The Experience of Indonesia

 ESCAP High-level Policy Dialogue
Ministry of Finance of the Republic of Indonesia International Economic Summit 2013
Eleventh Bank Indonesia Annual International Seminar
“Macroeconomic Policies for Sustainable Growth with Equity in East Asia”
15-17 May 2013, Yogyakarta, Indonesia
Jointly organized by
UN ESCAP, Ministry of Finance of the Republic of Indonesia and Bank Indonesia
Session 2 – Managing Inflationary and Balance of Payment Pressures
Presentation
The Experience of Indonesia
By
Iskandar Simorangkir
Executive Director, Bank Indonesia
May 2013
The views expressed in the paper are those of the author(s) and should not necessarily be considered as reflecting the
views or carrying the endorsement of the United Nations. This paper has been issued without formal editing.
Managing Inflationary and Balance of Payment
Pressures: The Experience of Indonesia
0
Iskandar Simorangkir
Executive Director/Head of Center for Central Banking
Research and Education
E S C AP - B a n k I n d o n e s i a H i g h - l e v e l P o l i c y D i a l o g u e
Macroeconomic Policies for Sustainable Growth with Equity
1 5 - 1 7 M a y 2 0 1 3 , Yo g y a k a r t a
2
Outline
The Global Economy
• Global Economic Outlook
Indonesia’s Economy
• Overview
• The Resiliency of Economic Growth
• The Risk of Balance of Payment, Exchange Rate and
Inflation
Bank Indonesia’s Policy
• Policy Mix in 2010-2012
• Policy Directions in 2013
3
The Global Economy
4
Global Economic Outlook
Global growth in 2013 is not expected to be as high as earlier predictions, while for
2014 is predicted improve gradually.
• Consensus Forecast predicts
the global economy in 2012
grew 3.12% (yoy), down from
the previous month at 3.16%
(yoy). For the year 2013, the
world economy is expected to
grow 3.41% (yoy).
• World Bank Global Economic
Prospect (GEP) predicted world
economic growth of 3.4% (yoy)
and 3.9% (yoy) in 2013 and
2014.
World GDP
Estimation for 2012 and 2013
BI
5
The Global Economy
U.S growth is expected to be held back by fiscal constraints, although there are some
indication of improvements in its consumption and production.
 U.S. Economic indicators improved, supported by
strong consumption and industry activity (PMI
Manufacture) still in expanding phase.
 European economy predicted still contracted
according to fiscal austerity policies by several
Eurozone countries.
 Industry as the Japanese economic engine
reflected a positive indications driven by improved
export and domestic confidence optimism.
 China production activity increased following the
increase in exports during Jan-Feb 2013.
China PMI Manufacture & Services
Index, level
60
55
50
45
NBS PMI Manuf
HSBC PMI Manuf
40
Date Mar 2013
Source: Bloomberg
35
Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
U.S. PMI Manufacture & Services
U.S Payroll and Unemployment Rate
6
Indonesia’s Economy
Overview Indonesia’s Economy
7
 Indonesian economy remains strong with increasing
macroeconomic risk.
 On the external side, pressure in current account deficit is
estimated to continue due to increasing domestic demand and
fuel consumption amid slow recovery in export commodity
prices.
 Inflationary pressure remain high in March 2013 driven by
rose in volatile foods prices pressure, although decelerated in
April.
 During first quarter of 2013 depreciation pressure on rupiah
continued at moderate level.
Domestic Economy: Demand Side
8
Indonesia's economic growth remains sound, although moderated…
• Indonesia's economy is still showing a good performance, even though there are
indications of growth moderation since Q4-2012 in line with global economic slowing
down.
• Private consumption is still resilient
• Investment remains strong albeit moderated.
• Export volume expanded further to 3.4% yoy from 0.5% in 4Q12, while import decelerated.
%YoY, Constant Price year 2000
GDP Forecast by Expenditure
Component
Private Consumption Expenditure
Government Expenditure
Gross Fixed Capital Formation
Export of Goods and Services
Import of Goods and Services
Gross Domestic Product
Sources: BPS
2011
4.7
3.2
8.8
13.6
13.3
6.5
2012
I
II
4.9
6.4
10.0
8.2
8.9
6.3
5.2
8.6
12.5
2.6
11.3
6.4
III
5.6
(2.8)
9.8
(2.6)
(0.2)
6.2
IV
5.4
(3.3)
7.3
0.5
6.8
6.1
2012
5.3
1.2
9.8
2.0
6.6
6.2
2013
I
5.2
0.4
5.9
3.4
(0.4)
6.0
9
Domestic Economy: Production Side
From sectoral side, the main contributor of growth is from construction,
trade, transport & telecommunication, as well as manufacturing.
%YoY, Constant Price year 2000
GDP by Industry
Component
Agriculturre
Mining and Quarrying
Manufacturing Industries
Electricity, Gas and Water Supply
Construction
Trade, Hotel & Restaurant
Transport and Communication
Financial, Ownership and Business
Services
Gross Domestic Product
Sources: BPS
2011
3.4
1.4
6.1
4.8
6.6
9.2
10.7
6.8
6.7
6.5
2012
I
4.3
2.5
5.5
5.7
7.2
8.7
10.0
6.4
5.5
6.3
II
III
4.0
3.3
5.2
6.5
7.3
8.7
9.9
7.1
5.8
6.4
5.3
(0.3)
5.9
6.1
7.6
7.2
10.4
7.5
4.5
6.2
2012
IV
2.0
0.5
6.2
7.3
7.8
7.8
9.6
7.7
5.3
6.1
4.0
1.5
5.7
6.4
7.5
8.1
10.0
7.1
5.2
6.2
2013
I
3.7
(0.4)
5.8
6.5
7.2
6.5
10.0
8.4
6.5
6.0
Household Consumption
10
Household consumption is expected to grow positively, eventhough weakening…
• Consumption still grew, however slowing
down.
• Consumers remain positively confident.
Retail, Car, and Motorcycle Sales
Retail Sales Index
Consumer Confidence Index
Reasons for the Resiliency of Consumption:
 Rising middle class
 Rising productive age
• Unscathed
by
the
global financial crisis,
Indonesia’s annual GNI
/ person has continued
to rise and reached
$2500 in 2010.
• The country is on track
to become a higher
middle income country.
• Concurrent with this
positive development,
Indonesia’s
middle
class is on the rise.
The Rise of Indonesia’s Middle Class (1)
In the late 1980s, 9 out of 10
Indonesians were poor or near poor
with consumption expenditure less
than $2 per / person / day.
In the past 10 years, the proportion
of the underprivileged has been
declining significantly.
In end of 2010, at least 5 out of 10
Indonesians can be categorized as
middle class.
A good size of core and upper
middle class is emerging, with
consumption expenditure between
$4 - $20 / person / day).
Note: Number of persons out of 10 .
Data source: PovcalNet – The World Bank ( constant $ PPP 2005).
The Rise of Indonesia’s Middle Class (2)
Survey
Year
Malaysia
Thailand
Filipina
Vietnam
Indonesia
2009
2009
2009
2008
2010
Middle Class (% of Population)
Lower MC Core MC
Upper MC
$2-$4
$4-$10
$10-$20
15.6
37.2
27.5
31.3
46.2
13.6
33.7
20.3
3.6
39.8
15.1
1.7
37.3
15.0
1.6
Source: PovcalNet - The World Bank
Total
80.4
91.0
57.7
56.5
53.9
As the most populous nation and the largest
economy in Southeast Asia,
the rise of
Indonesia’s middle class contributes significantly
to the expansion of domestic consumption.
The Expanding Middle Class Market
The rise of Indonesian middle class is happening both in rural and urban areas. Fueled by young
(productive age) consumers, the expanding middle class market has dominated the market for consumer
goods and services.
Investment
15
Investment in first quarter 2013 is forecasted to grow eventhough moderated..
• The increase is supported by growth in building
investment indicated from steady growth cement
sales.
• Business Survey (SKDU) : Investment is expected
to remain high in 2013 and mainly in form of new
investments.
• Decreasing import of capital goods in February
2013, mainly from imports of machinery and
transport equipment for industry, indicates a
slower growth for non-building investments.
Building Investment & Indicator
Investment Realization and Plan- SKDU
Machinery Investment & Indicator
Export and Import
16
Expectation of global economy recovery amplify potential growth of export
•
Positive signals of export increase have seen in
elevation of world trade volume accompanied by
moderate growth in commodity prices.
•
Several Indonesia's main export destination is
expected to chart higher growth compared to
last year thereby encouraging the demand for
Indonesian exports.
•
Imports decelerated.
Total Non-oil &Gas Export (real value)
Total Non-oil &Gas Export (real value)
Total Non-oil & Gas Import (Real Value)
Indonesia’s Balance of Payments (BoP) Performance
17
Indonesia’s Balance of Payments (BoP) Performance in Q1 and Q2 2013 is expected to
encounter a decline in deficit in line with improvement in capital and financial account..
 The improvement in the capital and financial account is mainly driven by increasing portfolio
investment in line with strong Indonesia's economic fundamentals and accomodative global
economic policy.
 However, the current account deficit is expected to increase primarily due to import which is still
quite high, related to the high fuel consumption.
 Reserves at the end first quarter in 2013 reached 104.8 billion U.S. dollars, equivalent to 5.7
months of imports and goverment external debt.
INDONESIA'S BALANCE OF PAYMENT S: SUMMARY
(Millions of USD)
2 0 11
2 0 12
2 0 12
I T E M S
3-Jul
I. C urre nt A c c o unt
A . Go o ds 1)
-Expo rts
-Impo rts
B . Services
C. Inco me
D. Current transfers
II. C a pit a l a nd F ina nc ia l A c c o unt
A . Capital acco unt
B . Financial acco unt 2)
III.T o t a l ( I + II )
IV . N e t E rro rs a nd O m is s io ns
V . O v e ra ll B a la nc e ( III+IV )
3)
V I. R e v e rs e s a nd re la t e d it e m s
M e m o ra ndum :
- Reserve A ssets P o sitio n
In mo nths o f impo rts & o fficial debt
repayment
- Current A cco unt ( % GDP )
- Debt Service Ratio ( % )
Not es:
1)
In t erms of f ree on board (f ob)
2)
Excludes reserves and relat ed it ems
3)
Negat ive represent s surplus and posit ive represent s def icit .
1,685
Q 1*
1-Mar
-3,105
Q2*
Q3*
1-Jun
1-Sep
-7,979
-5,336
Q 4 **
1-Dec
-7,763
34,783
3,810
818
3,198
200,788
48,353
47,538
45,549
46,706
188,146
-166,005
-44,543
-46,720
-42,351
-46,115
-179,729
-10,632
-2,075
-2,893
-2,480
-3,322
-10,770
-26,676
-5,898
-6,915
-6,225
-25,839
-6,801
591
4-Jul
-24,183
8,417
4,211
1,058
898
861
1,193
4,009
13,567
2,256
5,225
6,015
11,415
24,911
33
6
3
8
22
37
13,534
2,250
5,222
6,007
11,393
24,873
15,252
-850
-2,754
679
3,652
728
-3,395
-184
-57
155
-476
-563
11,857
-1,034
-2,811
834
3,176
165
-11,857
1,034
2,811
-834
-3,176
-165
0
0
0
0
110,123
110,493
106,502
110,172
6.1
0
112,781
6.1
0
112,781
6.5
6.2
5.8
0.2
-1.4
-3.6
-2.4
-3.6
-2.8
6.1
21.3
30.3
36.7
34.9
39.5
35.3
Current Account
18
Pressure on balance of trade is expected to increase.
 Increase in the deficit is associated with low trade
balance surplus and the high deficit on services and
income balance.
Export Price Index
 The low trade balance surplus is the impact from
slow global economic recovery and limited growth
of commodity prices amid strong domestic
economic expansion.
 Meanwhile, the high activity of imports and capital
inflows push the higher deficit in services and
income balance.
Current Account Composition
Trade Balance
US$ M
5
Neraca Perdagangan Non Migas
4
Neraca Perdagangan Migas
3
Neraca Perdagangan Total
2
1
0
-1
-2
-3
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Capital and Financial Account
The capital and financial account is expected to improve in Q1 and Q2 2013..
• FDI inflows continues due to positive domestic economy prospect and large market
potential.
• Foreign investment in portfolio investment continued to grow in first quarter of 2013 due
to attractive yield in the domestic financial market.
CFA Component
19
Rupiah Exchange Rate
20
Depreciation pressure on rupiah tend to moderate..
• Depreciation pressure is mainly due to trade balance deficit
condition and net demand in domestic forex market.
Foreign Exchange
• Depreciation pressure moderated by high capital inflows to the
domestic market due to attractive yield in rupiah asset.
• Bank Indonesia maintains the exchange rate stability in line
with its fundamentals by strengthening foreign exchange
intervention mechanism and implementing foreign exchange
term deposit (TD), as well as foreign exchange market
deepening
• On average, the exchange rate of rupiah depreciated 0.7% (qtq)
to a level of Rp9.680 per US dollar from Rp9.613 per USD. In
point-to-point, exchange rate has depreciated 0,82% (qtq) and
closed at Rp9.718 per US dollar at the end of first quarter.
Apr./Depr. Of Regional Currency & EURO
UIP (Uncovered Interest Parity)
Inflation
•Trend in CPI inflation is rising, although in the last month is showing a falling rate...
•Inflation is stemmed from volatile foods ...
CPI Inflation Disaggregation
22
Transmission of BI Rate to money market interest rates
The stability of interbank money market reflected in steady movement at the lower
band of the corridor..
• In March 2013, average O/N interbank rate was 4.17%
• In terms of risk, the perception of risk in the interbank market was still relatively maintained and
below the normal average threshold. This was reflected in the spread of O/N interest rate in
March 2013 still below the normal range.
• Volume of transactions in the interbank market increased in March 2013 with stable rate and
maintained risk indicate a deepening of interbank money market.
Interbank Transaction Volume of All Tenors
O/N Interbank and BI Rate
%
Rp T
5.75
200
Vol DF O/N (RHS)
5.6
160
Vol PUAB O/N
BI Rate
140
rPUAB O/N
5.1
100
4.6
80
60
4.1
rPUAB : 4,18%
Avg Vol DF: Rp80,5 T
RRT Vol PUAB : Rp10,6 T
40
20
27-Mar-13
3-Mar-13
7-Feb-13
14-Jan-13
21-Dec-12
27-Nov-12
3-Nov-12
10-Oct-12
16-Sep-12
23-Aug-12
30-Jul-12
6-Jul-12
12-Jun-12
19-May-12
0
25-Apr-12
3.6
1-Apr-12
15
11
9
16
Rp T
12
13
120
rDF O/N
8-Mar-12
17
180
11
11
3
12
13
13
12
13
11
11
10
6
11
9
9
10
7
5
6
2009
2012
11
10
9
11
7
5
13
2010
2013
9
9
2011
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
23
Bank Indonesia’s Policy
Policy Mix for Managing Inflationary and BoP Pressures in 2010-11
Instrument
Policy in 2010
Policy in 2011
1.
Interest rate
policy
Keep BI Rate at 6.5%
Increased BI Rate 25 bps to 6.75% on
February 2011, decreased to 6.50% on
October, to 6% on November and
subsequently fixed
2.
Exchange rate
policy
Decrease on Rupiah appreciation (4.6%)
on 2010 compare to 2009 (14.9%)
Rupiah appreciation in line with regional
appreciation
3.
Reserve
accumulation
Reserve increased from USD 66.0 bio at
the end of 2009 become USD 96.2 bio at
the end of 2010
Reserve amount USD 119.7 bio at the end
June 2011, or equivalent with 6.8 months
import and government foreign debt
payment
4.
Macroprudential
policy for capital
flows
• One Month Holding Period (OMHP)
policy for SBI since June 2010
• Shifting from SBI to Term Deposit to
decrease SBI supply that foreign
investor can buy
• Six Month Holding Period (SMHP) policy
for SBI since May 2011
• Limitation on bank short term foreign
debt max 30% from capital at the end of
January 2011
• Increasing on Foreign exchange RR from
1% became 5% (March 2011) and 8%
(June 2011)
5.
Macroprudential
policy to manage
domestic liquidity
• Strengthening monetary operation
strategy through June 15, 2010
package
• Increased primary reserve become 8%
on November 2010 and LDR reserve on
March 2011
Continue to strengthen monetary operation
strategy through June 15, 2010 package
Policy Mix for Managing Inflationary and BoP Pressures in 2012
Instrument
Policy in 2012
1.
Interest rate policy
Decreased BI Rate by 25 bps to 5.75% on February 2012, and
subsequently fixed
2.
Exchange rate policy
Managing Rupiah stability in line with fundamental economy: Orderly
Rp depreciation, Intervention vs Reserve
3.
Macroprudential policy for
capital flows
• Implementation of export proceed & external debt proceed
• Application of anticipatory measures to increase the supply of
foreign exchange as part of the stabilization dollars (relaxation
hedging period)
4.
Macroprudential policy to
manage domestic liquidity
• Widening lower corridor of overnight interbank money market
(PUAB) rate to 200 bps.
• LTV for Housing & Motor Vehicle
• Policy for financial market deepening & strengthen monetary
operation management (forex TD)
• Widening lower corridor of
-overnight
PelebaranPUAB
Koridor
ratebawah
to 200suku
bps
• Implementation
of export
proceed &
bunga PUAB menjadi
200bps
debtkebijakan
proceed DHE & DULN
-external
Penerapan
POLICY RESPONSE
9.00
7.00
5.00
3.00
BI Rate
Putting
sand in thekebijakan
wheel
Periode penerapan
implentation:
Increase
pengelolaan capt. inflows
forex
RR,sand
6MHP
for
SBI,
(putting
in the
wheel):
Foreign
Debt
kenaikan GWM valas, 6MHP
utk SBI, PKLN )
Penerapan
Applicationlangkah
of anticipatory
antisipatif
menambah
measures utk
to increase
the supply
of foreign
exchange
as part of
pasokan
valas
sbg bagian
the stabilization
dollars
stabilisasi
Rp (relaksasi
(relaxation
hedging
period)
tenor hedging)
Policy for financial
market
Kebijakan
pendalaman
pasar
deepening&&penguatan
strengthen
keuangan
monetary operation
manajemen operasi moneter
management (forex TD)
(TD valas)
Orderly external adjustment?
Pengaturan
LTV
LTV
for
Housing
& DP
utk KPR dan
Motor
utk KKBVehicle
•
•
•
•
•
1.00
POLICY CONCERNS (RISK FACTORS)
(1.00)
Jun
Jul
Aug
Sep
Okt
Nov
Dec
Jan
Feb
Mar
Apr
2011
(5.00)
(7.00)
Inflation and appreciation Rp
Tekanan
inflasi & apresiasi Rp:
pressure:
- Arus
masuk
modal
asing yang deras
• Large
capital
inflow
- Ekses
Likuiditas
• Liquidity
excess
• Plan ofkebijakan
increase BBM
fuel price
- Rencana
bersubsidi
•
Global
financial
market
- Tekanan pasar keuangan global
pressure
due torating
decrease
US
akibat
penurunan
AS (6ofAug
rating (6 Aug 2011)
2011)
Jun
Jul
Aug
2012
Potensi
pelemahan
Weak
global
economic &
ekonomi
global
reduction on
Rp &
appreciation
pressure:
penurunan tek
apr Rp:
(3.00)
May
•- Proyeksi
Global economy
pertumb ek.
worsened
global
yg lebih buruk
•- Tingginya
High uncertainty
cause
ketidakpastian
financial
market
perek.
global
jg risk
on-off
berdampak
pd risk on - off
pasar keuangan
Pressure on Rp
Tekanan
depr Rp
depreciate
yg
mulai
nyata
• Prospect of :
global
- Prospek
economy
pelemahan
ek.worsened
global
• Investment
- Investment
grade
•Grade
Decrease on
commodityharga
- Penurunan
prices
komoditas
global
Increase
Tekanan
depr
pressure on Rp
Rp& inflation
& inflasi
• High
meningkat
pressure
on
- Smkn
tingginya
global
tekanan
ek.
economy
global
• Uncertainty
on fuel price
- Ketidakpastian
policy BBM
kebijakan
Increase on Rp
Tekanan
depr Rp
depreciation &
&credit
peningkatan
growth
• European
crisis
pertumb
kredit:
escalatekrisis
- Eskalasi
• Slowing growth
Eropa
& uncertainty in
- Perlambatan
ek.
global financial
&market
ketidakpastian
•
•
•
psr keu global
bersubsidi
Inflation Gap (Ekspektasi - target)
Credit Gap (aktual - proyeksi)
% Depre/ (Apre) Spot
BI Rate
Sep
BI’s Policy Direction 2013
27
Going forward, Bank Indonesia policy will be directed to manage domestic demand in line
with efforts to maintain external balance. Bank Indonesia will continue to strengthen the
policy mix through five pillars.
5 PILARS of BANK INDONESIA POLICIES IN 2013
Interest rate
• Consisten t with inflation target
Exchange Rate
• Consistent with economic fundamental
Macroprudential
• Maintain the stability of the financial system and promote internal and external
balance
Communication
• Managing Inflation Expectation
Policy Coordination
• Supporting macroeconomic management, particularly in strengthening the
economic structure and sources of economic financing, strengthening the supply
side response, as well as monitoring macro risk and crisis management
THANK YOU