments (including sharia government bonds) and Bank Indonesia Certificates (SBIs). On the stock market, foreign investors also recorded a net purchase. However, the high level of uncertainty that lingers over global financial markets and the influence of this on the performance of economic fundamentals has potential to erode the share of foreign ownership in rupiah instruments. Graph 2.8 Trade Balance These developments helped to maintain a comfortable level of international reserves. At the end of August 2012, international reserves stood at 108.99 billion US dollars, equivalent to 5.9 months of imports and servicing of official external debt. I n f l a t i o n While CPI inflation surged in August 2012 on the seasonal factor of the Lebaran religious festivities, inflation fundamentals remained relatively under control. CPI inflation in August reached 0.95% (mtm) or 4.58% (yoy), increase from 0.70% (mtm) and 4.56% (yoy) in the preceding month (Graph 2.9). Inflationary pressure escalated primarily in the food stuffs category, due to the seasonal increase in demand during the Lebaran festive period and the ongoing rise in global food commodity prices (corn, wheat and soy beans). Also contributing to heightened inflation was seasonal inflation in non-food items, such as transport fares for the period of the Lebaran festivities and educational expenses, Graph 2.9 Inflation 8

Graph 2.10 Volatile Food Inflation Table 2.1 Volatile Food Inflation Contributors Commodities Inflation Tempe Tofu Beef Long Bean Kangkung Birds Eye Chili Deflation Pb.Chicken Egg Pb.Chicken Meat Red Chili Shallot Source : BPS Inflation (%, mtm) August 2012 Contribution (%, mtm) 8.54 0.05 9.08 0.05 4.90 0.04 11.22 0.02 7.67 0.02 8.29 0.01-5.51 0.05-2.12 0.04-7.25 0.03-6.00 0.02 Graph 2.11 Core Inflation: Food and Non Food mainly universities admission fees for the new academic year. On the fundamentals side, inflationary pressure reflected in core inflation remains well under control. Supporting this was steady improvement in inflation expectations, adequate supply side response and prudently managed depreciation in the rupiah exchange rate. Similarly, administered prices inflation remained low in the absence of government price policies on strategic goods and services. The volatile foods category remained relatively high due to the seasonal factor of the Eid-ul-Fitr festivities, sustained increases in global food prices and lack of adequate supply of some commodities. During August 2012, volatile foods inflation reached 1.46% (mtm) down from the 1.82% (mtm) recorded one month earlier albeit still at a high level (Graph 2.10). In annual terms, volatile foods inflation climbed to 7.76% (yoy), compared to 7.27% (yoy) in the preceding month. The most important contribution to food inflation came from fresh fish (0.1%), due to high demand during the period under review (Table 2.1). Consumers are thought to have switched to fish in response to soaring beef prices triggered by diminishing supply. High demand amid tight supply also boosted prices for a number of fruit and vegetable commodities. Alongside this, instability in global food prices, led by soybeans and lasting for several periods, had impacted domestic downstream commodities such as soybean cake and tofu. These two items contributed 0.05% (mtm) to inflation during the month under review (Table 2.1). On the contrary, there were price corrections in various food commodities such as eggs, chicken meat, red chilli peppers and shallots in keeping with the plentiful supply of these items, which helped contain volatile foods inflation. Although well under control in annual terms, core inflation recorded a modest rise in monthly figures due to external shocks accompanied by higher than expected increases in food prices in response to seasonal factors. Core inflation during August 2012 reached 0.97% (mtm) or 4.16% (yoy). Core food inflation and core non-food inflation excluding gold were up in comparison to the previous month, but remained mild (Graph 2.11). The continued shocks in global food prices had spurred volatile foods inflation, which in turn had produced knock-on effects on processed foods (the food category of core inflation). 9

In addition, the seasonal factors of increases in transport fares (Graph 2.12) and educational services, both were relatively high, and rising gold prices contributed to higher levels of non-food core inflation. Intercity fares went up by more than double the average increase of 6.5% over the past five years. Similar behaviour was recorded for inflation in education, driven mainly by steep increases in university tuition for the new academic year. In other developments, the steady upward trend in property prices had not produced an impact on overall inflation, and remained consistent with developments in fundamentals. Significant prices increases in recent months were visible in commercial property, while the rate of price increases for residential properties remained moderate. Nevertheless, the surge in core inflation pressure during the month is expected to be temporary, and the fundamentals of core inflation remained well under control. Supporting this was steady improvement in inflation expectations, reflected in the Consensus Forecast for August 2012 with CPI inflation in 2012 and 2013 expected to drop to 4.5% and 5.10% (Graph 2.13), in addition to inflation expectations on the financial market and Retail Survey and Consumer Survey (Graph 2.14). In other developments, the adequacy of supply side response to increasing demand was reflected in the levels of production capacity utilisation with capacity utilisation in manufacturing at about 71%. The rupiah exchange rate, another key factor, continued on a depreciating trend. However, this movement was prudently managed to keep inflation at a moderate level. Inflation in administered prices remained low in August 2012, despite a modest rise spurred by seasonal factors and the effect of increases in global oil prices. Administered prices inflation reached 0.35% (mtm) or 2.78% (yoy), having climbed from previous month s level of 0.03% (mtm) and 2.71% (yoy). This surge in inflation was driven by fare increases for urban dwellers returning to their home towns and villages over the Lebaran season, mainly for rail transportation, and the impact of rising global oil prices on energy prices (non-subsidised fuels). The inflationary contribution from gasoline reached 0.02% (mtm). Rupiah Exchange Rate Pressure continued to bear down on the rupiah during August 2012. The weakening in the rupiah was triggered by slowing export growth amid continued brisk growth in imports and the precarious nature Graph 2.12 Transport Fares Inflation Graph 2.13 Consensus Forecast Inflation Expectation Graph 2.14 Consumers Inflation Expectation Graph 2.15 Rupiah Exchange Rate 10

Graph 2.16 CDS of Main Europe Countries Graph 2.17 Indonesia s CDS & Yield Spread Graph 2.18 Swap Premium Graph 2.19 UIP (Uncovered Interest Parity) of global economic conditions. The persistently high uncertainties over the outlook for resolution of the crisis in Europe, the shaky recovery in the US and moderating trend in China s economic growth, all combined to put pressure on the rupiah, which had maintained gradual depreciation. The average value of the rupiah slipped during the month by 0.63% (mtm) to Rp 9,493 to the US dollar from Rp 9,433 to the US dollar. Point to point (ptp), the rupiah depreciated 0.94% to Rp 9,535 to the US dollar from the previous Rp 9,445 to the US dollar. Nevertheless, this downward movement in the rupiah was accompanied by reduced volatility. Key to this was Bank Indonesia s monitoring on developments in the forex market and actions to keep movement in the rupiah exchange rate aligned to the currency s fundamentals. Despite some respite early in the month, fears over the speed of global economic recovery again brought pressure to bear on the rupiah. The cycle of mounting investor expectations followed by disappointments over plans by the US Fed and ECB for additional stimulus measures to jumpstart flagging economies had put added pressure on global financial markets and exchange rate movements. However, strong indications of plans by the ECB and Fed to launch further stimulus policies imbued global financial markets with renewed optimism during August 2012. This in turn brought down the level of risks from external factors, as reflected in the decline in Credit Default Swaps (CDS) for major European economies (Graph 2.16). Perceptions of domestic risk were again stable, in keeping with the moderation of external risks. Indicating this was the comparatively stable movement in the CDS and swap premia (Graphs 2.17 and 2.18). In addition, the competitiveness of yields on rupiah-denominated instruments compared to neighbouring countries again provided attraction for investors. Reflecting this was Uncovered Interest Parity (UIP), which remained ahead of several other countries in the region (Graph 2.19). Even after factoring in the risk premium (Covered Interest Parity/CIP), rupiah denominated investments were still more competitive than those of Korea, Malaysia and the Philippines. 11

Financial Sector Developments International Financial Markets International financial markets showed improvement during the month under review, despite continued fluctuation. These gains were consistent with positive expectations on policy actions to be taken by the ECB and the Quantitative Easing III policy to be launched by the US Federal Reserve. This positive sentiment had stirred upbeat investor perceptions of risk and prompted gains in some Asian currencies against the US dollar. However, world oil prices were on the rise, fuelled by expectations of an economic stimulus in the US, China and Europe in response to the economic slowdown. Also contributing to increasing oil prices were the heightened geopolitical tensions in the Middle East. Despite this, international prices for other non-oil and gas commodities were in decline. Global inflationary pressures had similarly eased as a result of the slowing activity in the world economy. Some advanced economies had responded to the softening pressure in global inflation by retaining accommodative monetary policies. Rate cuts were also announced by some emerging markets, including Brazil and Colombia, in response to weakening domestic economic activity and the global outlook. Interest Rate Interest rates moved upwards on the rupiah interbank market in tandem with an increase in the deposit facility rate. The Bank Indonesia decision to raise the deposit facility rate, or the lower limit of the overnight interbank rate corridor, by 25 bps during August 2012 had led to a 15 bps increase in the overnight interbank rates to 4.16%. Interbank rates in longer tenors also moved upwards in tandem with the rise in overnight rates. Longer tenor interbank rates moved within the range of 4.13%-4.65%. In addition, interbank market transaction volume in the overnight tenor also widened to cope with high liquidity demand during the Ramadan fasting month. Concerning risks, perceptions on the interbank money market remain subdued. Perceptions of risk on the interbank market during August 12

2012, reflected in the spread between high and low overnight interbank rates, was little changed from the preceding month at 21 bps. These risk perceptions were largely stable despite a brief surge following a rate increase in the overnight deposit facility. On the monetary operations side, Bank Indonesia maintained consistency in its measures to strengthen monetary operations. During August 2012, these actions focused on extension of the maturity profile and optimisation of the reverse repo instrument for government debt securities. In August 2012, average monetary instrument rates climbed by 13 bps over the preceding month. August 2012 saw considerable absorption of funds by the Forex Term Deposit facility. The size of Forex Term Deposit diminished the volume of interbank forex trading on the domestic and foreign markets. Although forex volume on the interbank market was down, interest rates on the interbank forex market were relatively stable. Weighted average interest rates generated in auctions were largely stable in August 2012 compared to the previous month, except for a 1 bps drop in the 14-day tenor. Bank interest rates maintained stable movement, reflected in both deposit and lending rates. At 12.37%, the average rate for lending differed a little in July 2012 compared to the previous month. Rates for working capital credit and investment credit recorded further decline, although easing only by a thin 1 bps and 4 bps to 11.78% and 11.42%. Consumption credit, on the other hand, edged upwards 2 bps to 13.92%. As concerns deposit rates, the average 1-month deposit rate remained stable in July 2012 at 5.5% (Table 2.2 and Graph 2.20). Table 2.2 The Development of Interest Rates Interest Rate (%) BI Rate Deposit Guarantee 1-month Deposit (Weighted Average) Base Lending Rate Working Capital Credit Investment Credit Consumption Credit 2011 2012 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul 6.75 6.75 6.75 6.50 6.00 6.00 6.00 5.75 5.75 5.75 5.75 5.75 5.75 7.25 7.25 7.25 7.00 6.75 6.75 6.50 6.00 5.50 5.50 5.50 5.50 5.50 6.86 6.80 6.83 6.75 6.56 6.35 6.26 5.97 5.66 5.42 5.35 5.39 5.39 12.08 12.17 12.07 12.05 11.94 11.88 11.92 11.24 11.12 n.a n.a n.a n.a 12.55 12.50 12.39 12.36 12.31 12.16 12.14 12.11 12.01 11.86 11.78 11.79 11.78 12.11 12.10 12.06 12.02 11.97 12.04 11.73 11.69 11.62 11.56 11.51 11.46 11.42 14.32 14.30 14.25 14.02 14.18 14.15 14.14 14.15 14.13 14.10 14.03 13.90 13.92 13

Also confirming the downward movement in loan interest rates was the continued decline in the base lending rate (BLR). The BLR eased across all segments except for home mortgages, where the rate was unchanged. In July 2012, the BLR for the corporate and retail segments registered 9.77% and 11.07%, having eased from the previous month s levels of 9.81% and 11.08%. Similarly, the BLR for non-mortgage lending edged lower to 10.87% from 10.99% in the preceding month. The BLR for mortgage lending was unchanged from one month earlier at 10.50%. Credit Credit expansion remained strong in keeping with the buoyant pace of economic activity. In July 2012, credit growth (excluding credit channelling) reached 25.2% (yoy), down slightly from the previous month s level of 25.7% (yoy) (Graph 2.21). In disaggregation by category of use, investment credit recorded the most vigorous expansion at 29.6% (yoy), also outpacing the previous month s growth of 29.1% (yoy). On the other hand, working capital credit and consumption credit slowed in comparison to one month earlier, with expansion easing from 28.2% (yoy) and 19.6% (yoy) to 27.3% (yoy) and 18.9% (yoy) (Graph 2.22). Disaggregated by sector, credit expansion was driven largely by credit to the trade, manufacturing and business services sectors. In July 2012, trade accounted for the largest share of lending at 20%, followed by manufacturing with 16% and business services with 11%. These sectors charted brisk rates of credit expansion at 39.4%, 29.9% and 28.7% (yoy). Similarly, lending growth forged ahead in the construction sector and transportation sector at 31% and 30.4% (yoy). The agriculture sector, which represented only 5% of total credit, had also undergone rapid expansion since the beginning of 2012, reaching 40% (yoy) in July. In analysis by currency, growth in foreign currency credit slowed in contrast to the steady expansion in rupiah-denominated lending. During July 2012, foreign currency lending growth reached 27.9% (yoy), down slightly from 29.3 % (yoy) in the previous month, while expansion in rupiah lending reached 24.6% (yoy) compared to 25.1% (yoy) one month before. This was reportedly the effect of adverse external conditions. However, this slowdown was expected to have only limited impact on total lending growth. Graph 2.20 Development of Various Interest Rates Graph 2.21 BI Rate, Credit, and Deposit Graph 2.22 Credit by Usage 14

Graph 2.23 Base Money Concerning credit supply, there was tapering growth in bank deposits, from which lending is funded. Growth in deposits reached 20.2% (yoy) in July 2012, a slight reduction from the previous quarter s level at 21.2% (yoy). This was consistent with the slackening growth in time deposits. Indications suggest this was related to transfers of customer deposits to the financial market, reflected in the modest rise in demand deposit transactions. A breakdown by currency shows that rupiah deposits declined in proportion to total bank deposits, while foreign currency deposits expanded in share. In disaggregation by component, growth in foreign currency funding was bolstered by accelerated expansion in foreign currency-denominated time deposits. In related developments, bank foreign assets (FA) moved in tandem with the difference between foreign currency depositor funds and credit. Graph 2.24 Money Supply Money Supply Base money grew at a slower rate. During August 2012, growth in base money fell significantly to 5.2% (yoy) from the July level of 14.4% (yoy) (Graph 2.23). This decline resulted mainly from a similarly significant contraction in cash outside banks. Growth in currency outside banks plunged to -0.8% (yoy), representing a contraction following the preceding month s growth that reached 17.9% (yoy). This significant decline was explained by differences in private spending patterns during the Eid-ul-Fitr festivities and the Ramadan fasting month. In 2011, private spending was concentrated in the month of August, while in 2012, the surge in private spending shifted to July and mid-august 2012. This resulted in a significant difference in the calculation base for August, which dropped from a very high level in 2011 to one of less significance in 2012 in keeping with the shifting of the religious festive season. During July 2012, 1 growth in M1 and M2 reached 20.7% (yoy) and 19.1% (yoy), a decline in comparison to growth in the preceding month at 22.5% (yoy) and 20.9% (yoy) (Graph 2.24). The downturn in M1 growth was linked primarily to the diminished contribution of currency outside banks during July 2012. However, the surge in private spending during the fasting month had less significant effect with the Eid-ul-Fitr festivities falling in mid-august 2012. M2 growth was down in keeping with growth in M1 and time deposits. Concerning factors, M2 growth was bolstered by a 1 Data from Commercial Bank Reports. 15

reduction in the contribution of Net Domestic Assets (NDA), reflected in the diminished contribution of NCG following 13th month salary payments. The Stock Market The stock market sustained correction during the month under review. The Jakarta Composite Index (JCI) slipped 2.0% from the previous month to 4,060.33. The downturn in domestic stock market performance came mainly in response to negative market sentiment over the condition of Indonesia s balance of payments, which recorded a deficit in Q2 2012. Added to this, the fluctuation that continues unabated in global financial markets has borne down on stock market performance in other emerging market economies, with market correction reaching 0.8% (mtm) (Graph 2.25). Foreign investor exposure on the domestic stock market was again positive. Amid the pressures sustained by the JCI, foreign investor holdings on Indonesia s stock market showed positive albeit limited movement. During August 2012, foreigners booked a net purchase of 0.41 trillion rupiah. This exposure was down considerably from the preceding month, when the net purchase reached 4.59 trillion rupiah. The declining fortunes of the JCI were reflected across most sectoral indices, with the exception of infrastructure and consumption. The basic industry sector tumbled 5.7%, followed by agriculture with losses of 5.1%. Other sectors saw prices drop in the range 2.0%-4.8%. The mining sector has come under pressure from falling commodity prices amid excess supply of coal and shrinking demand from China (Graph 2.26). Graph 2.25 JCI and Global Stock Index Graph 2.26 Sectoral Index Government Bonds Market Performance on the government debt market was positive in line with the domestic stock market. In August 2012, overall yield on government debt securities climbed 46 bps over the preceding month to 6.12%. Yield on Indonesian government securities in short, medium and long tenors move up by 46 bps, 50 bps and 39 bps to 5.63%, 6.12% and 6.77%. Similarly, yields on 10-year bonds mounted by 55 bps to 6.26% from the July 2012 level of 5.71% (Graphs 2.27 and 2.28). The weakening on the government bonds market was explained by both domestic and external factors. These domestic factors were spurred in part by the current account deficit that has weakened the exchange rate. Graph 2.27 Government Bond Yield and BI Rate 16

Graph 2.28 Monthly Changes in Government Bond Yield External factors prompting the rise in yield included the deteriorating outlook in forecasts for China s trade, which had borne down on foreign investor interest in domestic transactions. The mounting uncertainty in the global economy and weakening in the exchange rate prompted net selling by foreign investors on the Indonesian government debt market. Foreigners booked a net sale of 1.4 trillion rupiah in August 2012 following a net purchase in the preceding month that reached 10.1 trillion rupiah. This offloading by foreign investors was recorded across all short, medium and long term government debt securities in line with growing uncertainties on global financial markets and the depreciation in the rupiah. Mutual Funds Market Mutual funds booked gains during July 2012. Overall performance was reflected in the 1.5% (mtm) growth in NAV compared to June 2012. In the period ending July 2012, mutual funds NAV advanced on the performance of money market and fixed income funds. MTM 1 2 3 4 2011 5 6 7 8 9 10 11 12 2012 1 2 3 4 5 6 7 July 2012 - December 2011 Stock Money Market Mixed Table 2.3 Developments of Mutual Fund Fixed Income Protected Index ETF- Stock ETF-Fixed Income Fund Sharia 1.8% 5.9% 3.9% -3.1% -1.9% 42.8% -24.1% -6.5% -13.8% -0.1% 3.7% -1.0% 2.7% -0.9% 1.1% 0.5% 1.4% -0.4% 0.9% 1.7% 8.0% -2.5% 6.0% 0.9% 0.5% 9.0% 7.2% 5.8% 3.6% 3.7% 3.6% 2.5% 0.6% 0.8% 1.2% 3.9% 3.3% 4.2% 1.0% 1.9% 3.9% 1.1% 0.3% -2.1% 1.3% -3.3% 0.4% 1.5% 0.1% 1.5% 1.8% -4.6% 5.3% -1.3% -0.6% 5.3% 1.8% 0.5% 0.0% 0.7% 0.1% 9.9% -5.5% 4.9% -0.3% -26.9% 5.9% 4.1% -0.4% 0.4% 4.0% -2.1% 63.7% 33.8% -1.0% 6.8% -7.3% 2.8% -3.4% 14.7% -4.8% -0.4% -40.5% -26.1% -2.1% -3.9% -7.9% 2.6% -4.1% -14.6% 9.6% -0.8% 6.8% 3.0% 1.0% 9.6% -2.7% 8.8% 3.9% 5.1% -1.7% 9.6% -1.6% 2.1% 1.1% -2.6% 30.8% 2.4% 0.1% 0.3% 2.7% 12.9% 5.5% 6.4% -1.0% 2.2% 8.1% 6.6% 2.0% 3.2% -5.1% 3.7% -0.9% 9.9% 0.8% 1.8% -2.8% 5.7% 2.5% 0.2% 2.2% 8.5% 62.5% 33.5% -1.7% 3.8% 79.0% 7.5% 4.4% 15.3% -1.5% 7.7% -1.2% 0.1% -1.9% 12.6% -11.4% -1.0% -1.2% -0.6% 0.3% 6.3% -32.9% -20.9% 1.7% 15.3% -10.3% 88.7% 6.1% -9.2% -0.7% -5.1% -6.8% -6.5% 0.5% -7.8% -0.6% -2.3% -9.4% -2.9% 6.7% -7.3% 4.7% 1.5% 1.3% 1.9% 36.5% 2.3% 1.9% 3.1% 1.7% 9.7% -4.1% 3.3% 0.3% 2.6% 22.1% -0.3% 5.7% 1.5% 3.3% 24.4% -0.1% 14.0% 0.8% 32.2% 129.1% 111.6% 9.5% 5.9% Total 17

Condition of the Banking System Domestic banking performance was positive during the month under review, amid adverse external conditions. Banking capital was reflected in the comfortably safe level of the capital adequacy ratio (CAR) for June 2012 in the 17%-18% range. Banking intermediation or credit maintained brisk expansion in July 2012 at 25.2% (yoy). Non-performing loans (NPLs) excluding channelling credit showed modest decline from the previous month with gross and net ratios at 2.2% and 0.6%. Concerning bank profitability, the Return on Assets (ROA) indicator was down slightly at 3.1% (Table 2.2). Main Indicators Total Asset (T Rp) Third Party Funds (T Rp) Credit * (T Rp) LDR* (%) NPLs Gross* (%) NPLs Net * (%) CAR (%) NIM (%) ROA (%) Table 2.4 Banking Indicators 2011 2012 Jun Sep Dec Jan Feb Mar Apr May Jun Jul 3,195.1 3,371.5 3,651.8 3,598.7 3,628.1 3,708.7 3,745.1 3,827.5 3,891.1 3,902.5 2,438.0 2,544.9 2,784.1 2,742.3 2,763.9 2,826.0 2,841.4 2,909.0 2,955.8 2,961.4 1,950.7 2,079.3 2,199.1 2,160.2 2,203.0 2,266.2 2,317.2 2,386.1 2,452.9 2,470.1 80.0 81.7 79.0 78.8 79.7 80.2 81.6 82.0 83.0 83.4 2.7 2.7 2.2 2.4 2.3 2.3 2.3 2.3 2.2 2.2 0.6 0.6 0.4 0.5 1.0 0.6 0.6 0.6 0.6 0.6 17.0 16.7 16.1 18.4 18.5 18.3 18.0 17.9 17.5 17.2 0.5 0.5 0.5 0.5 0.4 0.5 0.5 0.5 0.5 0.5 3.1 3.1 3.0 3.7 3.4 3.1 3.0 3.0 3.2 3.1 * without channeling 18

III. MONETARY POLICY RESPONSE In the Board of Governors Meeting convened on September 13 th, 2012 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 2013. Bank Indonesia sees that recent developments in the external balance have pointed toward improved current account deficit in Q3 2012, as expected earlier. However, Bank Indonesia remains vigilant on some risks, mainly worsening global economic growth, that may put pressure on the current account balance. 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. Bank Indonesia will also continue to strengthen coordination with the Government in managing domestic demand and improving current account deficit, so that it remains supportive to the effort to maintain macroeconomic stability and sustainable economic growth. Going forward, Bank Indonesia will continue to attain external balance in a gradual manner and remain focus on containing inflation. In this regard, Bank Indonesia will continue to strengthen the existing monetary and macroprudential policy mix, including measures to manage domestic demand. BI rate policy response is continued to be directed to control fundamental inflationary pressure, in line with macroeconomic outlook. In addition, coordination with the government to reduce pressure on external balance will also be strengthened. 19

Latest Indicators FINANCIAL SECTOR INTEREST RATE & STOCK One month SBI 9 1) One month Deposit 1 2) Three month Deposit 3 2) One week JIBOR 2) JCI Indices 3) MONETARY AGGREGATES (billion IDR) Base Money M1(C+D) Currency (C) Demand Deposit (D) Broad Money (M2 = C+D+T+S) Quasi Money (T) Quasi Money (Rupiah) Time Deposit Saving Deposit (Total) Foreign Currency Time Deposit Foreign Currency Demand Deposits Securities Other Than Shares (S) Broad Money - IDR Claims on Other Sectors Claims on Business Sectors 2011 2012 Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug 6.78 6.28 5.77 5.22 5.04 4.88 3.82 3.83 3.93 4.24 4.32 4.46-6.80 6.83 6.75 6.56 6.35 6.26 5.97 5.66 5.42 5.35 5.39 5.39-6.90 7.05 7.11 6.99 6.81 6.68 6.52 6.31 6.00 5.89 5.76 5.67-6.11 5.61 5.30 4.87 4.67 4.43 3.93 3.81 3.81 3.83 4.10 4.17-3,842 3,549 3,791 3,715 3,822 3,942 3,985 4,122 4,181 3,833 3,956 4,142 4,060 625,440 565,149 566,282 568,783 613,488 594,078 578,964 586,034 596,592 604,979 627,359 634,993-662,806 656,096 665,000 667,587 722,991 696,323 683,253 714,258 720,924 749,450 779,416 771,792-324,725 279,224 281,341 279,066 307,760 286,242 280,103 287,046 290,861 294,768 314,670 315,375-338,081 376,872 383,659 388,521 415,231 410,082 403,150 427,212 430,064 454,682 464,746 456,417-2,621,346 2,643,331 2,677,787 2,729,538 2,877,220 2,854,978 2,849,796 2,911,920 2,927,259 2,992,057 3,050,355 3,054,530-1,943,770 1,973,573 2,000,315 2,047,205 2,139,840 2,145,246 2,150,808 2,182,891 2,190,885 2,227,527 2,254,329 2,269,805-1,683,246 1,703,621 1,725,881 1,753,123 1,846,002 1,842,815 1,848,124 1,875,257 1,887,124 1,900,824 1,915,625 1,926,042-923,986 933,931 953,045 956,480 981,445 993,655 998,643 1,022,038 1,020,792 1,027,151 1,016,060 1,017,021-759,260 769,690 772,836 796,643 864,557 849,160 849,481 853,219 866,332 873,673 899,565 909,020-126,436 130,714 129,685 135,589 140,518 141,171 145,623 148,649 148,486 159,186 164,762 170,722-134,088 139,238 144,749 158,494 153,320 161,260 157,061 158,984 155,275 167,516 173,942 173,041-14,770 13,663 12,472 14,746 14,388 13,409 15,735 14,771 15,450 15,081 16,610 12,932-2,480,140 2,498,955 2,535,630 2,579,204 2,722,313 2,700,399 2,688,438 2,748,499 2,763,324 2,817,790 2,868,983 2,870,876-2,205,555 2,249,588 2,283,424 2,337,812 2,383,823 2,374,862 2,403,464 2,464,483 2,519,946 2,586,786 2,653,871 2,667,448-1,946,476 1,989,000 2,024,718 2,068,037 2,118,376 2,106,449 2,138,727 2,189,236 2,230,960 2,289,504 2,361,812 2,377,917 - P R I C E S CPI - monthly (%, mtm) CPI - 1 year (%, yoy) 0.93 0.27-0.12 0.34 0.57 0.76 0.05 0.07 0.21 0.07 0.62 0.70 0.95 4.79 4.61 4.42 4.15 3.79 3.65 3.56 3.97 4.50 4.45 4.53 4.56 4.58 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 8,578 8,823 8,835 9,170 9,068 9,000 9,085 9,180 9,190 9,565 9,480 9,485 9,560 15,021 13,558 14,187 13,507 13,460 12,414 12,594 13,565 12,742 13,627 12,337 - - 11,346 11,440 12,067 12,130 12,632 11,715 11,894 12,296 12,660 13,382 13,150 - - 100.79 93.80 89.68 89.08 88.57 88.84 87.74 89.93 94.46 92.55 85.58 - - 2011 2012 Q. III Q. IV* Q. I Q. II 6.5 6.5 6.3 6.4 4.6 4.6 4.9 5.0 7.1 11.5 10.0 12.3 16.7-8.7 164.1 108.7 17.8 7.9 7.8 1.9 14.0 10.1 8.0 10.9 * Provisional Figures ** Using 2000 base year (BPS-Statistic Indonesia) *** Bank Indonesia forecasts the numbers 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) 20