Managing Global Shocks: The Case of Indonesia Dr. Hartadi A. Sarwono Deputy Governor IIF Asian Regional Economic Forum Singapore, March 5, 2009
Outline 2 1. Crisis highlights 2. Macroconomic Condition and Outlook - Economic Growth - Balance of Payments - Exchange Rate - Inflation 3. Banking Sector
Crisis Highlight 3 The current global financial debacle has a destabilizing impact all over the world. The crisis has continued to remain unfolding with its full impacts difficult to assess. In Indonesia, the exogenous shock has led to the pressure stemming mainly from the reversal of capital outflows as foreign investors began to unwind their position to cover their loss of investments and partly reduce their exposure. IMF/WB s World Economic Outlook has been continued revising global outlook down-ward: Global Economic Growth from 1.6% to 0.5% World Trade Volume from 1.5% to -3.0%
The Indonesian economy had generally performed well in the first three quarters of 2008. However, the economic landscape was subsequently reshaped by the intensifying downturn in the global financial market on the last quarter 4 Gross Domestic Product (1) Domestic demand is still the main source of growth in 2008 supported by the growth of consumption 5.9% and investment 11.7%. Exports declined significantly in the 4 th quarter of 2008.
The economy still relies on the non-tradable sectors. The manufacturing sector declined. 5 Gross Domestic Product (2)
6 Slower Growth in 2009 The challenge is the potential slowdown in external sector. Export is expected to decline due to slowdown of both global demand and commodity price. Import will also drop as domestic economic activities decline. Bank Indonesia estimates the economic growth will slow in 2009 to around 4.0% as compare to the previous estimate of around 4.0%-5.0%. The source of growth will come mainly from domestic demand.
Balance of Payments remained sound in 2008. Slowing global demand, increasing import, and investors risk aversion gradually put pressure on the current account as well as financial account. 7
Trade and Current Account Balance in 2008 8 The performance of overall BoP in 2008 remain sound 1 st H 2008 benefited from global commodity price increased and buoyant domestic economic activities Pushing Non-oil/gas Exports growth to 22.4% in Q3-08 and Imports to 44.7% in Q3-08 However, Exports declined significantly to 0.2% in Q4-08 and Imports dropped to 28.6% in Q4-08. This showed that the impact of global economy slow-down to exports is deeper than the impact of domestic economic activities to imports. Current Account turned from $2.6 bio surplus in Q1-08 to deficit in the rest of 2008 bringing overall surplus albeit small by end of 2008 around $600.0 mio.
The impact of the global economy slow-down is much more severe to the economy through export channel, as compare to the impact of the slow-down of domestic economy through import channel. 9 50 45 40 35 30 25 20 15 10 5 0 % Exports (y.o.y) Imports (y.o.y) 44.7 22.4 28.6 0.2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2007 2008 Exports vs Imports Growth
Capital outflows signified at the 4 th quarter of 2008. Reflected on a drop in foreign reserves. 10 USD million 14,000 Central Bank Certificates Official Foreign Reserves (rhs) Gov't Securities USD billion 70 12,000 60 10,000 50 8,000 40 6,000 30 4,000 20 2,000 10-0 Foreign Holding on Domestic Assets & Foreign Reserves
11 Capital & Financial Account in 2008 Capital Account remained surplus in Q3-08 of $515 mio down from $2.6 bio surplus in Q2-08 Capital reversal occurred in Q4-08 due to strong selling of foreign owned SBI and government bonds: SBI dropped from $6.7 bio in Q3-08 to $800.0 mio in Q4-08 Bonds declined from $11 bio in Q3-08 to $8.0 bio in Q4-08 Foreign Exchange Reserves quickly down to $51.6 bio in Q4-8 from around $60.0 bio in Q3-08
Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Des Jan 06/Feb 13/Feb 23/Feb 27/Feb Currently, foreign reserves stabilizes at US 50-51 billion and it covers 5.4 months of imports & official debt repayment 12 USD billion 70 60 50 40 30 20 10 Foreign Reserves (lhs) Month of Imports & Official Debt Repayment Month 6 5 4 3 2 1 - - 2008 2009 Foreign Reserves in terms of Month of Imports
13 Looking Forward into 2009: CA Deficit The combination of global economic slowdown and further decline of commodity prices affects export performance. The accompanying fall in imports prevents the current account going deep into negative territory. Non-oil/gas Exports is expected to decline -25% to -28%. Non-oil/gas Imports also drop to -24% to -27%. The deficit of Current Account is estimated around 0.5% GDP.
Looking Forward into 2009: Capital A/C Private Sector 14 Expect continued de-leveraging and consolidation of global financial markets which affects private capital flows. Private Sector Debts: Short-term debts matured this year $17.4 bio including interest payment ($2 bio) Estimate of Trade Financing of $5.2 bio in the form of Bankers Acceptance and Trade Credits. Total private debt falls due in 2009 is estimated $22.6 bio Of all $17.4 bio, around 31% is obtained from parent company and affiliates. Of all $17.4 bio, around 57% is owned by foreign and join corporation.
Private Short-term Debts: SDDS versus Regular Debt Report 15 USD million
Looking Forward into 2009: Capital A/C Public Sector 16 Potential outflow from foreign owned SBI and government bonds will be diminished. Significant outflow during Q4-08 has left only institutional and long-term investors The recent issuance of global MTN of $3.0 bio showed that market appetite is still positive Expect more inflows from government financing of deficit and fiscal stimulus. The government secured its 2009 Budget deficit (2.6% of GDP) from both domestic and foreign financing. The government received commitment of contingency facility from multilateral and bilateral donors.
Budget Financing in 2009 The government has secured funding sources 17 (USD bn) Exchange rate: Rp11,000/USD
Budget Financing in 2009 The Prospective Target of Bonds Issuance 18 Bonds Issuance (USD bn)
Budget Financing in 2009 Contingency Facility from Multilateral & Bilateral Donors 19 Contigency/Additional Loan (USD bn) *) under negotiation
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Indonesia s debt burden improved and the indicators are better than the tresholds 20 300 % 250 Debt/GDP Debt/X DSR 200 150 100 WB Threshold 87.02 50 27.59 - Debt Ratios
21 Exchange Rate The Rupiah exchange rate is not immune or completely insulated from the global risk aversion toward emerging markets. Liquidity has dried up the domestic foreign exchange supply. Bank Indonesia has been present in FX market to reduce volatility without allowing substantial reduction in the foreign exchange reserves. Bank Indonesia will maintain this approach to mitigate inflationary pressure stemming from depreciation, and to improve market confidence during episodes of shocks and limited supply.
01-Jan-08 14-Jan-08 25-Jan-08 07-Feb-08 20-Feb-08 04-Mar-08 17-Mar-08 28-Mar-08 10-Apr-08 23-Apr-08 06-May-08 19-May-08 30-May-08 12-Jun-08 25-Jun-08 08-Jul-08 21-Jul-08 01-Aug-08 14-Aug-08 27-Aug-08 09-Sep-08 22-Sep-08 03-Oct-08 16-Oct-08 29-Oct-08 11-Nov-08 24-Nov-08 05-Dec-08 18-Dec-08 31-Dec-08 13-Jan-09 26-Jan-09 06-Feb-09 19-Feb-09 The Rupiah has been depreciated sharply around 18% in Q4-08 bringing annual average depreciation of around 5.4% from Rp9.140/$ in 2007 to Rp9.665/$ in 2008. 22 Rp/USD 12600 12200 11800 11400 11000 10600 10200 9800 9400 9000 8600 12150 11980 Exchange Rate
Adequacy of the Foreign Exchange Reserves 23 The current $50 bio Foreign Reserves may be adequate in normal times but not enough to underpin confidence in the extremely dynamic situation. The government budget support in the form of foreign loans and bonds As member of Asean +3 Indonesia has established: Bilateral Swap Arrangement with +3 countries of $18 bio Chiang Mai Initiatives Multi-lateralization (CMIM) pooling funds of $120 bio. Establishing central banks contingency Currency Swap facilities. Establishing other contingency facility with multilateral financial institutions.
Headline inflation has been trending down 24 Inflation
25 Inflation Outlook Inflation has been trending down from the peak to arrive at 11.1% in 2008. Expected to drop further closer to the lower range of 5%-7% in 2009, in line with slowing demand globally and domestically, as well as falling commodity prices. With inflationary pressure diminishing, Bank Indonesia sees more rooms for monetary policy easing. Bank Indonesia remains committed to focus on achievement of the medium term inflation outlook.
Jan-05 Mar-05 May-05 Jul-05 Sep-05 Nov-05 Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Banking sector remained sound Minimal exposure on toxic assets. CAR remained solid. Credit risks also kept in check. 26 % 25 % 10 9 20 8 7 15 6 5 10 4 3 5 CAR (lhs) NPLs (gross) 2 1 - - Banking Indicators: CAR & NPLs
Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 27 Loans was remarkably high accompanied with sufficient sources of loans funding %, yoy 40 35 30 25 20 15 10 5 - Deposits Loans Banking Indicators: Deposit & Loan Growth
Banking Sector Outlook: 2009 Banking system is expected to expand its lending growth of around 14%-16% Backed by 10%-12% deposits growth and sizeable secondary reserves in the form of SBI and bonds. NPL is expected to increase around 5%-6%. Banks will directly provide loan loss provisions and restructure bad loans. CAR is expected to decline around 14%-15%. The impact of weaker Rupiah is quite limited due to bank generally holds low NOP around 4-5% whereas the maximum limit is 20%.