Strengthening Resilience, Promoting the Momentum of Economic Recovery
The global economic conditions with continuing pressure from the crisis posed major challenges for the Indonesian economy during 2009. These challenges were quite surfaced at the beginning of the year, as a result of the strong lingering impact of the global economic crisis that reached its peak in the fourth quarter of 2008. Uncertainties associated with how deep the global contraction and how quick the global economic recovery will occur not only exacerbated risks in the financial sector, but also adversely impacted economic activity in the real sector. As a result, heavy pressure continued to bear down on monetary and financial system stability in the first quarter of 2009, while economic growth remained in downward trend due to a deep contraction in exports of goods and services. These developments undermined confidence among economic actors in the financial sector and real sector, as well as potentially reduced the positive performance achieved during the previous few years.
Facing these challenges, Bank Indonesia and the Government took a number of policies to safeguard macroeconomic and financial stability, and prevent further decline in economic growth through monetary and fiscal stimulus . The various policies implemented in 2009 were basically the continuation of a series of policies that have been taken by Bank Indonesia and the Government in the fourth quarter of 2008. These policies succeeded not only in safeguarding macroeconomic and financial system stability, but also in strengthening domestic economic resilience, paving the way for renewed improvement in economic activity since the second quarter of 2009. Contributing to the success were policies systematically introduced to bolster economic and financial fundamentals in the aftermath of the 1997/1998 crisis. Overall, the Indonesian economy in 2009 has been able to get through this challenging year with a remarkable achievement. Despite having slowed compared to 2008, economic growth reached 4.5% in 2009, the third highest in the world after China and India. Further slowdown in economic growth amid global economic contraction was avoided due to predominantly demand-driven structure of the economy. After the daunting pressures sustained in the first quarter of 2009, financial markets and macroeconomic stability also improved towards the end of 2009. This was reflected by the improvement in various financial sector indicators, such as Currency Default Swaps (CDS), the Jakarta Composite Index (JCI), yield on government bond and the exchange rate. Inflation also came to a modest 2.78%, the lowest ever in the past decade.
Various positive achievements of the Indonesian economy in 2009 has been increasingly reinforced optimism for a continuing process of economic improvement in the future. This optimism was also bolstered by the improving outlook for global economic recovery. Nevertheless, the dynamics of the economy forward continues to face several challenges that may potentially hamper the acceleration of economic growth. From the external side, the vital challenge especially related to the impact of the strategy to end the policy measures implemented during the crisis (exit strategy), including quantitative easing and fiscal expansion, in developed countries. Other external challenges are also associated with the occurrence of polarisation in world trade and the ongoing imbalances in the global economy. From the domestic side, the challenges associated with several problems that may interfere monetary policy effectiveness, include among others the considerable excess liquidity in the banking system, sizeable role of portfolio investments in the capital inflows structure, asset price bubble on the financial market, lack of financial market deepening and various structural problems in the real sector.
Looking ahead, Indonesian economic growth is expected to increase, while price stability is well maintained. The prospect of economic growth is supported by the continuing recovery in exports performance and an upturn in investment activity. The improvement in exports prospect is in line with the improvement in the global economic outlook, including the developed countries. The increase in external demand coupled with strong domestic demand is expected to encourage business to move forward with increasing production capacity. With these developments, economic growth in 2010 is projected to reach 5.5%-6.0% (yoy). Despite the resurgence in economic growth, inflation pressure is expected to remain under control and within the range of 2010 inflation target of 5% ± 1% (yoy). In a longer perspective, the Indonesian economy is predicted to chart further improvement with the support of sustained measures to increase production capacity, productivity, and efficiency in the economy. Growth is predicted to accelerate further and reach 6.5%-7.5% (yoy) in 2014. This expansion of economic capacity offers support for efforts to curb inflation towards the medium-term inflation target of 4% ± 1% (yoy).
Bank Indonesia future policy is aimed to maintain macroeconomic stability and financial system stability as a precondition for long-term sustainable economic growth. In this regard, monetary policy will be consistent with the efforts directed at achieving a low inflation target in the short and medium terms. Banking policy will be directed toward strengthening banking resilience, alongside measures to improve the banking intermediation function and financial market deepening. Payment system policy will be also directed to support financial system stability and improve the effectiveness of monetary policy transmission. In addition, Bank Indonesia will further strengthen policy coordination with the Government for maintaining macroeconomic stability and promoting the momentum for economic recovery.