No.14/29/DPSHM/Humas

Bank Indonesia and the Government, on this day at the House of Bank Indonesia, held a coordination meeting to formulate policy measures in order to cope with the rising current account deficit. "We need to take coordinated steps so that policy adjustments to the current account deficit will leads to a sustainable level so that the sustainability of economic growth can be maintained", stated Governor of Bank Indonesia (BI), Darmin Nasution. Bank Indonesia will take steps to accelerate the adjustment of the external balance through exchange rate policy, strengthening monetary operations, macroprudential policies to manage domestic demand, and policies that encourage capital flows. On the Government side, the policies will be pursued to continue increase of exports and managing imports to support a healthy Balance of Payments.

Indonesia's economy grew strongly with the main driving force comes from the strengthening of domestic demand. Economic growth in the second quarter of 2012 reached 6.4% with the main source of economic growth shifting from exports to domestic demand, namely investment and household consumption. Export growth slowed sharply due to slowing global economy that reduced demand from countries categorized as major trading partners and the falling prices of Indonesia’s export commodities. On the other hand, strong domestic demand has driven the growth of imports, especially capital goods and raw materials, which is beneficial for increased production and capacity of the national economy. The strength of Indonesia's economic performance was achieved with the inflation rate remains low and under control as well as increased job creation, especially in the formal sector.

On the external front, strong domestic demand, amid a decline in exports due to the decline in global economic performance led to rising current account deficit. In the second quarter of 2012 the current account recorded a deficit of 6.9 billion dollars (3.1% of GDP) increased from 3.2 billion dollars (1.5% of GDP) in the first quarter of 2012. On the other hand, capital and financial account transactions recorded a great surplus, from 2.5 billion U.S. dollars in the first quarter of 2012 to 5.5 billion dollars in quarter II-2012, either in the form of foreign direct investment (FDI), foreign portfolio investment, and the withdrawal of private sector foreign debt. This development shows that, in the midst of global economic uncertainty, foreign investors' confidence on Indonesia's economic resilience and outlook were remains high.

In the second half of 2012, the current account deficit is forecasted to decline to about 2% of GDP. Export decline forecasted will be smaller in the third quarter before returning to positive growth in the fourth quarter of 2012, while import growth is forecasted to be lower in the second half of 2012. On the other hand, capital and financial account surplus will remain large as well, both from foreign direct investment, portfolio investment and the withdrawal of foreign debt, so that the overall Balance of Payments will return to surplus in the second half of 2012. These forecasts are based on expectations that global economic conditions and commodity prices of exports will improve supported by the policy responses adopted by Bank Indonesia and the Government. In addition, recently rapid growth in investment activity and imports of capital goods is expected to increase the capacity of the domestic economy so as to reduce dependence on imports in the future.

In response to that situation, the Coordination Meeting agreed to take a number of policies in order to adjust the current account deficit that leads to a sustainable level to support the momentum of the national economy. Bank Indonesia will take four steps. First, the BI will continue to stabilize the rupiah in accordance with its fundamental conditions to support the adjustment of the external balance. Secondly, strengthening monetary operations to support the rupiah exchange rate stability and to control liquidity. Accordingly, while the BI Rate is held fixed at 5.75%, down corridors of monetary operations narrowed by raising the deposit facility rate by 25bps from 3.75% to 4.00%. Third, deepening of the foreign exchange market, by relaxing the relevant provisions tenor forward to non-resident of the previous minimum of 3 months to minimum of 1 week. Fourth, macroprudential policy through the management of credit growth by strengthening the implementation of the loan to value (LTV) including a plan for the implementation to the sharia-compliant finance industry and ban the use of Unsecured Personal Loan for credit advances.

On the government side, a number of policies have been and will be taken to strengthen the current account through efforts to boost exports, imports hit, as well as improving the investment climate through fiscal instruments. In this case, the Government has undertaken anticipatory measures through taxation and customs duties. In terms of taxation, the Government has issued a policy of tax holiday aimed at encouraging investment to produce capital goods and to reduce dependence on imports. On the import duty, the Government has granted import duty exemption facility aimed at reducing dependence on imports for finished goods (PMK 76/PMK.011/2012). In the mining sector there are currently significant developments in the settlement of Clean and Clear at the Ministry of Energy (which is about 4,000 companies). This will provide a significant increase in added value to the export from Indonesia. In line with the anticipatory policy, the Government has issued eight Anti-Dumping Duties regulations and 10 Customs Precautions regulations which ultimately aimed to protect domestic industry from the threat of serious harm caused by a surge in imports of similar goods. Optimization of control on smuggling in the customs area conducted by the Directorate General of Customs and Excise in the border area especially in the vulnerable smuggling coridors.

Looking ahead, the Government will strengthen the policy of the processing industry to reduce dependence on capital goods, raw materials and auxiliary materials to support the fulfillment of the national industrial tree that based on domestic products. "In the medium term, Government policy is directed to decreasing dependence on imports and continue to encourage exports" explains Coordinating Economics Minister Hatta Rajasa. Furthermore, coordination between Bank Indonesia and the Government will continue to monitor and evaluate the effectiveness of the policies that have been taken.

Jakarta, 10 August 2012
Head of Office of the Governor

Dody Budi Waluyo
Executive Director