22-Oct-2012

1

1

Juda Agung, PhD

Singapore, 24 September 2012

Euro-Area Uncertainties and Implications on Indonesian Economy

2 Outline… 2

Fundamentals of Indonesian Economy Impacts of Renewed Global Uncertainties

Policy Challenges and Responses

22-Oct-2012

2

Indonesian economy remains resilient… Despite global slowdown, Indonesia’s growth remains strong, posted an average of 6.0 % during 2007-2012. The Q2-2012 show that the economy is resilient amidts sharp fall in exports.

Inflation has fallen sharply, reaching a single digit. Core inflation has been fairly stable in the last 3 years at around 4%.

3

GDP Growth 2002 - 2012

3

4

5

6

7

8

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

5 Year Average: 5.1% 2002 - 2006

%, yoy

5 Year Average: 6.0% 2007 - 2011

-

4

8

12

16

20

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

%, yoy

CPI Inflation 2002 - 2012

Q2-

2012

6.4%

Strong Domestic Demand … GDP Growth by Expenditure

-1.9

2.0

-3.0

3.7

2.3

0.4

2.8

1.1

2.3

-4.1

0.9

2.9

0.5

2.8

-6 -4 -2 0 2 4 6

- Statistical Discrepancy

- Change in Inventories

Import

Export

Gross Fixed Cap Formation

- Government C.

- Household C.

Q2-2012 Q1-2012

Contribution of Growth (%)

22-Oct-2012

3

...supported by growing middle class consumers..

Middle Class Consumers (ADB)

5

Income Groups

(BPS)

28.4

104.5

129.2

15%

46%

54%

0%

10%

20%

30%

40%

50%

60%

0

20

40

60

80

100

120

140

160

19

90

19

93

19

96

19

99

20

02

20

05

20

06

20

07

20

08

20

09

20

10

Jumlah Middle Class Rasio Middle Class

Juta orang Persen

20.9 18.8 19.6 16.9

36.9 36.4 35.7 34.7

42.2 44.8 44.8 48.4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2005 2008 2011

Low income Middle income High income % share

Source: Susenas Survey (BPS)

... continuous increasing FDI... As a destination for FDI, Indonesia made impressive gains, moving up from ranking 20th in 2010 to 9th in recent survey.

Realized FDI (USD billion)

6

The A.T. Kearney FDI

Confidence Index, 2012

22-Oct-2012

4

Underpinned by structural reform… Structural reforms has been fruitful, reflected in improved business climate and rising investment, while consistent fiscal discipline has led to a downward trend of external debt.

Investment (% of GDP)

7

External Debt (% of GDP)

62.2%

151.2%

105.6%

85.3%

65.7%55.1%

35.9% 30.1%28.3%

27.3%

0%

20%

40%

60%

80%

100%

120%

140%

160%

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

*

Q2

- 2

01

2*

19.9 19.4

22.424.1

27.7

32.1

32.8

15

20

25

30

35

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

as % of GDP

Yet, Indonesia is not completely immune..

Direct impact from Euro-crisis would be limited since the share of Indonesian

export to China is less than 20%. Similarly, direct impact through banking sectors

is limited.

But, the indirect impact through China would be significant, since China is the

major destination of Indonesian exports.

Financial channel is working through the capital flows movements.

Trade Links with Euro-Area (Share of export to EA)

Banking Links with Euro-Area (Share of Assets owned by EA banks)

22-Oct-2012

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Trade Channel… Through trade channel, renewed global slowdown has negative spillover to Indonesia exports.

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2012

Jan-

Jun** Q. III Q. II*

1 China 13.5 19.4 89.1 84.1 37.6 33.3 2.5

2 Japan 11.4 22.1 20.4 17.2 0.1 3.3 -7.3

3 USA 9.6 30.5 21.8 14.5 5.9 -6.1 -5.3

4 India 7.9 39.4 92.6 37.6 4.8 16.8 -25.2

5 Singapore 6.4 15.7 20.9 25.8 -3.2 -10.5 -15.4

6 Malaysia 5.8 54.6 31.2 11.0 -10.9 -3.6 -13.9

7 South Korea 4.5 10.9 16.8 -1.2 6.3 -4.3 -8.3

8 Thailand 3.5 101.4 9.5 23.1 -8.7 -21.7 12.0

9 Netherlands 2.8 53.9 105.2 19.7 -1.2 5.5 -26.6

10 Taiwan 2.7 31.4 33.5 41.7 21.2 10.1 -3.0

Total 100.0 30.1 39.6 28.7 8.7 4.0 -8.5

Q. I

Share

(%)

2011

Q. IV Q. I Q. II

Growth y.o.y (%)

2012

Indonesian export to China… Indonesia’s Exports to China are largely for China’s domestic demand (Consumption and Investment).

Different from other Asian, Indonesian role in Chinese production network is relatively low ...

Decomposition of Asia’s Exports to China

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Elasticities of Asia’s exports to Chinese domestic demand vs Chinese exports

Source: Citi Research

22-Oct-2012

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Temporary External Imbalances… Rebalancing sources of growth toward domestic demand lead to a widening CA deficit.

Nevertheles, CAD reflects higher I, rather than higher C; and financed by FDI...

11

Current Account Balance (% of GDP)

Negara

Correlation to Saving Correlation to

Investment

1985-2005

1985-2005 (exclude

crisis)

1985-2005

1985-2005

(exclude crisis)

Indonesia -0.08 0.10 -0.50 -0.36

Malaysia 0.48 0.48 -0.93 -0.93

Philippines 0.20 -0.04 -0.80 -0.86

Singapore 0.69 0.72 -0.34 -0.47

Thailand -0.37 -0.58 -0.97 -0.97

1990-2011

1990-2011 (exclude

crisis)

1990-2011

1990-2011

(exclude crisis)

Indonesia -0.05 -0.09 -0.68 -0.65

Sumber: Moreno (2008), BI estimates

Correlation between CA vs Savings and Investment

Financial Channel… Through financial channel, capital flows have been volatile since the mid-2011, while exchange rate were under pressure...

Shallow financial markets and large share of foreign ownership...

Capital Flows and Exchange Rate

12

8,500

8,700

8,900

9,100

9,300

9,500

(8,000)

(6,000)

(4,000)

(2,000)

-

2,000

4,000

6,000

Jan-

11

Feb-

11

Mar

-11

Apr

-11

May

-11

Jun-

11

Jul-1

1

Aug

-11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Apr

-12

May

-12

Jun-

12

Jul-1

2

Aug

-12

StockGovt. BondSBIIDR/USD

USD Mn IDR/USD

Euro debt

crisis and

US rating

downgrade

Greece

election

22-Oct-2012

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Still, Indonesia is in a much better shape… Indonesia has sufficient policy space to respond. Adequate reserves and flexible exchange rate can provide a cushion, monetary and fiscal policy could be deployed to provide ample stimulus to growth if needed...

Reserves (USD biilion)

13

Fiscal and Monetary Policy Space

109

-

20

40

60

80

100

120

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

International Reserve in US$

• How to reduce widened CA deficit. While it is temporary, we need to be vigilant.

• Global slowdown would be long lasting

• Oil imports continue to increase in line with higher oil consumption and sluggish production.

• FDI inflows are mostly domestic markets oriented.

• What are appropriate measure to manage strong domestic demand, while inflation remains well anchored?.

• How to prepare ‘tail risk’ events, which could be triggered by Euro (Grexit and contagion) or US (fiscal clift).

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Policy Challenges Going Forward

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Policy Responses

Policy Mix Current Policy Stances

Monetary Policy Interest rate policy is relatively neutral given inflation is under control (within the target range for 2012 and 2013).

Exchange Rate Policy - In the episode of cap inflows, partially absorbing appreciation with FX reserve -Recently, exchange rates move more flexible as part of adjustment process in external imbalances. CB intervene to smooth out volatility. - Financial deepening in FX markets (forward market)

Macroprudential Policy -In the episode of cap inflows, macroprudential policy to limit hot money (minimum holding period, limit on foreign borrowing, and FX reserve req) - Recently, measure to limit credit expansion in some sectors (property and automotive).

Crisis Management - crisis management protocol at the level of authorities as well as national wide. - Better interagency coordination

Monetary policy mix is necessary given the multichallenges...But fiscal and structural policies are imperative to solve medium term issues.

THANK YOU