Monetary Policy Report Quarter IV-2008 - Bank Sentral Republik Indonesia
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October 29, 2020

General Review

In Q4/2008, Indonesia's economic performance began to show signs of impact from the global economic downturn. The continued weakening in the global economy and plunging commodity prices weighed heavily on Indonesia's exports, which in turn impacted the balance of payments and the exchange rate. On financial markets, the global financial crisis has triggered widespread turmoil on money markets, currency markets and bond markets. On the other hand, falling world commodity prices and slowing aggregate demand have eased inflationary pressure.

Looking ahead, the outlook for further economic slowdown in 2009 augurs for a sustained downward trend with inflation forecasted at 5%-7%. In January 2009, following an assessment of the current economic conditions and outlook, Bank Indonesia lowered the BI Rate 50 bps to 8.75%.

During 2008, the Indonesian economy charted generally strong performance amid the global turmoil. The Indonesian economy managed an estimated 6.1% growth, driven primarily by the engines of consumption and exports. In Q3/2008, the economy was still charting above 6% growth with continued healthy performance in the financial sector reflected in a stable exchange rate, mounting stock index
and declining yield on Government Securities.

However, in Q4/2008, the global financial turbulence began to bear down on the Indonesian economy. Weakening exports, pressure on the balance of payments and turmoil on the money market took their toll on Indonesia's economic growth.

On financial markets, global liquidity conditions tightened up in tandem with mounting perceptions of emerging market risks. This in turn triggered a slide in the IDX and Government Securities prices alongside a sharp downturn in the exchange rate in early Q4/2008. During 2008 overall, the average value of the rupiah fell 5.4% to Rp 9,666 to the US dollar.

In 2008, Indonesia recorded a balance of payments deficit. The current account began showing a deficit in Q2/2008. This deficit is explained more by the brisk pace of imports driven by robust domestic demand. At the same time, the capital and financial account and particularly portfolio investments continued to chart a surplus. The capital account surplus was buoyed by the issue of global bonds and
foreign capital inflows, especially on the Government Securities market, which saw significantly increased activity in Q2/2008. As Indonesia entered the second half of the year, the balance of payments came under mounting pressure. Within the current account, exports began tapering off in response to falling commodity prices. Similarly, the capital and financial account was impacted by diminishing investor interest in the domestic financial market.

The brisk exodus of foreign capital, especially on the markets for Government Securities and Bank Indonesia Certificates (SBIs), resulted in a portfolio investment deficit in Q3/2008 that widened further in Q4/2008. The combined deficits in the current account and the capital and financial account resulted in a surging balance of payments deficit in the final quarter of the year. Measured for 2008 overall, the
balance of payments recorded an estimated deficit of USD2.2 billion. At end-December 2008, international reserves stood at USD51.6 billion, equivalent to 4.0 months of imports and servicing of official debt.

Responding to these developments, monetary policy in 2008 was targeted at subduing inflationary pressures fuelled by high aggregate demand, especially during the first half of the year, as well as the second round effect of the quarterly fuel price hike that sent inflation soaring to 12.1%. The strong inflationary pressure driven by aggregate demand was also reflected in the onset of deficit in the current account from Q2/2008 due to rapidly growing imports and expansion in the money
supply, most importantly M1.

To fend of mounting inflationary pressure, Bank Indonesia progressively raised the BI Rate from 8% in May 2008 to 9.5% in October 2008. This monetary policy action prevented further acceleration in public inflation expectations and eased the downward pressure on the balance of payments. Following this, Bank Indonesia forecasted reduced future inflationary pressure in the wake of falling world commodity prices and slowing aggregate demand as a result of the global economic crisis. Thus in December 2008, the BI Rate was lowered a further 25 bps. Overall CPI inflation in 2008 reached 11.06%, with core inflation recorded at 8.29%.

Looking ahead, the Indonesian economy in 2009 will be strongly influenced by the dynamics of the global economy. Indonesia»s economic growth is forecasted in the range of 4.0%-5.0%, driven primarily by the household consumption component of domestic demand. Despite predictions of slowing, household consumption is still expected to show resilience, particularly in view of the government plans for an added fiscal stimulus in 2009. Furthermore, the government commitment for earlier realisation of budget expenditures, civil servant pay rises, the election year and increases in provincial minimum wage levels will also spur household consumption.

In regard to the balance of payments, the current account is forecasted to run a deficit in 2009 at about 0.11% of GDP due to deteriorating export performance, while imports are not set to decline at the same rate. International reserves at end- 2009 are estimated at USD 51 billion, equivalent to 4.7 months of imports and servicing of official foreign debt.

Indonesia's banking industry is expected to feel the effects of the global financial crisis and world economic slowdown. Nevertheless, the overall banking industry will still retain considerable resilience, as reflected in the CAR and NPL key banking indicators. The capital adequacy ratio (CAR) will remain high despite dropping slightly to 14.3%. Despite a rising trend in NPLs, the expected level is still at about 5%.

After factoring in these various developments, the Bank Indonesia Board of Governors decided to lower the BI Rate an additional 50 bps in January 2009 to 8.75%. Looking ahead, Bank Indonesia will stay the course with monetary policy conducive to domestic demand while remaining committed to economic stability in the medium to long-term. On the operational level, there is still room for further cuts in the BI Rate if the inflation outlook remains on track with the medium-term inflation target. In the area of banking, Bank Indonesia will continue pressing forward with the consolidation programme for a sound, strong and competitive banking system. Additionally, an important focus for Bank Indonesia will be the strengthening prudential management in the banking industry in order to weather the global crisis.



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