Statement By The Governor Of Bank Indonesia : Opportunity For Reinvigorated Economy In 2007 - Bank Sentral Republik Indonesia
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October 25, 2020
No. 9/ 1 /PSHM/Humas

In the Board of Governor’s Meeting held today, Bank Indonesia decided to lower the BI Rate to 9.50%, down 25 bps from the previous level. This decision was taken after an evaluation of Indonesia's macroeconomic conditions in 2006, the economic and monetary outlook, the various risks ahead and progress towards the inflation target, set at 6%±1% and 5%±1% for 2007 and 2008. The Board of Governor’s Meeting also sees 2007 as a landmark year with promise for reinvigorating the nation’s economy.
During 2006, the Indonesian economy was marked by overall macro stability, reflected in inflation at 6.6%, an appreciating exchange rate and economic growth expected not to vary widely from the preceding year.  Economic activity, which showed some weakening in early 2006 as a result of falling public purchasing power in the wake of the October 2005 fuel price hike, has gradually regained momentum. Economic growth for the full year is estimated to have reached 5.5% (yoy). Growth in 2006 was driven primarily by rapidly expanding exports and also by consumption, which continues to provide significant momentum for growth.

The significant improvement in exports during 2006 strongly reinforced the balance of payments, which recorded a hefty surplus. The high balance of payment surplus in 2006 resulted mainly from the surplus in the current account. Non-oil and gas exports showed impressive growth on the strength of world demand and high international commodity prices. At the same time, import growth declined due to lack of recovery in domestic demand. Nevertheless, there was a significant increase in capital goods imports, indicating a rise in potential for production. The substantial balance of payments surplus enabled the government to move forward with early repayment of USD7.6 billion owed to the IMF. Even after the early repayment, international reserves at end-2006 were still up from the previous year at about USD42.4 billion.

From the second half of 2005 to April 2006, the tight bias monetary policy pursued by Bank Indonesia succeeded in curbing rising expectations of inflation. The very high inflation in early 2006 gradually eased to 6.6% (yoy) at the end of the year, below the 8.0%±1% target range.
In May 2006, Bank Indonesia embarked on a cautious easing in the BI Rate.  At year end, the BI Rate stood at 9.75%, having come down 300 basis points from the level recorded at the beginning of the year. The sustained reductions in the interest rate have been welcomed by business and have met with positive response from market actors. Reflecting this were rising share prices, with the stock index closing 2006 at 1,805, decline in long-term bond yield and renewed growth in consumer confidence. Despite this, the reductions in the BI Rate have only seen limited transmission to lending rates. For this reason, this monetary relaxation measure is accompanied by changes in definitions and banking regulations pertaining to the Legal Lending Limit (LLL). Other steps have also been taken to reinforce the national payment system and thus assure its efficient, expeditious and reliable operation in support of economic activities.

In the banking sector, various performance indicators point to general performance improvement. Significant gains have been recorded in industry financial and operational indicators, reflected in growth in total assets backed by expansion in earning assets including credit. Total banking industry assets were up at Rp 1,635 trillion in November 2006. Credit expansion reached Rp 78.2 trillion (10.7%), bringing total bank lending to Rp 806.3 trillion. Funding this credit expansion was Rp 123 trillion (10.9%) expansion in depositor funds, which mounted to a cumulative Rp 1,251 trillion. Bank capitalisation has held at a very reassuring level, reflected in the bank capital adequacy ratio (CAR) that has remained steady at about 20%.
Looking ahead, the Board of Governors envisages yet higher growth for the Indonesian economy in 2007, alongside macroeconomic stability. Growth in 2007 is predicted to reach 5.7%-6.3%, surpassing the estimated 5.5% economic growth for 2006.
Nevertheless, aside from the progress and optimism, the Board of Governors' Meeting also takes note of various structural issues that daunt the Indonesian economy. Resolution of these structural issues will promote more rapid economic advancement for Indonesia. Weak support in the investment climate and market structures, inadequate infrastructure and bureaucratic difficulties have resulted in slow investment growth, low productivity and inefficiency in production factors. This in turn has led to supply side rigidities that hamper response to macro stimulus policies.  On one hand, the structural problems have kept the quality of economic growth at a low level, with growth unable to absorb the ever expanding workforce. On the other hand, the implications arising from these issues include various susceptibilities in financing structures, both for financing from foreign and domestic sources.

CPI inflation in 2007 is predicted to come within the government-set inflation targeting range of 6+1%. Supporting this CPI inflation forecast is low pressure from administered prices, the expected continued low pressure from volatile foods inflation and the government commitment to keep markets adequately supplied with food and especially staple needs.
Having considered the objective information presented in these economic forecasts for 2007, the Board of Governors believes that consistent macroeconomic policy, more precisely targeted structural policies and accelerated implementation of these policies are prerequisites for higher quality economic growth. For this reason, the commitment, hard work and coordination of the entire nation will be vital to achieving higher quality economic growth in 2007.
In the monetary sector, Bank Indonesia’s policy will remain focused on building macroeconomic stability in support of sustainable economic growth through consistent application of the Inflation Targeting Framework (ITF). In the banking sector, Bank Indonesia will keep working to strengthen the banking intermediary function to ensure effectiveness in availability of financing to meet business needs. Despite some difficulties hampering the operation of the intermediary function during 2006, credit expansion is expected to reach 18% in 2007 as the investment climate improves.

Jakarta, 4 January 2007
Directorate of Strategic Planning
and Public Relations

Budi Mulya



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