2011 Economic Report on Indonesia - Bank Sentral Republik Indonesia
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February 28, 2020

Executive Summary
Indonesia’s Economic Resilience  Amid Global Economic Uncertainty

In 2011, the Indonesian economy demonstrated considerable resilience in the face of mounting uncertainties in the global economy, reflected in even stronger growth performance and steady, prudently managed macroeconomic stability. Economic growth reached 6.5%, an all-time high for the past ten years, while inflation was a mild 3.79%. Accompanying this more robust performance was improvement in quality of growth, reflected in the substantial role of investment and exports as sources of growth, falling levels of unemployment and poverty and improvement in equitable distributi on of growth across Indonesia’s regions. On the external side, Indonesia’s balance of payments charted a respectable surplus that expanded the internati onal reserves position and contributed to appreciation in the rupiah exchange rate. In the financial sector, financial system stability held firm despite pressure on financial markets during the second half of 2011 from the impact of the worsening crises in Europe and the United States. With strong economic resilience and low external debt risk supported by prudent macroeconomic policies and a range of ongoing structural policy measures, Indonesia was again rewarded with an upgrade that took the sovereign rating to investment grade.

Indonesia’s robust economic fundamentals proved adequate to minimise impact from the global economic turmoil. Uncertainty over the European debt crisis and fears over the outlook for US economic recovery during 2011 fuelled turbulent conditions on financial markets and dented global growth. The brunt of fallout in Indonesia from the global turmoil was borne by financial market, led by the stock and bond markets, while impact on the real sector was comparatively minimal. In the financial sector, the decision by some investors to pull out foreign capital during the second half of 2011 put pressure on the rupiah, Government bond yields and share prices. Nevertheless, the stabilisation measures pursued by Bank Indonesia and the Government, reinforced by the strong fundamentals of
the financial sector and macroeconomic stability, averted a breakout of turmoil on the financial market. In the real sector, external-side support for Indonesia’s economic resilience came from diversificati on of export markets marked by growth in intra-regional trade within Asia in additi on to the expanding role of foreign direct investment (FDI). On the domestic front, economic resilience was also bolstered by buoyant purchasing power in response to rising incomes and a demographic structure weighed heavily in favour of productive age groups.

In addition to strong economic fundamentals, appropriate policy responses were key to supporting Indonesia’s economic resilience. Bank Indonesia and the Government engaged in policy coordination to reinforce economic fundamentals while mitigating impact from external turbulence. On Bank Indonesia’s part, the measured, timely application of a monetary and macroprudenti al policy mix proved successful in safeguarding macroeconomic and financial market stability. This policy mix was implemented through interest rate and exchange rate policy responses as well as macroprudential policies for management of capital inflows and banking liquidity. Also supporting the monetary and macroprudential policy mix was a communications strategy to improve the effectiveness of monetary policy transmission and minimise uncertainty for market actors. In the banking system, Bank Indonesia worked untiringly to strengthen banking resilience, enhance the supervision function and promote intermediati on with focus on productive sectors. From the Government side, fiscal policy sought to deliver an enlarged stimulus while safeguarding fiscal sustainability. At the sectoral level, the Government worked hard to boost the quality of economic growth through improvements to the investment climate, accelerated construction of infrastructure, stronger competitiveness in industry and exports and greater national food resilience, including measures to stabilise prices. Policy coordination between Bank Indonesia and the Government in order to improve economic resilience and macro stability was also reinforced through the implementati on of Crisis Management Protocols (CMPs) and control of inflati on at the central and regional levels through Infl ati on Control Team (TPI) and Regional Inflation Control Teams (TPIDs) forums.

In the outlook for 2012, Indonesia’s economy is predicted to forge ahead, although risks from a downturn in the global economy remain high. In 2012, the economy is forecasted to grow by 6.3%-6.7% while inflation is projected within the 4.5% ± 1% targeting range. This growth will be driven mainly by the domestic economy, with investment playing an expanding role. Indonesia’s large domestic market, prudent macroeconomic stability, low interest rates, improved investment climate and investment grade status are factors that will drive robust investment growth. In keeping with this trend, inflows of FDI are predicted to mount higher, helping to keep the balance of payments in a healthy surplus. This will contribute to stability in the rupiah exchange rate in the face of risks of shocks in movements of capital. However, due to the risk of further weakening in the global economy, Indonesia’s economic growth may trend towards the lower limit of the forecasted range in the absence of monetary and fiscal stimulus measures. Meanwhile, Government plans concerning subsidised fuels and other strategic commodities may stoke inflationary pressure in coming periods.

In 2012, Bank Indonesia will optimise the role of the monetary policy mix to curb inflation within the targeting range and boost economic growth in order to mitigate risks from the global economic slowdown. In the banking sector, Bank Indonesia will improve efficiency to enable banks to optimise their contribution to the economy while continuing to build the resilience of the banking system. In addition, Bank Indonesia is working to increase financial inclusion through broader public access to banking services. In the payment system, Bank Indonesia is devoting untiring effort to improve efficiency, reliability, security and consumer protection in both the nati onal payment system and in the payment system linkages with other countries. These measures underpin the confidence that
during 2012, economic growth will again reach the median projection. In the medium-term, given the forecasts for improvement in the world economy and ongoing launching of structural policies in investment and manufacturing, the Indonesian economy can look forward to higher, sustainable growth alongside prudently managed macroeconomic stability. Indonesia’s economy is forecasted to grow at 6.6%-7.4% while inflation will ease further in line with the 4.0% ± 1% target for 2016



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