1. General Review
In 2009, the Indonesian economy has demonstrated considerable resilience in the face of the global economic crisis. Reflecting this is the brisk pace of economic growth at above 4% in Q3/2009. For 2009 overall, Bank Indonesia predicts that economic growth in Indonesia may reach 4.3%. Looking forward to 2010 and 2011, the economy is expected to chart even higher growth on the back of stronger world recovery and more conducive conditions on world financial and banking markets matched by prudently managed domestic fundamentals. In 2010, Indonesia's economic growth is forecasted in the range of 5.0%-5.5% with the outlook for 2011 at 6.0%-6.5%.
Regarding the global economy, Bank Indonesia expects the recovery process to keep moving forward. The recovery is now sensed to be taking stronger hold across a broader range of countries and economic sectors. The various policies implemented by fiscal and monetary authorities during 2009 have successfully prevented even steeper world economic decline. The green shoots of recovery started to show in Q2/2009. The powerhouses of the world economy that have maintained growth throughout the crisis are the dynamic economies of Asia, such as China, Korea and India. The positive effect of the economic performance of these nations has spilled over to other countries in the region, including Indonesia, through expanding demand for exports. Furthermore, the stimulus packages launched by governments in developed countries alongside improvement in financing from the banking system and consumer confidence have underpinned rising consumption levels since the second half of 2009. Even so, the world economic recovery process remains overshadowed by risks. Among these are the stubbornly high unemployment and sizeable fiscal deficit outcome in the United States that have triggered concerns among market actors over the sustainability of US financial operations.
Improvement in the global economy is again reflected in the positive developments on global financial markets. Intense pressures were bearing down on global financial markets early in the year, but by the end of 2009 these pressures had begun to ease. Supporting this was optimism fuelled by the ongoing recovery in the global economy and strengthening performance in the financial institutions in advanced nations. These developments fostered positive perceptions leading to renewed asset price gains on global financial markets beginning in Q2/2009. This optimism for the global economy has provided a lift for financial market performance around the world. Global stock market indices are climbing, while risk perceptions for financial market assets in developed nations and emerging markets has similarly improved as reflected in the decline in credit default swaps (CDS).
The multifaceted dynamics of the global economy in 2009 have brought their influence to bear on developments in the Indonesian economy. The global economic recovery, the rise of China and India and prudent macroeconomic policies at home have worked to the advantage of the Indonesian economy. Within the region, Indonesia has become the "flavour of the day" as a result of the economic resilience maintained throughout 2009, amid the global crisis. The growth in the Indonesian economy has been driven mainly by strong domestic demand. The expansion in the domestic economy over this period is driven more by consumption spending, a result of election-related expenditures, low inflation, various fiscal stimulus initiatives to boost public purchasing power and reductions in taxes.
Alongside this, Indonesia's export performance is up in response to the ongoing and more broad-based recovery process in the world economy and rising global commodity prices. Against the background of these developments, economic growth for 2009 overall is forecasted to reach 4.3%.
Further confirmation of renewed growth momentum in Indonesia during 2009 comes from the regional economic assessments conducted by Bank Indonesia. For the most part, local economies report brisk consumption and exports driven by rising demand for primary products imported by China, India and South Korea. Export growth in the Sumatra and the Kali-Sulampua (Kalimantan-Sulawesi-Maluku-Papua) regions is fuelled mainly by rubber, nickel, coal and CPO. These regional economic gains are closely related to the continued strength of domestic consumption, led by the Java-Bali-Nusa Tenggara (Jabalnustra) and Jakarta regions, as well as recovery in exports of estate and mining commodities from Kali-Sulampua and Sumatra driven by improving world economic conditions. Complementing this is the fiscal stimulus outcome now at 36.2% and realised regional government capital expenditures in the Kali-Sulampua and Jakarta regions, which have mounted over the same period in 2008. The stimulus has brought some modest improvement in investment growth in the regions, albeit minimal. Nevertheless, strong domestic consumption and expanding volume of primary commodity exports has invigorated activity in key sectors in local regions, namely agriculture in Jabalnustra and Sumatra, mining in Kali-Sulampua and tertiary sectors in Jabalnustra and Jakarta. Throughout 2009, the combination of the domestic-oriented economies in Jabalnustra and Jakarta and the export-oriented economies in Sumatra and Kali-Sulampua has bolstered national economic growth in the face of the onslaught of the global crisis.
Concerning prices, the Indonesian economy in 2009 was marked by low inflationary pressure. November inflation was recorded at -0.03% (mtm), down from 0.19% in the previous month. The deflation in November is linked mainly to the renewed correction in prices for staple goods. Measured annually, CPI inflation eased from the previous month to 2.41% (yoy). On the non-fundamentals side, security of domestic supplies, efficient distribution and the still fairly low international commodity prices have eased volatile foods inflation. Administered prices inflation has fallen sharply following the government decision to lower fuel prices at the beginning of the year. Regarding fundamentals, inflationary pressure has eased in response to the external factors of lower trading partner inflation, appreciation in the exchange rate and softening public expectations of inflation. In view of these developments, inflation at end-2009 could potentially come below the previous forecasted 2.9% (yoy).
The balance of payments has charted more robust performance in 2009 in line with conducive developments at the global level. Key to these gains is the improvement the current account as the global economic recovery moves ahead. Further support for the current account has come from the upward trend in prices for Indonesia's exports, led by resource-based commodities. The current account surplus is also projected to climb further in spite of rising non-oil and gas imports. At the same time, optimism for global economic recovery in tandem with improving perceptions of emerging market risks is expected to sustain the pace of capital inflows. With the improvement in the balance of payments, Indonesia's international reserves position at end-November 2009 stood at USD65.84 billion, equivalent to 6.5 months of imports and servicing of official debt.
The more robust performance in the balance of payments has contributed to stability in the rupiah during 2009. Throughout the year, the rupiah has maintained an appreciating trend. Positive global investor perceptions of the Indonesian economy have stimulated investor risk appetite for domestic financial market assets, which has kept capital inflows pouring into the Indonesian financial market. The rupiah exchange rate has responded with steady appreciation since Q2/2009, reaching Rp 9,445 to the US dollar at end-November. This represents a gain of 15.3% (ptp) from the end-2008 level recorded at Rp 10,900 to the US dollar.
These economic developments have bolstered the domestic financial market. Monetary policy transmission has also improved, as shown in the money market and bank interest rate response to the BI Rate. On the bond market, monetary policy transmission is reflected in declining yield on government securities across all tenors, with the steepest reduction recorded for short-term maturities. However, policy transmission faces greater resistance in the longer tenors. This is an indication of less favourable long-term investor perceptions of inflation expectations and the fiscal sustainability outlook. On the stock market, the index and prices are on the rise. Foreign investors have regained interest in emerging market financial assets in response to the global economic recovery. With the added support of Bank Indonesia monetary policy and healthy domestic macroeconomic indicators, this has stimulated more vigorous growth in the Jakarta Composite Index.
The money market has seen steady improvement in interest rate transmission to interbank transactions. The overnight rate on the interbank market has stayed around the level of the BI Rate following the switch in the monetary policy operational target to the O/N interbank rate in July 2008. The downward movement in O/N rates has been followed by interbank rates in above O/N tenors. The BI Rate is also being transmitted more effectively to bank deposit rates. The 337 bps fall in 1-month deposit rates during 2009 surpasses the 275 bps reduction in the BI Rate over the same period. This represents markedly stronger response when compared to the previous round of BI Rate cuts in 2006. However, lending rates have responded to movement in the BI Rate with only slow, limited improvement. During 2009, the aggregate lending rate (average for working capital, investment and consumption credit) eased by 76 bps. The constrained response in lending rates is explained by a number of factors, including persistently strong perceptions among banks of sustainability risk in the real sector. Due to the tepid response in the banking system, there has been only sluggish growth in bank sources of financing. As of October 2009, expansion in credit (including channelling) had reached only 4.2% (ytd), well below the level for the same period one year earlier.
Looking forward, the domestic economy has potential to surpass earlier growth forecasts for 2009 and 2010. This trend is expected to carry forward into 2011. Supporting factors include more conducive external conditions with faster than predicted recovery in the world economy and securely managed domestic conditions buoyed by sustained vigorous household consumption. The renewed export growth that began taking hold at end-Q1/2009 is set to maintain pace in keeping with the recovery in the world economy. Besides the improvement in the world economy, an important factor in the accelerated export growth is the comparatively speedy recovery in Indonesia's exports of resource-based commodities buoyed by rising demand in trading partner nations. Within Indonesia, household consumption growth is predicted to maintain comparatively strong momentum as a major contributor to the GDP, although not as strong as during the 2009 election period. Key to this consumption growth will be sustained consumer confidence, higher incomes on the back of strengthening exports and low inflation. Against this background, Indonesia's economic growth in 2010 is forecasted at 5.0%-5.5% before climbing further in 2011 to 6.0%-6.5%.
The outlook for global economic recovery in 2010 will have positive benefits for Indonesia's balance of payments. Supporting this improvement will be gains in the current account and the capital and financial account. The ongoing recovery in the world economy coupled with steady improvement in world commodity prices will lift export performance to new levels. Preliminary figures for non-oil and gas imports point to a turnaround in Q2/2009 in keeping with expanding activity in the domestic economy. In the capital and financial account, performance will be bolstered by more favourable domestic and external conditions compared earlier forecasts.
In regard to inflation, the trend in 2010 and 2011 is predicted to return to normal as the wheels of the Indonesian economy gather renewed growth momentum. For these reasons, inflation in 2010 and 2011 is predicted in the range of 5%±1%. Among the external factors in the inflation forecast are escalating inflation in trading partner nations in keeping with the predicted improvement in the global economy and rising international commodity prices. At home, inflationary pressure is also likely to result from increases in administered prices. Concerning volatile foods inflation, possible supply shocks from the expected El Nino phenomenon are predicted to have only minimum effect in stoking inflationary pressure.
After careful consideration of the developments outlined above, the Bank Indonesia Board of Governors Meeting convened on 3 December 2009 decided to hold the BI Rate at the level of 6.50%. An added factor is that the current BI Rate level is consistent with achievement of the 2010 inflation target of 5%+6%. This policy stance is also regarded conducive to the economic recovery and banking intermediation processes.