Dr. Sugeng - Constant Contact

Indonesian Economy Beyond 2014:
Continue to be positive being the third
fastest growing G-20 economy
Dr. Sugeng
Chief Representative Office,
Bank Indonesia New York
Washington DC, December 11, 2014
Key Messages
A Strong economic fundamental …

The Indonesian economy has a strong economic fundamental: economic growth is
still high with inflation in a check. Meanwhile, the rupiah exchange rate is
relatively stable along with its fundamental. This brought about resilience in the
face of uncertainty in the world economy.

The economic resilience was supported by prudent monetary and fiscal policies as
well as bold and pre-emptive policy responses by Bank Indonesia since June 2013,
with a close coordination with the Government fiscal policy and structural
reforms.
Challenges and prospect

Some challenges are still lingering on Indonesia’s economy: (i) to bring the fiscal
and current account conditions to a sustainable levels, (ii). to cut down inflation
expectation, (iii) to manage stability against the Fed’s monetary normalization, (iv)
to face an economic slowdown in China, Japan, and Europe.

With strengthening its monetary and macro-prudential policy mix to manage
macro- economic and financial stability as well as coordination with the
government, Indonesia’s economy is expected to have a better prospect in the
years to come.
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Strong Economic Fundamentals …
4
Indonesia Potential Growth
GDP 2013: 5.8%
GDP 2014: 5.1% – 5.5% supported by strong domestic demand
Indonesia’s Economic Growth (2003 – 2013)
Economic Growth from demand side
The domestic demand is still the driving force of growth.
Economic Growth by Components (%, yoy)
5
The third fastest growing economy.......
6
Inflation remained fundamentally under control….
 Core inflation has been fairly stable in the last 3 years, reaching 4.2% (yoy) in Nov. 2014
 CPI inflation in Nov. 2014 was 6.23% (yoy), a higher compared to 4.83% in Oct. 2014 due to
fuel price hikes of around 30%.
 Impact of fuel price hikes on inflation will be diminishing in January 2015
Inflation increases due to fuel price hikes ...
7
Foreign Exchange Reserves are on an upward trend….
 Foreign exchange reserves at the end of Nov-2014 reached US$111 billion,
equivalent to 6.6 months of imports or 6.4 months of imports and foreign debt
payments.
 The availability of reserves as the second line of defense in the form of bilateral currency
swap agreement (China, South Korea, and Japan), besides from Chiang May Initiative
Multilateralization (CMIM) Agreement.
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A sound banking sector
9
Prudent fiscal policy and debt management ….
10
2014 and going forward
SOME CHALLENGES …
11
Maintaining fiscal sustainability ……
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 Fuel subsidy is
continually mounting that
pontentially exceeds the
deficit target of 2.4% GDP
in 2014.
 Thus, cutting the budgets
or increasing the
subsidized fuel price is
needed.
Maintaining a sound balance of payments …..
13
Current Account Deficit is still relatively high, but in a decline trend …
 The deficit reached 3.07% of GDP in QIII-2014, lower than 4.06% in QII-2014.
 However, overall BoP was in increasing surplus of $6.5 billion in Q3-2014 , larger than
$4.3 billion in QII-2014 due to strong capital inflows both in the form of Foreign Direct
Investment and portfolio investment.
Balance of Payments
Trade Balance
The Rupiah exchange rate against US dollar development….
•
•
•
The increase of current
account deficit had an
impact on the rupiah
depreciation.
But in fact, this is
necessary to prevent
the widening of current
account deficit and
ensure that the
economic slowdown
remains manageable.
Current pressures on
the Rupiah remain,
mainly comes from
strengthening us dollar.
14
Inflation Risk
15
Inflation expectation begin to increase triggered by fuel price hike
expectation ….
Financial Sector Inflation Expectation
12
Retail Sales Inflation Expectation
1.500
Spread (RHS)
Inflation Expectation
CPI (yoy)
10
1.300
1.100
8
900
6
700
500
4
4,82*) 300
2
100
-100
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0
2010
2011
2012
2013
2014
Increase in external vulnerability
16
External debts has increased, especially those of private sectors, raising concerns on
strengthening prudential for better risk mitigation ..
Debt Service Ratio (DSR) Breakdown
Global Uneven Growth . . .
17
In the face of elevated global risks
The Fed policy
normalization
Sl
Slow growth of
China
European economy
stagnation
Decelerating growth
of Japan
18
POLICY RESPONSES BY THE GOVERNMENT
AND BANK INDONESIA IN 2014 . . .
Fiscal Reform . . .
19
The new government increased
domestic oil prices by around 30% on November 18, 2014.
1
Fiscal sustainability..
2
Creating a huge amount of
fund for financing:
- Infrastructure
- Social goal ( People-based
subsidy )
Some measures conducted by Bank Indonesia ….
As an independent body, Bank Indonesia will maintain macro economy stability, financial
stability, and ensure the payment system in a sound, efficient and safe condition
Pre-emptive Monetary Policy Mix conducted in 2013 and 2014:
• Continuing a tight bias monetary policy. The increase of BI Rate to 7.75% in November
2014 is to anchor inflation expectation and to ensure that inflationary pressures remain
under control and temporary, after the subsidized fuel price hike, and that inflation
promptly returns towards its target corridor of 4±1% in 2015.
• Allowing more flexibility on the movement of the rupiah exchange rate in line with its
fundamentals
• Strengthening payment system policy to support the smooth expansion of government
social assistance program to public in order to tight over the impact of fuel price hikes
through the use of electronic money and the implementation of Digital Financial Services
(DFS)
• Adopting macro-prudential measures (LTV etc)
• Deepening the financial market
• Strengthening coordination with the Government i.e. via Inflation Controlling Team and
Regional Inflation Controlling Team
20
BI Policy response on corporate external debt . . .
Increase
risks
Policy
responses
Increase of Corporate
External Debt Risk due to:
Phase 1: Currency and Maturity
Mismatch Regulation
•Global Risk: the possibility of
global liquidity tightening ,
weak external demand for
exports, and low commodity
price.
1. Hedging Ratio Requirement
•Domestic Risk: Increase of
DSR and Debt/GDP causing
currency risk, liquidity risk,
and over-leverage risk.
Phase 2: Over-leverage
Regulation
2. Liquidity Ratio Requirement
Strengthen reporting requirement to
include balance sheet condition.
Corporate must fulfill credit rating
minimum requirement to apply
external debt
1. The rating must be issued by
approved BI ‘s rating agency
Legal Basis: Law No.23 Year
1999/No.6 Year 2009 regarding Bank
Indonesia, Article 10 point 1 (b)
21
Expected
results
• Improved corporate’s risk
mitigation to reduce currency
& maturity mismatch caused
by external debt.
• Enhanced forex market
deepening.
• Safeguard macro and financial
system stability.
• Improving corporate external
debt management in order to
mitigate default risk.
• Strengthening accurate data and
information of non-bank
corporate external debt to
support monetary policy
formulation.
.
22
Economic Prospects …..
Economic Outlook
23
2014
Economic 5.1-5.5%
Growth
2015
5.4-5.8%
Inflation
> 4.5±1%
4.0±1%
CA Deficit
(% GDP)
±3%
<3%
A positive factor for supporting a better economic prospects:
The new Government committed to maintain and improve
investment environment, infrastructure, and political stability
Ministers in Economic Area are professional:
- Minister of Finance (Bambang Brodjonegoro)
- Minister of Energy and Mining (Sudirman Said)
- Coordinating Minister of Economic Affairs (Sofyan Djalil)
- State-owned Enterprises Ministry (Rini Soemarno)
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Thank You
Appendix
26
Extra slide
Managing External Debts …..
27
Indonesian external debts has increased, especially those of private sectors, raising
concerns on strengthening prudential for better risk mitigation ..
 Overall external debt end of July 2014 at USD 290.6 billion, of which public debt at USD
134.2 billion (46.2%) and private debt at USD 156.4 billion (53.8%).
 Debt service ratio (DSR) at 50.3%, mostly DSR of the private sector, while DSR of public
sector remains very low and continues declining.
 Short-term debt (remaining maturity) accounts for 20.6% of total debt. Debt to GDP ratio
at 33.9% while debt to export ratio at 133.0%.
Outstanding External Debts
DSR: Government and Private
DSR
DSR - Government
DSR - Private
Impact of fuel price hikes toward inflation
28
Adjustment on fuel price subsidy will increase risk of inflation . . .
• Rp2000/L increase on fuel price subsidy will increase inflation around 2.4-2.8%. Yet
the impact will be temporary.
• BI will strengthen coordination with Government through TPI/ TPID to overcome
second round effect and to guidance the inflation toward its BI’s target.
Dampak Kenaikan BBM (Premium dan Solar)
Bobot SBH
2012 (%)
Inflasi (%)
Sumbangan (%)
Dampak langsung
- Bensin
- Solar
3,95
0,16
30,77
36,36
1,27
1,21
0,06
Dampak tidak langsung ke tarif angkutan
- Angkutan ASDP
- Angkutan Antar Kota
- Angkutan Dalam Kota
- Angkutan Laut
0,01
0,66
2,57
0,05
14,68
14,00
24,18
3,04
0,73
0,00
0,09
0,62
0,00
0,12
0,09
5,73
10,18
0,01
0,01
63,10
17,46
0,57
1,21
0,57
0,36
0,21
2,58
Dampak Kenaikan Harga BBM Bersubsidi
- Tarif KA
- Tarif Taksi
Dampak tidak langsung ke komoditas lainnya *)
- Core
- Volatile Food
Total dampak ke Inflasi IHK
*) Da mpa k ti da k l a ngs ung berda s a rka n es ti ma s i denga n da ta terki ni , yg ma na el a s ti s i ta s 10%
kena i ka n ha rga BBM bers ubs i di a ka n mena mba h teka na n i nfl a s i core s eki ta r 0,17% da n VF s eki ta r
0,36%.
Economic Growth by Sector
29
The domestic demand is still the driving force of growth.
%Y-o-Y, Tahun Dasar 2000
Sector
Agriculture
Mining and Quarrying
Manufacturing Industries
Electricity, Gas and Water Supply
Construction
Trade, Hotel & Restaurant
Transport and Communication
Financial, Ownership and Business
Services
Gross Domestic Product
Source : BPS-Statistics Indonesia
2013
I
II
III
IV
3.7
0.1
6.0
7.9
6.8
6.5
9.6
8.2
6.5
6.0
3.3
(0.6)
6.0
4.0
6.6
6.4
10.9
7.7
4.5
5.8
3.3
2.0
5.0
3.8
6.2
6.1
9.9
7.6
5.6
5.6
3.8
3.9
5.3
6.6
6.7
4.8
10.3
6.8
5.3
5.7
2013
3.5
1.3
5.6
5.6
6.6
5.9
10.2
7.6
5.5
5.8
I
2014
II
III
3.2
(0.4)
5.1
4.8
6.7
4.8
10.2
6.1
5.7
5.2
3.4
(0.3)
5.0
8.1
6.4
4.5
9.8
6.2
5.7
5.1
3.7
0.3
4.6
6.2
6.3
4.2
9.0
6.0
6.5
5.0
DXY Index: Januari – Desember 2014