General Review
The ongoing recovery in the global economy has helped bring improvement to the domestic economy, which now has potential to outperform earlier forecasts for both 2009 and 2010. In 2009, the economy is expected to chart 4.0%-4.5% growth, ahead of the earlier 3.5%-4.0% prediction. Following this, the economic growth forecast for 2010 is 5.0%-5.5%.
The recovery process in the global economy is showing indications of increased momentum across a broader range of countries. The most dramatic gains are visible in Asia's emerging markets, led by China. In the developed world, economic contraction has eased. A wide range of global macroeconomic indicators points to growing optimism for global economic recovery. Retail sales, capacity utilisation and production indices have begun to climb in advanced nations and emerging market countries alike. Despite the improvement, the recovery continues to be daunted by risks. The risk of sustained high unemployment in developed economies poses hurdles to further improvement in global economic performance.
Recovery in the world economy is also reflected in the improving condition of global financial markets. The risks daunting advanced economies and the developing world receded further during Q3/2009, as evident in the progressive easing in the risk indicator of Currency Default Swaps (CDS). The global stock market forged ahead during the quarter, despite some temporary correction. In the real sector, optimism for economic recovery and the depreciating trend in the US dollar have boosted international commodity prices. Nevertheless, these price movements have not produced significant upward pressure on overall price levels. Inflation in advanced nations and emerging markets remains low, with some nations still undergoing deflation as a result of weakened consumption.
At home, the Indonesian economy is moving into more positive territory in response to the steady improvement in the global economy. Q3/2009 GDP growth is estimated at 4.2%, up from the earlier 3.9% prediction. On the demand side, rising consumption has been bolstered by increased export revenues, stronger consumer confidence and seasonal factors in the period preceding the Eid-ul-Fitr festivities. Modest improvement is reported in investment, despite continued sluggish growth. Externally, preliminary figures for export growth are stronger due to improving economic conditions in trading partner nations and rising global commodity prices. On the other hand, import growth is estimated at minimal levels. On the supply-side, the manufacturing and the trade, hotels and restaurants sectors charted improved growth in Q3/2009 in keeping with the Eid-ul-Fitr religious festivities.
Further confirmation of renewed growth momentum 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 from China, India and South Korea for primary products and an upswing in investment activity across all regions. Export growth in the Sumatra and the Kali-Sulampua (Kalimantan-Sulawesi-Maluku-Papua) regions is fuelled mainly by rubber, nickel, coal and CPO, while in the Jakarta region, growth is driven by manufactured products. On the supply side, the mainstay of regional growth in Jakarta is strengthening performance in manufacturing, trade, hotels and restaurants and the financial sector. In the Jabalnustra (Java-Bali-Nusa Tenggara) region, the key growth sectors are food crop agriculture and trade, in contrast to the Sumatra and Kali-Sulampua regions where growth relies primarily on mining and estate crops. Added support for regional economic growth came from the increased volume of regional budget expenditures during Q3/2009. However, the recent earthquake in West Sumatra portends to impact economic growth in that region. Leading sectors forming the traditional economic backbone of West Sumatra, such as agriculture, the trade, hotels and restaurants sector and transport and communications, have inevitably been impacted by the quake. However, from a nationwide perspective, the West Sumatra economy accounts for a comparatively small share of national economic growth at 1.7%.
Concerning prices, inflation in Q3/2009 maintained a steady downward trend, falling to 2.83% (yoy). Inflationary pressure remained low during the quarter due to improving inflation expectations, the appreciating exchange rate and still modest global commodity prices. Alongside this, demand-side pressure remained minimal, despite indications of resurgent pressures. On the non-fundamentals side, the Government kept hikes in administered prices to a minimum during Q3/2009. Combined with plentiful supply of foodstuffs, this has eased upward pressure on prices. The hike in toll road charges on 28 September 2009 is expected to have negligible impact on inflation, accounting for 0.05% of inflation formation during 2009.
The improvement in the global economy and particularly in trading partner nations is set to have positive impact on the Q23/2009 balance of payments. The recovery in the global economy and especially in trading partners alongside the escalating trend in global commodity prices has potential to boost export performance to new levels. At the same time, imports are expected to remain low due to continued weak demand from investment. The current account in Q3/2009 has potential to chart a surplus. Alongside this, in the capital and financial account, inflows of foreign funds and portfolio investments again recorded an estimated surplus, despite short-lived correction in foreign portfolio capital during August 2009.
In other developments, the decision by Moody's to upgrade Indonesia's sovereign credit rating from Ba3 to Ba2 is expected to have a beneficial effect on capital inflows and cost of financing. Besides this, Indonesia, like other IMF members benefiting from coordinated global policy actions, received an SDR allocation worth SDR1.74 billion equivalent to USD2.7 billion. This helped boost international reserves to USD62.3 billion at the end of September 2009, sufficient for 6.2 months of imports and servicing of official external debt.
The improvement in the balance of payments and positive sentiment on global financial markets has contributed to the stability of the rupiah. Despite coming under temporary pressure at end-August 2009, the exchange rate gained value while charting reduced volatility. This appreciation in the rupiah is supported by robust domestic economic fundamentals reflected in the balance of payments surplus, attractive returns and improving perceptions of risk that offer attraction for foreign investors. Reinforcing this is positive sentiment for the global economy that contributed to brisk inflows of capital into Indonesia. The rupiah remains competitive against other currencies in the region. During Q3/2009, the average value of the rupiah appreciated 5.5% to Rp 9,973 to the US dollar while charting reduced volatility.
In the financial sector, these developments have provided an uplift for domestic financial market conditions. Overall financial market performance is up alongside steady improvement in monetary policy transmission. During Q3/2009, the stock market charted index gains. Improving domestic fundamentals and rising global commodity prices were the key factors providing significant boost to share buying by foreign and domestic investors. On the bond market, yield on government securities is down in keeping with the lower level of the BI Rate and growing foreign investor interest in these instruments. Even so, yield on longer tenors (above 15 years) remains comparatively high due to lingering perceptions of risk.
The banking sector is marked by stable conditions in the national banking system and initial improvement in bank response to monetary policy signals. On the micro level, this stability is indicated by the comfortable level of the capital adequacy ratio (CAR) at 17.0% in August 2009. Similarly, the gross non-performing loans (NPLs) ratio remains below 5% with the net ratio at less than 2%. The ample condition of bank liquidity is reflected in the rise in bank holdings of monetary instruments (SBIs and FASBI), increased volume of interbank money market transactions and decline in the overnight interbank rate, now hovering below the BI Rate level. In other developments, the bank interest rate response to monetary policy measures showed further improvement, particularly in deposit rates. By mid-Q3/2009, the average lending rate had dropped 18 bps or more than for the equivalent period one quarter earlier. Related to this, bank loan disbursements from January to August 2009 were up by Rp 46.7 trillion or 3.5% (ytd).
Looking forward, the Indonesian economy has potential to surpass earlier growth projections in 2009 and 2010. Key to this is the continued strength of private consumption growth, better than expected exports and the government stimulus. The brisk pace of private consumption is bolstered by high levels of consumer confidence in line with low inflation and interest rates and the effect of mounting export revenues. Alongside this, export performance is improving on the back of the strengthening global economic recovery and higher prices for oil, natural gas and non-oil and gas commodities. Only limited investment growth, however, is expected due to persistently low levels of capacity utilisation. The fiscal stimulus has also bolstered the performance of the domestic economy, as reflected in brisk growth in government consumption and investment. On the supply side, renewed growth is forecasted across a range of sectors, consistent with strengthening domestic and external demand in tradable sectors. In response to these developments, the Indonesian economy in 2009 is forecasted to chart 4.0%-4.5% growth in 2009, ahead of the originally predicted 3.5%-4.0%. For 2010, Bank Indonesia forecasts economic growth in the range of 5.0%-5.5%. Vigilance is still needed in regard to various risks from uncertainty in the recovery process for world trade given that the stimulus-backed actions to boost recovery in advanced nations are more oriented to domestic demand, the high unemployment besetting developed nations and protectionist tendencies in operation in some countries after the global crisis. At the same time, a close watch is needed on the risk of escalation in world oil prices driven by speculative activity.
The balance of payments outlook for 2009 and 2010 points to a growing surplus. Exports are predicted to gather pace on the strength of world economic recovery and rising commodity prices. On the domestic front, imports are set to maintain limited growth due to the sluggish pace of investment expansion. In 2010, the current account is again forecasted to chart a surplus. Similarly, improved performance in the capital and financial account is expected as a result of more favourable domestic and external conditions compared to the past. The secure condition of domestic fundamentals, improving risk perceptions and keen investor interest in domestic assets is expected to boost inflows of foreign capital into Indonesia, channelled into both portfolio investments and foreign direct investment.
In the inflation outlook, the downward trend in 2009 is forecasted to continue, despite potential for return to normal levels in 2010. CPI inflation in 2009 is on track to come within the inflation targeting range at 4.5%±1%. In 2010, CPI inflation is predicted to return to normal in the 5±1% range as a result of domestic economic expansion, rising imported inflation driven by higher commodity prices and inflation expectations. On the non-fundamentals side, heightened inflationary pressure is expected from hikes in some non-strategic administered prices. Nevertheless, volatile foods inflation is forecasted to stay low in view of measures taken to safeguard the supply and distribution of food and energy commodities.
After factoring in these developments, the Bank Indonesia Board of Governors Meeting convened on 5 October 2009 decided to keep the BI Rate unchanged at 6.5%. The decision was taken after the Board of Governors concluded that the 6.50% BI Rate remains consistent with achievement of the 5%±1% inflation target for 2010. This policy stance is also regarded conducive to the economic recovery and banking intermediation processes.