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MonetaryPolicy Review

Economy, Monetary, and Finance

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MONETARY POLICY STATEMENT

At the Bank Indonesia Board of Governors’ Meeting held on 8th April 2014, it was decided to maintain the BI rate at 7.50%, with the Lending Facility rate and Deposit Facility rate held respectively at 7.50% and 5.75%. This policy is consistent with ongoing efforts to steer inflation back towards its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015, as well as reduce the current account deficit to a more sustainable level. Bank Indonesia considers recent developments in the economy of Indonesia as favourable and in line with previous projections, marked by lower inflation and a balance of trade that has returned to record a surplus. Looking ahead, Bank Indonesia will continue to remain vigilant of a variety of risks, globally and domestically, as well as implement anticipatory measures to ensure economic stability is preserved and stimulate the economy in a more balanced direction, thereby buoying current account performance. To this end, Bank Indonesia will continue strengthening the monetary and macroprudential policy mix as well as enhancing coordination with the Government to control the rate of inflation and reduce the current account deficit, including policy to bolster the structure of the economy and manage external debt, in particular private external debt.

The global economic recovery continues, albeit at a moderate pace. The global recovery is primarily supported by economic improvements in advanced countries, in line with the perpetuation of monetary stimuli. In emerging market countries, especially China, the economic slowdown is the result of economic rebalancing policy. Such conditions have the potential to influence international commodity prices that remain low. Meanwhile, economic growth momentum is picking up in other trade partners of Indonesia, like India. Looking ahead, Bank Indonesia will continue to monitor risks stemming from global economic growth as well as other external risks, like the planned normalisation policy of the Federal Reserve and conditions in a number of other vulnerable emerging market countries.

Bank Indonesia expects the ongoing episode of domestic economic moderation to continue, leading to a more balanced and sound economic structure. External demand is improving and substituting moderating domestic demand as a source of economic growth. Several latest indicators and leading indicators demonstrate that household consumption surged in the first quarter of 2014 in the run up to the 2014 General Election, among others. Exports are also following a more favourable trend on the back of exports from the manufacturing sector in harmony with the economic recoveries reported in advanced countries. Meanwhile, private investment growth during the first quarter of 2014 remained limited and is not expected to pick up until the second semester. As a whole, economic growth in Indonesia for 2014 remains in the range projected previously by Bank Indonesia at around 5.5-5.9%.

More balanced economic growth is further buttressed by improvements in the external sector from the standpoint of the trade balance and the financial account. The balance of trade of Indonesia in February 2014 rebounded to record a surplus of US$ 0.79 billion, bolstered by a burgeoning surplus in the non-oil/gas trade account. The growing surplus in the non-oil/gas account stemmed from a contraction in non-oil/gas

MONETARY POLICY REVIEW

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imports in line with moderating domestic demand along with a surge in non-oil/gas exports, primarily from the manufacturing sector as the economies of advanced countries continue to recover. The trade surplus also emanated from reductions in the oil and gas trade deficit as a result of rising oil and gas exports due to increased oil lifting as well as a decline in oil and gas imports in accordance with the mandatory use of biodiesel as fuel in the transportation sector and the electricity sector. In terms of the financial account, foreign capital inflows continued unabated in March 2014, thus foreign portfolio inflows to financial markets in Indonesia reached US$ 5.8 billion accumulatively in the first quarter of 2014. Against this auspicious backdrop, foreign exchange reserves held in Indonesia at the end of march 2014 topped US$ 102.6 billion, equivalent to 5.9 months of imports or 5.7 months of imports and servicing external debt, which is well above international adequacy standards of around three months of imports. Looking forward, Bank Indonesia expects improvements in the external sector to continue, underpinned by a current account deficit in 2014 that can be brought down to below 3.0% of GDP and a deluge of foreign capital inflows. To this end, Bank Indonesia will continue to monitor a plethora of risks, global and domestic, which could undermine external sector resilience and its pertinent response, including the performance of external debt, in particular private eternal debt.

A more balanced domestic economic structure along with improvements in external sector performance are helping to strengthen the rupiah exchange rate. In March 2014, the rupiah closed at a level of Rp 11,360 per US dollar, appreciating 2.19% compared to the level at the end of February 2014. On average, the value of the rupiah in March 2014 was Rp 11,420 per us dollar, which is 4.38% stronger than the average in the previous month of February 2014 at Rp 11,919 per US dollar. Consequently, the rupiah appreciated 7.13% up to the end of March 2014 compared to the level reported at yearend 2013, or 2.85% compared to the average value for 2013 overall. Looking ahead, Bank Indonesia will consistently maintain rupiah exchange rate stability according to its fundamental value, supported by efforts to deepen the money market. A number of advancements have been accomplished in terms of rupiah and foreign exchange money market deepening, like the mini Master Repurchase Agreement (MRA), while hedging transactions will be improved and constitute the focus of future policy.

The rate of inflation continued a downward trend in March 2014, which further supports the prospect of achieving the inflation target of 4.5±1% in 2014. The rate of headline inflation was low in March 2014 at 0.08% (mtm) or 7.32% (yoy), down on that posted in February 2014 at 0.26% (mtm) or 7.75% (yoy). Furthermore, inflation in March was also lower than the average rate over the past six years. Inflationary pressures eased as a result of lower core inflation, which dropped in line with exchange rate appreciation, moderating domestic demand and well-anchored inflation expectations. Furthermore, food prices also experienced deflation due to greater supply of several food commodities at the onset of the harvest season. In future, Bank Indonesia will continue to monitor the array of risks that could potentially undermine achievement of the inflation target, like corrections to administered prices and potentially rising food prices as various regions enter the dry season, including possible indications of a weak El Nino episode forecast for August 2014. In this context, Bank Indonesia will continue to strengthen its policy mix and coordinate with the Government at the central and local levels to control inflation in accordance with its target corridor.

Banking system resilience and better financial market performance helped maintain financial system stability. Tenacious banking industry resilience to credit risk, liquidity risk and market risk was preserved and supported by a solid capital structure.

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Credit growth to the private sector cooled off from 20.9% (yoy) in January 2014 to 19.9% (yoy) in February 2014, as domestic demand moderated. Bank Indonesia will continue to coordinate with the Financial Services Authority (OJK) to steer future credit growth thereby promoting a more sustainable and sound direction of domestic economic growth. Meanwhile, capital market performance in March 2014 improved, as corroborated by gains on the IDX Composite Index and lower yields of tradeable government securities (SBN). Improvements on the capital market have driven investor optimism concerning the domestic economic outlook.

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THE ECONOMY AND MONETARY POLICY

The economy of Indonesia proceeded in a positive direction during March 2013 in line with prevailing projections. Several domestic indicators evidenced an easing of inflationary pressures accompanied by greater economic balance. This was signified, amongst others, by a lower rate of inflation in the reporting month and a favourable swing in the trade balance back towards a surplus in February 2014. Furthermore, the composition of economic growth was shown to improve as external demand picked up to offset moderating domestic demand.

Promising domestic economic performance was bolstered by a persistent global economic recovery, albeit at a slightly more moderate pace. Global economic growth was still driven by recoveries in advanced countries, like the United States, countries in Europe and Japan. Additionally, the fragile recoveries in developed countries were achieved on the back of ongoing monetary stimuli. In emerging market countries, however, specifically China, economies slowed as economic rebalancing policy was instituted. Meanwhile, stronger economic growth was also reported in trade partner countries too, like India.

Weaker growth in emerging market countries, particularly China, contributed to tumbling commodity prices on international markets. Moderating economic growth in China lead to a lower oil price despite rising at the beginning of the year due to the prolonged winter in the United States and Europe. The downward oil price trend in 2014 is also attributable to a surge in supply, primarily from OECD countries.

Looking forward, Bank Indonesia will continue to monitor a range of economic risks in the global economy because of their propensity to undermine economic prospects. External risks stem from the Federal Reserve’s plan to implement normalisation policy along with an array of vulnerabilities affecting emerging market countries, including economic rebalancing policy currently pursued in China.

Economic Growth

Moderating economic growth in Indonesia is persisting in a more balanced and sounder direction. By component, external demand strengthened to compensate weaker domestic demand as a source of economic expansion. Several early and leading indicators demonstrated gains in growth momentum in terms of household consumption during the first quarter of 2014, driven by activities associated with the 2014 General Election. Exports are also expected to increase, predominantly due to manufactured exports, as the economies of advanced countries continue to recover. Meanwhile, limited growth was recorded for private investment during the first quarter of 2014, which is only expected to pick up in the second semester of the year. Overall, the economy of Indonesia in 2014 is predicted to grow in the range of 5.5-5.9%, pursuant to previous Bank Indonesia projections.

Household consumption increased in the first quarter of 2014 owing to greater consumer confidence and more spending in preparation for the 2014 General Election. Greater consumer confidence is expected to boost household consumption, which is verified by the results of recent surveys conducted by several institutions indicating that consumer confidence is following an upward trend. The Consumer Confidence Indexes (CCI) of Bank

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The global economic recovery persisted at

a more moderate pace

The sluggish global economic recovery

suppressed rising commodity prices

Consumption drove gains in GDP during

quarter I 2014

Solid consumer confidence and spending on the General

Election helped bolster consumption

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Indonesia and ANZ Roy Morgan increased in quarter I 2014. Meanwhile, the Consumer Confidence Index (CCI) according to Danareksa actually slumped moderately due to less public optimism concerning the current economic outlook, which lead to limited availability of employment opportunities (Graph 2.1).

Graph 2.1Consumer Confidence Index

Graph 2.2 Income Expectation Index

Stronger consumption was also supported by greater public purchasing power and more favourable income expectations. According to the Consumer Survey conducted by Bank Indonesia in March 2014, income expectations are on the rise (Graph 2.2). Several other indicators support that prognosis, buoyed by growth in household consumption. Moreover, a low rate of inflation at the beginning of the year and further remunerations for civil servants at 14 ministries/institutions in 2014 helped prop up public purchasing power. The income effect of higher interest rates provided additional income for households with savings placed at a bank. In addition, the wages of informal workers also increased, as reflected by higher real wages for agricultural labourers as well as more favourable farmer rates despite an ongoing contraction overall.

Government consumption was thought to intensify during the first quarter of 2014 in line with the pattern of budget absorption at the beginning of an election year. National spending in the first two months of the year exceeded that recorded during the same period of the previous year. The realisation of government spending up to February 2014 amounted to 9.6% of the target, dominated by routine spending and non-productive spending, like spending on personnel, debt repayments and subsidies. Meanwhile, social welfare spending skyrocketed in the wake of severe flooding at the beginning of 2014.

Export performance improved in the first quarter of 2014 due to ongoing economic recoveries in several advanced countries. The effect of economic recoveries in developed countries was shown to drive exports from the manufacturing sector. Further gains in export growth were constrained by weak exports of mined products and agricultural produce. Up to February 2014, mining exports continued to slump due to a deeper contraction in exports of coal. Moderating demand and lower government targets imposed on coal production in 2014 compared to the previous year will restrict exports of coal. Moreover, exports of mined minerals also contracted in response to implementation of the Mineral and Coal Mining (Minerba) Act, effective from January 2014. Agricultural exports expanded more slowly as a result of weak exports from fisheries and of coffee.

Departing from the ongoing trends of consumption and exports, private investment remained limited in the first quarter of 2014. During quarter I 2014, the confidence of the business community waned, which was reflected by a lower Business Tendency Index

Exports of natural resources stable but

exports of manufactured goods

surge

Limited investment reported in quarter I

2014 but rebounding in the

second quarter

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published by BPS-Statistics Indonesia (Graph 2.3). In addition, construction investment was also shown to grow more conservatively. At the beginning of the year, the realisation of government capital spending was limited by the protracted realisation of infrastructure development. Such conditions were exacerbated further by weaker sales of cement and a stable production index in the cement industry. Less intense construction investment activity was also linked to the impact of macroprudential policy instituted by Bank Indonesia to control property growth.

Private investment growth is expected to rebound in the second semester of 2014. Capacity utilisation in the manufacturing industry increased in the first quarter of 2014 to a level beyond the historical average of 75%, which is expected to act as an incentive for entrepreneurs to invest (Graph 2.4). Besides, preparations by a number of mining firms (35.8%) to build smelters in 2014 are expected to drive investment activity. Up to February 2014, the plan for foreign direct investment (FDI) agreed by the Indonesia Investment Coordinating Board (BKPM) for the construction of smelters totalled US$ 179.8 million covering 13 projects. Meanwhile, domestic investment amounts to Rp 10.3 trillion covering nine projects.1

Graph 2.3Business Tendency Index

Graph 2.4 Capacity Utilization

Import performance remains suboptimal in harmony with moderating domestic demand. Up to February 2014, real non-oil/gas imports continued to decelerate due to contracting imports of raw materials and consumer goods congruent with moderating domestic demand (Graph 2.5). Imports of consumer goods continued to contract despite rebounding slightly.

Graph 2.5

Non Oil Import – Real Value

1 Liaison Assessment “The Mineral and Coal Mining (Minerba) Act and Preparations by Mining Firms”,

Bank Indonesia.

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By economic sector, greater activity in a number of sectors in the run up to the 2014 General Election helped propel economic growth during the first quarter of 2014. Implementation of the General Election is catalysing growth in the manufacturing sector, the trade, hotels and restaurants sector, transportation and communication as well as the services sector. Meanwhile, slower growth was reported in the agricultural sector owing to a poor harvesting season stemming from severe weather conditions. Weaker growth was also expected in the mining sector as oil production tailed off and the non-oil/gas sector performed limitedly. Furthermore, growth in the construction sector was also restricted by the limited realisation of infrastructure development by the government as well as the impact of Bank Indonesia LTV regulations on property.

Indonesia Balance of Payments

More balanced economic growth domestically was also shored up by improved external sector performance in terms of the balance of trade and financial account. Robust global economic growth spurred a rebound in the Indonesia balance of trade, which swung back to running a surplus of US$ 0.79 billion in February 2014 after recording a US$ 0.45 billion deficit in the previous month. A burgeoning surplus in the non-oil/gas account, to the tune of US$ 1.58 billion, during the reporting period contributed to the overall trade surplus (Graph 2.6).

Graph 2.6 Indonesia Balance of Trade

The budding non-oil and gas trade surplus that contributed to the balance of trade surplus in February 2014 originated from a contraction in non-oil and gas imports. The contraction in non-oil/gas imports was consistent with moderating domestic demand coupled with stronger non-oil/gas exports, primarily from the manufacturing sector, as a result of persistent economic recoveries in advanced countries. Non-oil/gas imports contracted deeply in February 2014 by 8.9% (mtm). The decline in non-oil/gas imports affected all import commodities. Imports of consumer goods, raw materials/auxiliary goods and capital goods respectively contracted by 8.6%, 8.1% and 11.9% (mtm). Conversely, non-oil/gas exports experienced a significant rebound despite remaining in negative territory. In comparison to the preceding month when an 11.9% (mtm) contraction was documented, non-oil/gas exports rallied in February 2014 to register a contraction of just 0.6% (mtm). A surge in manufactured exports, predominantly vegetable oil, including crude palm oil (CPO), contributed to the rebound in non-oil/gas exports. Exports of crude palm oil expanded by 23.6% (mtm) in line with growing demand from China, India and the Netherlands. Furthermore, coal exports also rebounded to positive growth of 2.8% (mtm) in the reporting period.

Non Oil and Gas Oil and Gas Total

Billion US$

Balance of trade returned to a surplus

in February 2014

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The trade surplus also stemmed from a smaller oil and gas trade deficit as a result of expanded oil lifting and lower oil and gas imports. Exports of oil and gas commodities grew 16.2% (mtm) in February 2014 in response to a surge in exports of gas and oil products. Oil lifting increased in February 2014 to 838 thousand barrels per day. Meanwhile, oil and gas imports decreased, among others, due to the mandatory use of biodiesel in the public transport sector and the utilities sector (electricity).

In terms of the financial account, the deluge of foreign capital inflows endured as economic fundamentals in Indonesia improved. Up to the end of March 2014 foreign portfolio inflows to domestic financial markets accumulated to US$ 5.8 billion. Inflows of foreign capital expanded non-resident holdings of domestic financial instruments, like shares, tradeable government securities - SBN (including Islamic tradeable government securities) and global bonds (Graph 2.7). Against such an auspicious backdrop, the capital and financial account is expected to record a more impressive surplus than previously forecast.

Graph 2.7 Portfolio Inflows

More favourable conditions lead to a stronger position of foreign exchange reserves in Indonesia during March 2014, totalling US$ 102.6 billion. The current level of foreign exchange reserves is equivalent to 5.9 months of imports or 5.7 months of imports and servicing external debt, which is well above international adequacy standards of around three months of imports. Looking ahead, Bank Indonesia expects improvements in the external sector to persist, buttressed by a current account deficit in 2014 of below 3% of GDP and accompanied by tenacious inflows of foreign capital. Bank Indonesia will also remain vigilant of risk, global and domestic, which could undermine external sector resilience and respond appropriately, including that associated with external debt, particularly private external debt.

Rupiah Exchange Rate

A more balanced domestic economy underpinned by improved external sector performance coacted to strengthen the rupiah during the reporting period. In March 2014, the rupiah closed at a level of Rp 11,360 per US dollar, appreciating 2.19% on the level posted at the end of February 2014 (Graph 2.8). On average, the value of the rupiah in March 2014 was Rp 11,420 per US dollar, 4.38% stronger than the average value in February 2014 at Rp 11,919 per US dollar. Consequently, the value of the rupiah up to March 2014 was 7.13% stronger than the level reported at yearend 2013. Furthermore, rupiah appreciation was accompanied by less volatility.

Million US$

Foreign capital inflows continued as

economic fundamentals

improved

Forex reserves hit US$ 102.6 billion at

the end of March 2014

The rupiah appreciates in

response to propitious

advancements domestically and

externally

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Rupiah appreciation was fairly impressive when compared to prevailing trends amongst other currencies in the region. The majority of currencies belonging to ASEAN+5 member countries experienced consolidation triggered by mounting geopolitical tensions in the Ukraine and the hawkish attitude of the Federal Reserve at the Federal Open Market Committee held on 18-19th March 2014 (Graph 2.9). In addition, further indications of an economic downturn in China, as a leading trade partner in the region, triggered a correction in the risk-appetite of investors to financial assets in the region. 

Graph 2.8Rupiah Exchange Rate

Graph 2.9 Apreciation/Depreciation

of Regional Currency Looking forward, Bank Indonesia will consistently maintain rupiah exchange rate stability in accordance with its fundamental value and shored up by an array of efforts to help deepen domestic money markets. In order to reinforce such policy, several advancements in terms of financial market deepening (rupiah and foreign exchange markets), like the mini Master Repurchase Agreement (MRA) and hedging transactions, will be improved further and become the focus of future policies.

Inflation

The rate of inflation in March 2014 followed a downward trend, thereby underpinning the prospect of attaining the target corridor of 4.5±1% in 2014. The rate of inflation was low in March 2014 at 0.08% (mtm) or 7.32% (yoy), down from 0.26% (mtm) or 7.75% (yoy) in the previous month (Graph 2.10). Furthermore, the rate of inflation in March 2014 was also lower than the average over the past six years.

Graph 2.11 Inflation

The drop in the rate of inflation to

7.32% in March 2014 confirms the

ongoing downward inflation trend

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Low inflation in the reporting period was also the result of deflation of volatile foods. Volatile foods recorded 0.55% (mtm) deflation in March 2014 or 7.25% (yoy), which is below the historical average over the past half decade. Price corrections stemming from a surge in supply were responsible for the reported episode of deflation (Graph 2.1). An abundant chicken harvest at large farms pushed down the prices of chicken meat and eggs. In addition, the prices of red chillies also experienced relatively deep deflation in the wake of plentiful supply at several production hubs, like Subang, Tasikmalaya, Ciamis, Sukabumi and Garut, which should endure into the following month. Deflation was also reported in the fisheries subsector as supply returned to normal as weather conditions conducive to fishing reappeared. Additionally, the prices of several commodities in the miscellaneous fruit and vegetable subsector were also corrected, including tomatoes, carrots and melon.

A deeper episode of volatile food deflation was prevented by inflation of Bird’s eye chillies, rice, garlic and cooking oil. Limited supply in East Java as a consequence of the volcanic eruption of Mount Kelud drove up the prices of Bird’s eye chillies. Nationally, the price of rice soared due to a delayed harvest as a result of extreme flooding on the island of Java, which is a main production centre, as well as constraints faced in the replanting process. The price of garlic was subjected to escalating inflationary pressures stemming from a reduced supply from imports. Meanwhile, the price of cooking oil increased as the international price of crude palm oil spiralled.

Table 2.1 Volatile Food Inflation Contributor

Table 2.2 Administered Prices Inflation Contributor

No. Volatile Food %,mtmContribution 

(%,mtm)

1 Pb. Chicken Egg ‐12.35 ‐0.09

2 Red Chili ‐15.68 ‐0.09

3 Pb. Chicken Meat ‐3.29 ‐0.04

4 Tomato ‐11.38 ‐0.02

1 Rice 1.45 0.05

2 Birds Eye Chili 22.51 0.05

3 Cooking Oil 2.14 0.02

4 Garlic 9.97 0.02

Deflation

Inflation

No. Administered Prices %,mtmContribution 

(%,mtm)

1 Air Travel Fee 1.45 0.05

2 Filter Cigarette 22.51 0.05

3 Clove‐Flavored Cigarette 2.14 0.02

4 White Cigarette 9.97 0.02

Inflation

The lower rate of inflation noted in March 2014 was further supported by well-mitigated core inflation in line with rupiah appreciation and anchored inflation expectations. Core inflation was 0.21% (mtm) or 4.61% (yoy) in the reporting period due to significant rupiah appreciation amid mounting international inflationary pressures and the impact of rupiah exchange rate pass-through in 2013 (Graph 2.11). In addition, indicators of inflation expectations also bolstered optimism concerning well-controlled core inflation up to yearend 2014. On commodity markets, inflation expectations for prices in the upcoming three months eased at the retail and consumer levels, which are supported by the return to normal demand in the wake of the 2014 General Election and holy fasting month of Ramadan. Anchored inflation expectations are further corroborated by the quarterly Consensus Forecast (CF), which projects a rate of inflation of 5.1% (yoy) at yearend 2014, which is consistent with the prevailing target corridor of 4.5±1% (Graph 2.12).

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Graph 2.11

Core Inflation and External Factors Graph 2.12

Inflation Expectation-Consensus Forecast

A further decline in the rate of inflation was suppressed by inflation of administered prices, which are expected to increase as a new surcharge is imposed on airfares. Inflation of administered prices was 0.31% (mtm) or 17.47% (yoy) in the reporting period. The aforementioned surcharge on airfares contributed around 0.03% (mtm) to the rate of inflation (Table 2.2). Notwithstanding, the impact of the surcharge on airfares, which came into effect on 26th February 2014, was less intense than expected as several airlines held off transmitting the surcharge to costumers in an attempt to maintain their level of price competitiveness. Furthermore, significant rupiah appreciation over the past few months has also minimised the impact of the surcharge as the aim of the charge was indeed to overcome rupiah deprecation as well as higher prices of aviation fuel.

Geographically, a low rate of inflation was supported by deflation in a number of regions of Sumatera, Kalimantan as well as Bali and Nusa Tenggara (Figure 2.1). Nevertheless, the rate of inflation on the island of Java and in the capital region of Jakarta necessitates greater vigilance as it creeps above its historical average over the past five years. Inflation in those two regions stems from a delayed harvest season at production centres as a consequence of severe flooding. Such circumstances triggered more intense inflationary pressures on foodstuffs on the island of Java and in the special region of Jakarta compared to other regions. Data indicates that the price of rice at the retail level continued to increase up to the third week of March 2014.

Figure 2.1 Map of Inflation by Region (%, mtm)

Exchange Rate (dep(+)/apr(‐), %, yoy)  Import price index (Imported inflation)proxy, %, yoy) Core traded inflation (%, yoy), RHS

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Looking ahead, Bank Indonesia will continue to monitor all risks that could undermine achievement of the inflation target. Such risks include corrections to administered prices and potentially higher food prices as a number of regions enter the dry season, compounded by forecasts of a low-intensity El Nino episode in August 2014. In this regard, Bank Indonesia will continue to reinforce its policy mix and coordinate with the Government at the central and local levels to guide inflation towards its target corridor.

Monetary Performance

The tight monetary policy stance adopted by Bank Indonesia influenced the performance of interest rates and base money during the reporting period. The interbank rate continued to rise along with bank lending and deposit rates. Higher interest rates, coupled with moderating domestic economic growth, decelerated growth in base money.

The interbank money market was characterised in March 2014 by a slight increase in the overnight rate as well as transaction volume. The average weighted overnight interbank rate in March 2014 jumped from 5.85% to 5.88% (Graph 2.13). Consequently, the interest rate spread between the overnight interbank rate and the overnight deposit facility rate broadened to 13 bps compared to 10 bps in the previous month. Meanwhile, average transaction volume on the interbank money market swelled from Rp 9.1 trillion to Rp 11.5 trillion (Graph 2.14). Notwithstanding, tight liquidity conditions eased as the spread of the interbank money market to overnight tenors as well as the max-min spread narrowed compared to the previous month.

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Jan‐12 Apr‐12 Jul‐12 Oct‐12 Jan‐13 Apr‐13 Jul‐13 Oct‐13 Jan‐14

Vol DF O/N (RHS) Vol PUAB O/N (RHS)

rBI Rate rPUAB O/N

rDF O/N

Rp T%

Avg Vol DF: Rp 85.9TRRT Vol PUAB : Rp 11.5T

rPUAB : 5.88%

Graph 2.13Interbank O/N Rate

Graph 2.14 Interbank O/N Rate & Volume

The upward trend in the interbank rate was also followed by interest rates in the banking industry. In February 2014, lending rates soared 7 bps to 12.54%, while the rate on one-month term deposits increased 9 bps to a level of 7.99% (Graph 2.15). Consequently, interest rate spread between the lending rate and the one-month deposit rate narrowed to 456 bps from 458 bps in the previous month (Graph 2.16). The most pronounced rise in lending rates affected working capital credit, which saw a 10-bps hike to 12.33% in the reporting period. In comparison, the rate on investment credit increased 6 bps to 11.98% and the rate on consumer loans climbed just 3 bps to 13.20%.

Corrections to administered prices

and soaring food prices due to

inclement weather were a potential risk

to achievement of the inflation target

The benchmark interest rate and other monetary

instruments remain congruent with the tighter

policy stance adopted by Bank Indonesia

Bank interest rates continued an upward trend

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Graph 2.15Loan Rates

Graph 2.16 Bank Interest Rates

The ascending trend in bank interest rates along with the persistent moderation of domestic demand helped erode liquidity in the economy (M2). In February 2014, M2 totalled Rp 3,639.5 trillion, up 10.9% (yoy), which is a slower increase compared to that in January 2014 when growth of 11.6% (yoy) was reported (Graph 2.17). By component, the slowdown in M2 stemmed from the components of M1 (currency and rupiah demand deposits) as well as quasi-money (deposits including term deposits, rupiah and foreign currency savings accounts as well as foreign currency demand deposits). M1 growth declined from 7.0% (yoy) in January 2014 to 6.1% (yoy) in February 2014 (Graph 2.18). Meanwhile, the expansion of quasi-money also slowed in the reporting month from 12.7% (yoy) to 12.1% (yoy).

Based on its determinants, the slowdown in M2 growth was confirmed by a decline in net domestic assets (NDA), particularly loans to the private sector (credit), and government financial operations. Loans to the private sector grew 19.9% (yoy) in February 2014, slower than that achieved in the previous month at 20.9% (yoy). Meanwhile, financial operations conducted by the central government contracted in line with the seasonal pattern of low government spending at the beginning of the year, as reflected by an increase in central government deposits held at Bank Indonesia and commercial banks.

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M1 Kartal (COB) Giro Rupiah

% Kontribusi Pertumbuhan M1

Graph 2.17M2 Growth Contribution

Graph 2.18 M1 Growth Contribution

0

1

2

3

4

5

6

7

8

9

5

7

9

11

13

15

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

Jan‐13

Jul‐13

Jan‐14

Spread‐rhs Sb Kredit Sb Dep 1 bln BI rate Sb LPS

%

Selisih rKredit ‐ rDepo1: 456 bps

%

7.98

12.54

Spread rCredit‐ rDeposit1:456bps

Spread‐rhs Credit 1m deposit BI Rate LPS

% of M1 Growth Contribution % of M2 Growth Contribution

Rupiah Demand Dep Currency (COB)

Quasy Money

Liquidity in the economy (M2)

continued to decline

 | 14

The Banking Industry

Financial system stability was maintained by banking industry resilience amid domestic economic moderation during the reporting period. Well-mitigated credit risk, liquidity risk and market risk helped bolster the performance of the banking sector. Furthermore, strong capital resilience also buttressed the resilience of the banking industry.

Credit growth continued to follow a slowing trend in harmony with moderating domestic demand. As mentioned previously, credit growth achieved 19.9% (yoy) in February 2014, which is down on the previous month at 20.9% (yoy) (Graph 2.19). The slowdown in credit growth stemmed mainly from working capital credit, accounting for a 48% share of total credit, which slowed to 17.1% (yoy) compared to 19.5% (yoy) in the previous month. Conversely, growth of investment credit and consumer loans accelerated slightly to 34.3% (yoy) and 14.0% (yoy) respectively from 34.1% (yoy) and 13.8% (yoy) in the preceding month. By sector, leading economic sectors like the trade sector and manufacturing sector contributed to the cooling down of credit growth. Accordingly, credit extended to those two primary economic sectors slowed to 26.0% (yoy) and 26.6% (yoy) from 29.3% (yoy) and 29.5% (yoy) respectively (Graph 2.20).

In February 2014, deposit growth also decelerated as interest rates increased and the economy cooled off. Deposits expanded 11.2% (yoy), which is less growth than the 11.4% (yoy) documented in the previous month. The slowdown in deposit growth mainly affected term deposits and demand deposits, which achieved growth of 13.2% (yoy) and 7.3% (yoy) respectively, compared to 13.8% (yoy) and 7.8% (yoy) in January 2014 (Graph 2.21).

5

6

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11

12

‐10

‐3

4

11

18

25

32

39

Jan‐08

Mar‐08

May‐08

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Sep‐08

Nov‐08

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Sep‐09

Nov‐09

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May‐10

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Mar‐12

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Jul‐12

Sep‐12

Nov‐12

Jan‐13

Mar‐13

May‐13

Jul‐13

Sep‐13

Nov‐13

Jan‐14

Total KMK KI KK BI Rate (RHS)

% yoy % 

per Feb 2014

0 10 20 30 40

Pertanian

Pertambangan

Industri Pengolahan

Listrik, Air dan Gas

Konstruksi

Perdagangan

Pengangkutan

Jasa Dunia Usaha

Jasa Sosial

Lainnya

Jan‐14 (Kontribusi %yoy) Jan‐14 (%yoy) Des‐13 (%yoy)

%

Graph 2.19. Credit Growth Graph 2.20. Credit Growth Contribution

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 5

 10

 15

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35

Jan‐10

Mar‐10

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Nov‐10

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Mar‐11

May‐11

Jul‐11

Sep‐11

Nov‐11

Jan‐12

Mar‐12

May‐12

Jul‐12

Sep‐12

Nov‐12

Jan‐13

Mar‐13

May‐13

Jul‐13

Sep‐13

Nov‐13

Jan‐14

DPK (RHS) Giro (Pangsa 22.8%)

Tab (Pangsa: 32.6%) Depo (Pangsa 44.7%)%, yoy

Per Feb 2014

Grafik 2.21. Depositor Fund’s Growth

Working capital Cons

Jan‐14 (Contribution %yoy)

Others

Social Services

Business Services

Transportation

Trade

Construction

Electricity, Gas & Water

Manufacturing

Mining

Agriculture

Credit growth continued to cool

off, achieving 19.9% in February 2014

 | 15

Amid a slowing trend in terms of credit growth, coupled with moderating domestic demand, bank capital continued to grow and risk was mitigated. In February 2014, the capital adequacy ratio (CAR) was impressively high at 19.78%, well above the minimum requirement of 8% and up on the level of the preceding month at 19.63%. Such conditions reflect enhanced resilience in the banking industry, which is necessary to overcome pressures and shocks, including the tenacious upswing in interest rates. Meanwhile, the ratio of non-performing loans (NPL) remained low and stable in the 1.99% range (Table 2.3).

Table 2.3 Banking Performance

Indikator

Utama Feb Mar Apr Mei Juni Juli Agt Sep Okt Nov Des Jan Feb

Total Aset (T Rp) 4,237.1 4,313.8 4,367.8 4,418.7 4,461.8 4,510.3 4,581.1 4,737.3 4,717.0 4,817.8 4,954.5 4,880.5 4,888.8

DPK (T Rp) 3,207.3 3,243.1 3,299.4 3,349.7 3,374.4 3,392.9 3,440.2 3,526.2 3,520.9 3,563.4 3,664.0 3,594.7 3,603.6Kredit * (T Rp) 2,718.7 2,768.4 2,824.2 2,887.5 2,959.1 3,021.1 3,067.4 3,147.2 3,159.5 3,214.4 3,292.9 3,258.4 3,267.8LDR* (%) 84.77 85.36 85.60 86.20 87.69 89.04 89.20 89.25 89.74 90.21 89.70 90.65 90.68 NPLs Bruto* (%) 2.03 1.97 1.96 1.95 1.88 1.87 2.00 1.86 1.91 1.88 1.77 1.90 1.99 CAR (%) 19.15 18.92 18.61 18.39 17.98 17.95 17.90 18.00 18.36 18.60 18.36 19.63 19.78 NIM (%) 5.34 5.41 5.42 5.41 5.43 5.46 5.50 5.48 5.50 5.51 4.89 4.11 4.12 ROA (%) 2.89 2.99 2.92 2.96 2.98 3.00 3.00 3.01 3.03 3.04 3.08 2.85 2.74 * without channeling

20142013

Non-Bank Financing Non-bank financing also eased off during the reporting period in accordance with moderating domestic demand. In the first quarter of 2014, total financing reached Rp 14.1 trillion, amounting to negative growth of -0.13% (yoy), which represents a deeper contraction than that noted in the final quarter of 2013 at -0.07% (yoy) (Table 2.4). By component, the majority of non-bank financing in the first quarter of 2014 was contributed by bonds, to the tune of Rp 8.5 trillion. Meanwhile, shares totalled Rp 4.0 trillion, with six companies instigating initial public offerings in March 2014.

Tabel 2.4. Non-Bank Financing

Trillion IDR

2009 2010 2011

Total Total Total Q1 Q2 Q3 Q4 Total Jan Feb Mar Q1 Q2 Q3 Q4 Total Jan Feb Mar Tw I

Nonbank 47.5 123.5 120.0 13.6 47.3 10.8 37.2 108.9 0.8 10.5 5.0 16.3 58.3 3.6 34.7 112.9 3.4 4.9 5.9 14.1

Stocks 12.4 78.0 62.8 2.4 5.6 1.8 11.2 21.0 0.7 1.4 0.7 2.8 29.3 2.8 22.7 57.5 2.7 0.0 1.2 4.0

o/w Financial sector issuers 6.6 20.6 20.4 0.0 2.3 0.7 0.0 3.1 0.0 0.0 0.3 0.3 6.0 1.2 9.1 16.6 0.4 0.0 0.0 0.4

Obligasi 25.8 34.7 51.3 9.6 41.0 7.1 20.1 77.7 0.0 8.7 4.0 12.7 27.7 0.3 9.9 50.5 0.0 4.8 3.7 8.5

o/w Financial sector issuers 17.5 27.0 41.4 8.3 26.2 4.8 14.4 53.7 0.0 7.3 2.6 9.9 13.5 0.0 7.5 30.8 0.0 3.2 3.2 6.4

MTN dan Promissory Notes 3.9 10.8 5.9 1.6 0.8 1.9 5.9 10.1 0.1 0.4 0.3 0.8 1.3 0.6 2.2 4.9 0.6 0.1 0.9 1.6

o/w Financial sector issuers 3.2 1.9 1.3 0.1 0.6 0.1 2.1 0.0 0.4 0.3 0.7 1.3 0.1 1.1 3.2 0.6 0.0 0.6 1.2

2012 20142013

Banking industry resilience has

remained firm, CAR=19.8% and

NPL=1.9%

 | 16

Stock Market and Government Securities Market

Stronger economic fundamentals, which piqued investor optimism, propagated improvements in the performance of the stock market and tradeable government securities market. The domestic stock market continued to follow an upward trend during March 2014, supported by bullish sentiment. The IDX Composite index achieved a level of 4,768.28 (on 28th March 2014), representing a gain of 3.2% (yoy) on the 4,620.22 attained in February 2014. By sector, all economic sectors on the stock market enjoyed gains in March 2014. The property sector performed best, experiencing 11.1% growth, followed by the miscellaneous industries sector at 5.4%. Finally, the others sector achieved growth in the 0.2-4.8% range (Graph 2.22).

In terms of daily performance, the IDX Composite index peaked at 4,878.64 on 14th March 2014 despite subsequently correcting back down to a level of 4,698.97 on 20th March 2014. The correction in the IDX Composite occurred in the wake of the Federal Open Market Committee (FOMC) meeting convened by the Federal Reserve, where the decision to persist with tapering policy was decided, indicating an end to stimuli towards the close of this year as well as rising interest rates into the middle of 2015. Overall, the domestic stock market outperformed stock markets in the Philippines, Malaysia, Vietnam and Singapore but underperformed compared to Thailand (Graph 2.23).

By investor group, the dynamics of the domestic stock market in March 2014 were inextricably linked to the behaviour of foreign investors. During the month of March 2014, foreign investors booked net purchases surpassing those booked in the previous month. Positive sentiment at the global level along with widespread optimism surrounding the domestic economic outlook attracted foreign investors to expand their holdings on the domestic stock exchange. Foreign investors booked net purchases totalling Rp 14.48 trillion in March 2014, which is up significantly on conditions reported in February 2014 when net purchases amounting to Rp 7.82 trillion were booked (Graph 2.24). Up to the end of March 2014, the composition of shareholdings was 64% for non-residents and 36% for local investors.

3,2%

0,2%

1,1%

3,8%

1,7%

5,4%

0,5%

4,7%

4,8%

11,1%

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IHSG

Infrastructure

Mining

Finance

Basic Industry

Misc. Industry

Consumption

Trade

Agriculture

Property

Monthly Changes

3,2%

1,3%

3,3%

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5,8%

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0,0%

0,2%

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‐6% ‐3% 0% 3% 6% 9%

Indonesia (IHSG)

Vietnam

Thailand (SET)

Philippine

Kuala Lumpur (KLCI)

Strait Times (STI)

Shanghai (SHCOMP)

Hong Kong (Hang Seng)

India (SENSEX)

England (FTSE)

Japan (Nikkei)

US (Dow Jones)

EM ASIA

World

Graph 1.22. Sectoral Index March 2014 Graph 1.23. JCI and Global Stock Index March 2014

Bullish sentient precipitates gains in the IDX Composite

to a level of 4,468.3 at the end of March

2014

 | 17

Graph 1.24. JCI and Net Foreign Buy/Sell

Robust performance of the domestic stock market also affected the market of tradeable government securities (SBN). In March 2014, the yield of tradeable government securities decreased for all tenors compared to yields in February 2014. Overall, yield dropped 33.31 bps to 7.90% compared to 8.23% in February (Graph 2.25). The yields of short, medium and long-term tradeable government securities declined respectively by 29.20 bps, 28.77 bps and 47.87 bps to 7.35%, 7.93% and 8.57%.

Congruent with stock market performance, tradeable government securities were bolstered by the prevailing selling trend of foreign investors. In March 2014, foreign investors booked net purchases totalling Rp 15.77 trillion, which is slightly lower than that booked in the previous month at Rp 16.49 trillion (Graph 2.26). During the same period, holdings of tradeable government securities by insurance companies and Bank Indonesia increased, while holdings by pension funds subsided. Consequently, foreign holdings of tradeable government securities accounted for 32.55% in March 2014 compared to 32.02% in February. In addition, purchases by foreign investors tended to favour short and medium-term tradeable government securities.

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Feb 2014 ‐ Mar 2014 (mtm)Feb‐14Mar‐14

%bps

Tenor

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(35)

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Okt

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Dec

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Juni

Juli

Agust

Sept

Okt

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Feb

2011 2012 2013 2014

Net Foreign Buy/Sell Yield SUN (RHS) %Rp. Trillion

Graph 1.25. Monthly Changes of Government Bonds Yield

Graph 1.26. Government Bonds Yield and Net Foreign Buy/Sell

Trillion IDR

Similar trends were noted for tradeable

government securities (SBN), with yield dropping 33.31

bps

 | 18

MONETARY POLICY RESPONSE

At the Bank Indonesia Board of Governors’ Meeting held on 8th April 2014, it was decided to maintain the BI rate at 7.50%, with the Lending Facility rate and Deposit Facility rate held respectively at 7.50% and 5.75%. This policy is consistent with ongoing efforts to steer inflation back towards its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015, as well as reduce the current account deficit to a more sustainable level. Bank Indonesia considers recent developments in the economy of Indonesia as favourable and in line with previous projections, marked by lower inflation and a balance of trade that has returned to record a surplus. Looking ahead, Bank Indonesia will continue to remain vigilant of a variety of risks, globally and domestically, as well as implement anticipatory measures to ensure economic stability is preserved and stimulate the economy in a more balanced direction, thereby buoying current account performance. To this end, Bank Indonesia will continue strengthening the monetary and macroprudential policy mix as well as enhancing coordination with the Government to control the rate of inflation and reduce the current account deficit, including policy to bolster the structure of the economy and manage external debt, in particular private external debt.

3 Bank Indonesia

decided to hold the BI Rate at 7.50%

 | 19

RECENT INDICATORS

Mar Jun Sep Dec Jan Feb Mar

INTEREST RATE & STOCKNine Months SBI Rate 1) 4.87 5.28 6.96 7.22 7.23 7.17 -One Month Deposit Rate 2) 5.51 5.60 6.73 7.92 7.89 7.98 -Three Months Deposit Rate 2) 5.64 5.72 6.58 7.64 7.96 8.05 -One Week JIBOR 2) 4.28 4.46 5.89 6.99 6.44 6.50 -JSX Indices 3) 4,941 4,819 4,316 4,274 4,419 4,620 4,768

Monetary Aggregates (billion IDR)Base Money 664,935 691,678 715,662 821,679 781,500 755,167 -M1(C+D) 810,112 858,557 864,637 887,064 842,669 834,526 -

Currency (C) 331,226 347,204 357,001 399,589 380,061 367,645 -Demand Deposit (D) 478,886 511,353 507,636 487,475 462,608 466,881 -

Broad Money (M2 = C+D+T+S) 3,322,586 3,413,437 3,580,934 3,727,696 3,649,270 3,639,490 -Quasi Money (T) 2,500,342 2,543,285 2,691,903 2,817,826 2,784,379 2,783,472 -Securities Other Than Shares (S) 12,132 11,594 24,394 22,805 22,223 21,492 -

Factors Affecting Broad Money 3,322,586 3,413,437 3,584,017 3,727,696 3,649,270 3,639,491 -Net Foreign Assets 947,362 833,821 972,110 1,011,361 1,035,758 1,013,467 -Net Domestic Assets 2,375,225 2,579,616 2,611,907 2,716,334 2,613,512 2,626,024 -

Net Claims on Central Goverment 366,902 330,871 342,434 406,612 345,714 318,741 -Claims on Other Sector 2,973,874 3,180,790 3,382,424 3,525,435 3,490,575 3,503,302 -

Monetary Aggregates Growth (%,YOY))Base Money 13.46 10.25 12.02 16.58 17.69 15.21 -M1(C+D) 13.42 10.15 8.69 5.39 6.95 6.09 -

Currency (C) 15.39 10.34 9.66 10.39 16.27 14.34 -Demand Deposit (D) 12.10 10.03 8.02 1.61 0.34 0.39 -

Broad Money (M2 = C+D+T+S) 14.10 11.87 14.53 12.76 11.64 10.94 -Quasi Money (T) 14.54 12.77 16.05 14.84 12.72 12.10 -Securities Other Than Shares (S) -17.86 -30.20 112.91 118.85 105.22 97.89 -

Factors Affecting Broad Money 14.01 11.81 14.57 12.70 11.64 10.94 -Net Foreign Assets 2.29 -9.91 -0.36 4.76 7.87 8.08 -Net Domestic Assets 19.47 21.26 21.34 15.98 13.21 12.09 -

Net Claims on Central Goverment 23.49 16.37 14.57 4.31 -8.63 -11.79 -Claims on Other Sector 20.61 20.03 22.79 20.84 20.60 19.78 -

- - -

CPI - Monthly (%, mtm) 0.63 1.03 -0.35 0.55 1.07 0.26 0.08CPI - Yearly (%, yoy) 5.90 5.90 8.40 8.38 8.22 7.75 7.32

IDR/USD (end of period, mid rate) 9,719 9,925 11,580 12,170 12,210 11,609 11,360Non Oil & Gas Export (f.o.b, million USD) 4) 12,727 11,970 12,248 13,672 12,051 11,983 -Non Oil & Gas Import (c & f, million USD) 4) 10,969 12,127 15,059 11,313 11,372 10,357 -

Tw.IV

GDP Growth (%, yoy) 6.00 5.80 5.62 5.70 -Consumption 4.77 4.78 5.89 5.44 -Investment 5.54 4.47 4.54 4.37 -Changes in Stocks 16.50 4.04 -8.01 -8.63 -Export 3.58 4.82 5.25 7.40 -Import -0.03 0.69 5.09 -0.60 -

2013 2014

2013 2014Tw.I

PRICE

EXTERNAL SECTOR

QUARTERLY INDICATORS

INDICATORS

Tw.I Tw.II Tw.III

The Monetary Policy Review (MPR) is published monthly by Bank Indonesia after the Board of Governors’ Meeting each January, March, April, June, July, September, October and December. This report is intended as a medium for the Board of Governors of Bank Indonesia to present to the public the latest evaluation of monetary conditions, assessment, and forecast for the Indonesian economy, in adddition to the Bank Indonesia monetary policy response published quarterly in the Monetary Policy Report in April, July, October, and December. Specifically, the MPR presents an evaluation of the latest developments in inflation, the exchange rate, and monetary conditions during the reporting month and decisions concerning the monetary policy response adopteed by Bank Indonesia.

For further information:Policy Regulation and Communication Division Monetary Policy Group Monetary and Economic Policy Department Telp: +62 21 2981 8334/6836 Fax: +62 21 3452489 Email: gkm_komunikasi@bi.go.id Website: http://www.bi.go.id

Dewan Gubernur Agus D.W. Martowardojo – Governor Mirza Adityaswara – Senior Deputy Governor Halim Alamsyah – Deputy Governor Ronald Waas – Deputy Governor Perry Warjiyo – Deputy Governor Hendar – Deputy Governor