Move on with Grace - bi.go.id · subsidised premium gasoline and automotive diesel. In addition the government has implemented sectoral policies to bolster the resilience of the domestic

i

Move on with Gracein Steadiness

Tradition brings innovation that perfects through generations to keep the balance of the ark. Thus, although the storm hits the sea, the steadiness still preserved. And keep the ark moves on in grace, sails through the ocean.

CHAPTER

ITHE INDONESIAN ECONOMY IN 2009

2

The Indonesian Economy in 2009

The global economy that was still under pressure from the crisis posed major challenges for the Indonesian economy during 2009. These challenges emerged mainly at the beginning of the year due to the lingering impact of the global economic crisis that reached its peak in the fourth quarter of 2008. The uncertainties correspond to the depth of the global contraction and the speed of the global economic recovery, not only heightened risks in the financial sector, but also adversely impacted economic activity in the domestic real sector. These unfavourable circumstances bore down heavily on monetary and financial system stability in the first quarter of 2009, while economic growth posed downward trend contributed from steep contraction in exports of goods and services. These adverse developments in turn undermined the confidence of economic agents both in the financial sector and real sector and potentially reduce positive achievements in the previous years.

Bank Indonesia and the Government took a series of policies during 2009 to address these challenges. These policies were essentially a continuation of the measures adopted by Bank Indonesia and the Government in the fourth quarter of 2008. Amid considerable uncertainties in the financial sector and real sector, the policies were aimed to safeguard macroeconomic and financial system stability as well as to strengthen domestic economic resilience. In monetary policy, Bank Indonesia adopted an easy monetary policy stance in combination with

The Indonesian Economy in 2009 | CHAPTER I 3

various other policies, including measure to curb excess volatility in the foreign exchange market. Bank Indonesia policies for the banking system were focused on improving banking industry resilience through further actions to strengthen the banking intermediation function. In fiscal policy, the Government with approval of the Indonesian Parliament implemented a substantial fiscal stimulus, involving tax relief and measures to safeguard public purchasing power. Furthermore, the Government in the beginning of the year has lowered prices for subsidised premium gasoline and automotive diesel. In addition the government has implemented sectoral policies to bolster the resilience of the domestic economy.

These policies persued succeeded not only in safeguarding macroeconomic and financial system stability, but also in strengthening domestic economic resilience, with the economy showing initial improvement in the second quarter of 2009. Financial system and macroeconomic stability also maintained steady improvement for the rest of 2009, reflecting in various improvement financial sector indicators such as CDS, the Jakarta Composite Index, yield on government securities and the exchange rate. The improvement in financial system stability subsequently paved the way for strengtened confidence among economic agents in the real sector and subsequently invigorated economic activity, which passed its lowest growth in the third quarter of 2009.

Overall, the Indonesian economy emerged from the challenging year in a good shape. Despite lower than 2008, economic grew 4.5% in 2009, the third highest growth in the world after China and India. Further slowdown in economic growth was avoided due to the domestic demand-driven structure of the economy. Inflation also came to a modest 2.78%, the lowest level in the past decade. The financial system stability was maintained with the onset of recovery in the bank intermediation function mainly during the second half of 2009. Further downward pressure on the domestic financial system was contained to some extent by regulations prohibiting domestic banks from engaging in speculative activities, most importantly that related to structured products. These regulations comprise the series of policies for strengthening and consolidating the banking system in the wake of the 1997/1998 crisis.

This chapter elaborates further on the dynamics of the domestic economy. The analysis is divided into three parts. The first part explains the global economy as a factor exerting considerable influence over the Indonesian economy in 2009. The second part presents the various policies pursued by Bank Indonesia and the Government in response to the global economic downturn. The third part discusses domestic economic performance during the period of the global economic downturn. The third part begins with analysis of the balance of payments, followed by the financial market, banking industry,

4 CHAPTER I | The Indonesian Economy in 2009

economic growth, inflation and lastly unemployment and poverty. The analysis of economic growth and inflation will also be presented from a regionally-based economic perspective.


1.1

The Global Economy

The global economic crisis that reached its peak in the last quarter of 2008 still continued until early of 2009. Global financial markets remained fraught with instability due to strong negative sentiment of the outlook for global economic recovery as well as deteriorating the performance of leading US financial institutions such as Citigroup, AIG and BoA. This unfavourable environment lead the investors to scaled back their portfolios in credit markets and capital markets, both in advanced and emerging markets. The declining fund placements on emerging markets was also driven by heightened risk perceptions on emerging markets as described, among others, in the CDS levels for some Asian emerging markets which remained high, averaging 450 bps at end-March 2009 compared to the normal level of about 100 bps recorded in the first half of 2008 (Chart 1.1). Under these uncertainties, global investors shifted their portfolios to risk-free assets such as US Treasury Bonds. On money markets, the continuing liquidity crunch was reflected in the widening USD LIBOR-Overnight Index Swap (OIS) spread (Chart 1.2). At the end of March 2009, the spread in advanced economies such as the US, UK and the European Union was still around 150 bps, well above the normal level of about 70 bps such as recorded in the first half of 2008. On stock markets, an ongoing exodus of investor funds continued to bear down on global stock indices (Chart 1.3).

The development in the global financial sector impacted global economic growth. The consolidation process and uncertainties in the financial sector impoded flows of liquidity to the real sector and contributed to further


contraction in the global economic growth. Following the uncertainties in the financial sector, global economic growth projections were steadily revised downwards. International financial institutions such as the IMF made several revisions to world economic growth projections during 2009. In April 2009, the IMF forecasted that the world economy would pose 1.3% contraction, down considerably from November 2008 when growth was still projected at a positive 2.2% (Table 1.1). The global economic contraction was driven to a large extent by contraction in advanced economies, while growth in developing economies remained in positive territory, driven by the performance of China, India and Indonesia.

In line with the declining of world economic growth, contraction also took place in world trade volume (Table 1.1). In April 2009, world trade volume in 2009 was estimated to record a negative growth around 11.0%, down considerably from the positive 3.0% in 2008. This contraction represents the steepest decline since the first publication of world trade volume statistics in 1970 (Chart 1.4). In this respect, some Asian economies heavily reliant on trade recorded a significant contraction due to declining exports, triggered by plunging commodity prices and falling demand in developed economies.

Chart 1.1 CDS of the Emerging Countries Chart 1.2 LIBOR and 3 Months OIS Spread

bps

Source: Bloomberg

2008 2009I III IVII I III IVII

0

50

100

150

200

250

300

350

400

US UKEuro AUS

bps

Source: Bloomberg


-

250

0

250

500

750

1.000

1.250

1.500

Thailand Malaysia Indonesia Vietnam Korea

Table 1.1 World Economic Growthpercent

Source: World Economic Outlook (WEO), IMF

CountriesPeriods of Projection

Nov-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10

World 2.2 0.5 -1.3 -1.4 -1.1 -0.8

Advanced Economies -0.3 -2.0 -3.8 -3.8 -3.4 -3.2

USA -0.7 -1.6 -2.8 -2.6 -2.7 -2.5

European Union -0.5 -2.0 -4.2 -4.8 -4.2 -3.9

Japan -0.2 -2.6 -6.2 -6.0 -5.4 -5.3

Emerging Markets 5.1 3.3 1.6 1.5 1.7 2.1

Commonwealth Countries in Eastern Europe 3.2 -0.4 -5.1 -5.8 -6.7 -7.5

Asian 7.1 5.5 4.8 5.5 6.2 6.5

China 8.5 6.7 6.5 7.5 8.5 8.5

India 6.3 5.1 4.5 5.4 5.4 5.6

ASEAN-5 4.2 2.7 0.0 -0.3 0.7 1.3

Middle East 5.3 3.9 2.5 2.0 2.0 2.2

Western Hemisphere 2.5 1.1 -1.5 -2.6 -2.5 -2.3

World Trade Volume (goods and services) 2.1 -2.8 -11.0 -12.2 -11.9 -12.3


The downturn in global economic growth in turn contributed to low levels of global commodity prices and weak global inflationary pressures. Decreasing demand for global commodities pushed downward pressure on prices for energy and non-energy commodities (Chart 1.5). Despite a modest upturn after the end of March 2009, world oil prices in first quarter of 2009 stayed at around 48 US dollars per barrel (Chart 1.6). Low commodity prices and the slowdown in global demand eased inflationary pressures, both in the advanced economies and the developing economies (Chart 1.7).

The uncertainties and pressures in the global economy triggered by the ongoing global liquidity crunch, had led many countries to implement intensive policy responses, both for conventional and un-conventional policy. Central banks pursued conventional policies by cutting policy rates to near-zero levels in some developed economies. The conventional policy was reinforced by un-conventional

policies in some advanced economies, such as expanding the basis of collateral used in central bank monetary operations, extending the tenor of liquidity support and buying securities including mortgage-backed. Other policy actions included blanket guarantees on bank deposits, recapitalisation of financial institutions and measures to limit portfolio losses in the banking sector. Financial institutions in some advanced countries, including the United States and Europe, were bailed out by central banks in order to preserve financial system stability and to prevent further negative impact on the economy. The force of the pressure bearing down on financial markets also prompted the Federal Reserve, Bank of England, European Central Bank, Bank of Japan and the Swiss National Bank to set up currency swap agreements to ease the US dollar liquidity crunch in some regions.

On the fiscal side, governments in developed and developing countries implemented substantial fiscal

Chart 1.6 International Oil PriceChart 1.5 Commodity Price Index

Chart 1.3 Stock Indices of Developed and Emerging Countries Chart 1.4 World Trade Volume Growth

Source: Bloomberg

index index

USEuro

Japan

Singapore

Hong Kong

IndonesiaThailand

40

50

60

70

80

90

100

110

40

50

60

70

80

90

100

110Ja

n-08

Mar

-08

May

-08

Jul-0

8Se

p-08

Nov

-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep-

09N

ov-0

9Ja

n-08

Mar

-08

May

-08

Jul-0

8Se

p-08

Nov

-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep-

09N

ov-0

9

Rebased 1/1/2008 = 100

Source: IMF

percent

-15,0

-10,0

-5,0

0,0

5,0

10,0

15,0

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

Source: Bloomberg

USD/barrel USD/barrel

20

45

70

95

120

145

170

20

40

60

80

100

120

140

160

Minas WTI (rhs)

MinasWTI

AVERAGE*

94.962.8

99.962.0

20082009

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2008 2009

Source: IMF

2007 2008 2009I II III IV I II III IV I II III IV

index (2005=100)

Total Non-Energy Energy

75

125

175

225

275

Total Commodity IndicesNon-Energy Index - Food and Baverages - Agriculture Raw Materials - MetalEnergy Index - Crude Oil Price Index

Rincian (Indeks 2005=100) 2009

-30,9-18,3-13,1-16,8-27,5-36,9-36,3


stimulus to push demand and to mitigate rising unemployment. Governments took these policies after considering that the room for further interest rate cuts became more limited. The fiscal stimulus in the US soared to 787 billion US dollars (5.5% of GDP) comprising 287 billion US dollars in tax relief, which 500 billion US dollars allocated for infrastructure projects and other social programmes. In Europe, fiscal stimulus packages in the four major economies (Germany, UK, France and Italy) amounted to 1% of GDP, while three stimulus packages launched by the government of Japan totalled 12 trillion yen representing an equivalent 122 billion US dollars. In China, the government released 4 trillion yuan into the economy, an amount equivalent to 586 billion US dollars or 13.3% of GDP, allocated primarily for infrastructure development.

The various policy measures launched in many countries succeeded in reducing systemic risk on financial markets and restoring market participants confidence since second quarter of 2009. The liquidity injections by central banks eased credit market tightness as well as lowering the LIBOR-OIS spread down to levels before the Lehman Brothers bankruptcy in September 2008. At the same time, intervention by central banks in developed countries through expanded scope and intensity of monetary operations, as well as measures to consistently safeguard the financial system have diminished the systemic risk on financial markets. On one hand, the response from some major central banks to buy higher-risk securities had increased markets activities that were previously weaken due to the reluctance of market participants to engage in transactions. On the other hand, the purchase of securities was also aimed

at reducing short-term financing costs for the private sector.

In subsequent developments, the decline in financial market risk were also described in the narrowing of the CDS and 3-month LIBOR-OIS spread in some countries since the second quarter of 2009 (Charts 1.1 and 1.2). In line with this environment, the risk perceptions in stock market also improved, generating incrising global financial markets, including stock markets in Asia (Chart 1.3). The rising stock market performance in Asia were partly contributed by low interest rates and slower economic recovery in developed countries, that subsequently encouraged higher capital flows into Asian stock markets (Chart 1.8).

With recovery under way in the financial sector, the improvement was also observed in world economic growth. The significant fiscal stimulus had a beneficial effect on household consumption, which resumed an upward trend. The positive indicator in consumption was followed by improvement in manufacturing sector starting in third quarter of -2009. Even the US housing sector, the original trigger of the crisis, was believed to have passed its lowest point since the third quarter of 2009. Aggressive interest rate cuts accompanied by purchasing policies of mortgage-based debt securities had also reduced the cost of home financing in the US. Responding to low interest rates on home mortgages, home purchases by the households had resumed, resulting in a gradual rise in housing prices.

The role of developing Asian countries to global economic recovery were quite substantial. In this regards,

Chart 1.7 Inflation of Advanced and Developing Countries Chart 1.8 Capital Flow to Asia Stock Market

Source: Bloomberg



percent,yoy percent,yoy

USEurope

Japan

UK China

Indonesia

Philippines

India

-4

-2

0

2

4

6

8

10

12

14

16

-4

-2

0

2

4

6

8

10

12

14

16 Advanced Country Developing Country (right side)

Source: Bloomberg

millions of USD

-1.3

-0.8

-0.3

0.2

0.7

1.2

A week moving average 4 week moving averages

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2008 2009


higher economic growth in Asia’s emerging markets had compensated the sluggish recovery in advanced economies (Chart 1.9). In China, the fiscal stimulus had boosted growth in government-sponsored infrastructure projects, minimizing the impact of slow recovery in exports. In India, the vibrant manufacturing sector had helped sustain positive growth in the economy. Rising demand from China and India had benefited exports from other Asian economies. The improvement in exports along with fiscal stimulus and accommodative monetary policy had contributed to Asian economies to reach a more rapid recovery compared to other regions. Along with this improving trend, the world economy had undergone a faster than expected recovery and estimated to record 0.8% contraction, a more favourable figure when compared to earlier forecasts (Table 1.1).1

The faster than predicted recovery in the global economy and accommodative global policies had boosted the prices of the world energy and non-energy commodities. While demand in advanced countries remained weak, demand in emerging markets, led by China, had spurred increases in commodity prices. Robust demand in Asian emerging markets for biofuels as an alternative energy, had boosted the prices for primary commodities such as soy beans and CPO. The rising prices for mining commodities such as coal and metal ores were also consistent with the increasing trend of manufacturing sector in developing countries. Oil prices at end-December 2009 reached 79.4 US dollars per barrel, up from of 33.9 US dollars recorded in the second week of February 2009. The escalation in global commodity prices and strengthening world demand subsequently contributed to rising global inflationary pressure at the end of 2009 (Chart 1.7).

1 For the latest estimation of world economic growth in 2009, see the WEO Update January 2010

During the period of global economic recovery, many countries have taken policies to safeguard financial system stability and promote economic recovery. Albeit pursued less intensively compared to the first quarter of 2009, monetary policy remains in easing stance,. Approaching year end, some central banks started to raise their policy rates to respond to future inflationary pressure. In addition to monetary relaxation, central banks in developed countries, such as the Federal Reserve, Bank of England, European Central Bank, Bank of Japan and the Swiss National Bank extended their currency swap agreements to ease pressure on US dollar liquidity in some regions until October 2009. The Federal Reserve also expanded the guarantee for securities accepted within the framework of the Term Asset-Backed Securities Loan Facility (TALF) and eased the term of collateralised securities.

Chart 1.9 World Economic Growth

Source: IMF

2006 2007 2008 2009I II III IV I II III IV I II III IV I II III IV

percent, qtq, annualized

-10

-5

0

5

10

15

World Advanced Country Developing Country


1.2To mitigate the impact of the global economic crisis on the Indonesian economy, Bank Indonesia and the Government took a series of policies to reinforce earlier measures. Some policies were aimed at restoring confidence among economic agents both in the financial and non-financial sectors, overcoming the liquidity tightness in the banking system and strengthening economic growth momentum. Other policies were also implemented to mantain financial system resilience and monetary stability, in order to support sustainable economic growth.

The various policies undertaken in 2009 were a continuation of the series of policies implemented by Bank Indonesia and the Government in the fourth quarter of 2008.2 In response to instability in the financial market, the Government issued three new Government Regulations in Lieu of Low (PERPPU), namely PERPPU No. 1 of 2008 concerning Amendment to the BI Law, permitting credit rated with current collectibility to be used as collateral for the Short-Term Funding Facility (FPJP), PERPPU No. 3 of 2008 concerning Amendment to the Indonesian Deposit Insurance Corporation (LPS) Law, setting forth the basis for increasing the LPS customer deposit guarantee ceiling from Rp 100 million to Rp 2 billion, and PERPPU NO. 4 of 2008 concerning the Indonesian Financial Safety Net (IFSN), used among others to provide settlement guarantee if a bank or non-bank financial institution (NBFI) experiences liquidity difficulties

2 A full description of the policies adopted by Bank Indonesia and the Government in Q4/2008 is presented in ”Indonesian Economic Report 2008.”

Policy Responses


or is declared a systemically important failed bank or NBFI. PERPPU No. 4 of 2008 also stipulates the establishment of the Financial System Stability Committee (FSC) comprising the Minister of Finance, Governor of Bank Indonesia and the FSC secretary. Besides these policies, Bank Indonesia announced some improvements to existing regulations in the fourth quarter of 2009, including updating regulation concerning Short-Term Funding Facility (FPJP) which subsequently revised as the Emergency Liquidity Assistance (ELA), extending the FX swap tenor, issuing regulation limiting currency speculation against the rupiah and a prohibiting transaction on structured product derivatives linked to foreign exchange transactions.

g Monetary Policy Response

Bank Indonesia maintained easing monetary policy stance during 2009. With minimum inflationary pressure, Bank Indonesia saw the necessity to boost the domestic economy while ensuring financial system stability. The inclusion of financial system stability in these monetary policy formulation has a strategic importance, because Bank Indonesia observed for continuation instability in the financial system may trigger further pressure on macroeconomic stability and potentially disrupt the economy. This policy direction and strategy is consistent with the implementation of the ITF in striking the optimal balance between achievement of the inflation target and economic growth over the last 5 years.

With this monetary policy direction, Bank Indonesia lowered the BI Rate in 2009 in different magnitudes, divided into three phases, based on a comprehensive assessment on the current state and the outlook of the economy. During the first phase in January-March 2009, the BI Rate was cut by 50 bps each month to 7.75% (Chart 1.10). The bold response in the BI Rate cuts was taken by considering the remain considerable pressure still linger the financial system and the continuing slowdown in economic growth. Against this, future inflationary pressures were estimated to be benign. In the second phase of April-August 2009, BI Rate cuts were done in lower magnitude of 25 bps per month, bringing the rate to 6.50% in August 2009. This policy course was taken after considering waning pressures on the financial system and contained inflationary pressure, while economic growth was quite mild. In the third phase from September to December 2009, the BI Rate was held steady at 6.50%. With financial system stability firmly in hand, the 6.50% level of the BI Rate was adequately consistent with the

inflation target for 2010-2011, while allowing room for measures to boost economic growth. During 2009, the BI Rate was slashed 275 bps from the December 2008 level of 9.25%.

Bank Indonesia also implemented some operational policies on the foreign exchange and rupiah money markets to strengthen monetary policy effectiveness. The objective of these polices is to provide assurance for short-term liquidity in money market while simultaneously optimising bank liquidity management. On the foreign exchange market, Bank Indonesia pursued an exchange rate stabilisation policy to mitigate the impact of the global liquidity crisis on domestic foreign exchange liquidity. This policy was undertaken in a measured action, while maintaining an adequate foreign exchange reserves (Chart 1.10). The policy was adopted amid continued heavy pressure on the rupiah, particularly during the first quarter of 2009, due to the mounting capital outflows from the financial market. Bank Indonesia also adopted another policy on 30 January 2009 to ensure adequate liquidity on the forex market by launching foreign currency repurchase agreements (repo) using the Government Global Bonds as its underlying instruments in these transactions.3 This policy enables domestic banks to repo their Global Bonds to Bank Indonesia in order to obtain foreign currency liquidity.

To provide greater asuransse of adequate foreign exchange liquidity, Bank Indonesia also strengthened bilateral and multilateral cooperation with regional central in the form of currency swap agreements. In March 2009,

3 Bank Indonesia Regulation No. 11/4/2009 concerning Bank USD Repurchase Agreements with Bank Indonesia dated 30 January 2009.

Chart 1.10 BI Rate and International Reserves


billions of USD percent

International Reserves BI Rate (rhs)

5

7

9

11

13

15

20

30

40

50

60

70


Bank Indonesia and the People’s Bank of China concluded a Bilateral Currency Swap Arrangement (BSCA). This arrangement provides for a rupiah/renmimbi swap line valued at Rp 175 trillion/RM 100 billion and get to be effective for 3 years. This arrangement can be extended by mutual agreement.4 This agreement is not only expected to ensure short-term liquidity, but also support trade and investment between the two countries. Bilateral agreement was also established between Bank Indonesia and Bank of Japan, acting on behalf of the Minister of Finance, by the signing of amendment to increase the value of the BSA concluded under the Chiang Mai Initiative as part of the financial cooperation among ASEAN+3 member countries in April 2009. The amendment permits

4 This cooperation exists outside the Bilateral Swap Arrangements under the Chiang Mai Initiative framework.

Indonesia to swap rupiah against USD to a maximum of 12 billion US dollars, higher than the previously agreed 6 billion US dollars. In a further cooperation under a multilateral arrangement, Indonesia also signed the CMIM agreement with other ASEAN+3 members in December 2009. Under the CMIM cooperation framework, Indonesia has a borrowing quota of 11.925 billion US dollars.

On the rupiah money market, Bank Indonesia also implemented various measures to safeguard money market stability. Within this context, Bank Indonesia opened repo windows for 1 and 3 month tenors to provide a guarantee and temporary cushion for banking liquidity, from mid-April 2009 to September 2009. This strategy complements existing measures such as standing facilities, comprising standing deposit facilities and standing lending facilities. In addition to these policies, Bank Indonesia

Source : Ministry of Finance

Table 1.2 Additional of Fiscal Stimulus

Stimulus Allocation (trillion rupiah)

I. Increasing Purchasing Power 25.85

A. Tax 2.50

B. Subsidy on Expenditure 1.35

1. Tax Subsidy (DTP) 1.00

2. Non Tax Subsidy 0.35

II. Improving Business and Exports Competitiveness and Resiliancy 35.47

A. Tax 18.50

B. Subsidy on Expenditure 16.47

1. Tax Subsidy (DTP) 12.30

2. Non Tax Subsidy 4.17

C. Financing 0.50

III.Improving Labor Intensive Infrastructure 11.94

A. Institutional Expenditure 11.22

1. Public work 6.60

2. Transportation 2.20

3. Energy 0.50

4. Public housing 0.40

5. Market 0.32

6. Farming 0.65

7. Training for Labor 0.30

8. Special Housing 0.10

9. Health 0.15

B. Non Institutional Expenditure 0.72

Total Stimulus 73.3


was maintaining economic liquidity while simultaneously reinforcing the banking liquidity structure of the banking system with a 2.5% additional secondary statutory reserve requirement effective from October 2009.

g Fiscal Policy Response

Fiscal policy in 2009 focused on delivering a stimulus to the economy during the period of the global economic downturn, while simultaneously maintaining the fiscal sustainability. The fiscal stimulus package approved by the Indonesian Parliament was launched with three key objectives: (i) maintain and/or boost public purchasing power, (ii) bolster corporate/business sector resilience in coping with the global crisis and (iii) create jobs and mitigate the impact of worker lay-offs through labour-intensive infrastructure development policies. This additional stimulus totalled Rp 73.3 trillion was packaged into tax savings and tax subsidies for business and the infrastructure package (Table 1.2). This stimulus raised the deficit in the Revised 2009 Budget to 2.4% of GDP from the originally targeted 2009 Budget deficit at 1% of GDP (Table 1.3).

The additional fiscal stimulus in the Revised 2009 Budget increased the previously planned stimulus. In the 2009 Budget, the scope of stimulus actions also extended to personnel expenditures and subsidies. Related to personnel expenditures, basic salaries were raised by an average of 15% and a 13th month salary was paid for civil servants and members of the armed forces and police. Subsidies were also allocated for fuel, electricity, fertilisers and foodstuffs. Under the food subsidy policy, the Government provided subsidised rice for the poor, covering 18.5 million target households. Each target household received an average of 15 kg rice each month sold at Rp 1,600/kg for 12 months.

The realization of the 2009 budget (APBN-P2009) turned to be lower than the target deficit. The 2009 Budget deficit came to Rp 87.2 trillion or 1.6% of GDP, below the earlier target set at 2.4% (Table 1.3). Even so, the adjusted budget adequately supported the original programmes and objectives. This was possible because the lower deficit was resulted from differences in the assumptions used. For example, savings were achieved on the fuel subsidy, which came 14% below target due to the lower than predicted of Mid Oil Platts Singapore (MOPS) price. Added to this was 14.4% saving on debt interest payments as a result of appreciation in the rupiah beyond the assumed

level and draw down on foreign borrowings below the budgeted target.

The financing strategy for the 2009 budget deficit also sought to avoid pressure on the fiscal sustainability. This financing strategy involved the prioritising of domestic market issuances of government securities, implementation of a front loading strategy, utilizing foreign currency government securities as a supplementary instrument and activating of the buyback and debt switching. Under the buyback strategy, the Government bought government securities twice for total Rp 8.52 trillion. Debt switching was carried out by holding six debt switching auction of government securities accounted Rp 2.93 trillion. The debt switching strategy was implemented to extend debt maturity and reduce refinancing risk. This strategy has kept the official debt burden in comparison to the capacity of the economy on a downward trend, reflected in the decrease the official debt to GDP ratio from 33% in 2008 to 29% at the end of 2009 (Chart 1.11). The financing strategy was also supported by the approximately Rp 38.1 trillion financing surplus in the 2009 budget outcome, which can be used as source of future financing (Table 1.3).

In addition to the expansionary fiscal policy implemented in the stimulus, the Government also lowered prices for subsidised gasoline and automotive diesel fuels on 15 January 2009. Premium gasoline was reduced 18.2% from Rp 5,500/litre in December 2008 to Rp 4,500/litre and automotive diesel by 6.25% from Rp 4,800/litre in December 2008 to Rp 4,500. The decision to reduce prices for subsidised fuels was done after earlier price cuts announced in December 2008 in response to the

Chart 1.11 Public Debt to GDP Ratio

Source: Ministry of Finance

percent

Foreign Debt Government Security Total

77

67 61

57

47 39

35 33 29


downward trend in world oil prices that commenced during the second half of 2008.

g Banking Policy Response

Bank Indonesia policy for the banking system focused on building the resilience of the banking industry through further actions to strengthen the banking intermediation function. In early 2009, a policy framework to resolve the liquidity crunch in the banking system was established under the second amendment to Act No. 23 of 1999 concerning Bank Indonesia in Act No. 6 of 2009. This law sets forth the legal basis for Bank Indonesia to extend credit or financing to banks with short-term funding difficulties and to extend the emergency liquidity assistance (ELA) to systemically effected banks. To promote banking intermediation, Bank Indonesia also

lowered the risk weighted assets for credit to micro, small and medium enterprises (MSMEs).

Other policies also pursued by Bank Indonesia to bolster resilience in the banking system include implementation of risk management and prudential principles in activities related to structured products. In regard to risk management, Bank Indonesia introduced a policy to include of operational risk as one factor in the capital adequacy calculation.5 Another regulation on bank risk management, was also issued, especially the one that prioritising customer protection through product and banking activities information transparency.6 To

5 Circular Letter No. 11/3/DPNP dated 27 January 2009 concerning Calculation of Risk-Weighted Assets for Operational Risk, using the Basic Indicator Approach

6 Bank Indonesia Regulation No. 11/25/PBI/2009 concerning

Table 1.3 State Budget 2008-2009

* Based on Central Government Financial ReportSource : Ministry of Finance

trillions rupiah

Items 2008*

2009

Budget(Law No.41/2008)

Revised Budget Realization % Budget-r

A. Government Revenues and Grants 981.6 985.7 871.0 866.8 99.5

I. Tax Revenues 658.7 725.8 652.0 641.2 98.3

1. Domestic Taxes 622.4 697.3 631.9 622.5 98.5

2. International Trade Taxes 36.3 28.5 20.0 18.7 93.2

II. Non-Tax Revenues 320.6 258.9 218.0 224.5 103.0

1. National Resources Revenues 224.5 173.5 138.7 137.9 99.4

2. Profit Transfer from SOEs 29.1 30.8 28.6 26.0 90.8

3. Bank Indonesia Surplus 3.7 5.4 5.9 5.8 98.8

4. Other Non-Tax Revenues 63.3 49.2 44.9 54.8 122.2

III. Grants 2.3 0.9 1.0 1.1 110.6

B. Government Expenditures 985.7 1.037.1 1.000.8 954.0 95.3

I. Central Government Expenditures 693.4 716.4 691.5 645.4 93.3

II. Regional Expenditures 292.4 320.7 309.3 308.6 99.8

C. Primary Balance 84.3 50.3 -20.3 6.6

Budget Surplus/Deficit -4.1 -51.3 -129.8 -87.2

Surplus/Deficit (percent of GDP) -0.1 -1.0 -2.4 -1.6

Financing 84.1 51.3 129.8 125.3 96.5

I. Domestic Financing 102.5 60.8 142.6 142.7 100.1

1. Banks 16.2 16.6 56.6 55.6 98.2

2. Non-Banks 86.3 44.2 86.0 87.1 101.3

II. Foreign Financing (nett) -18.4 -9.4 -12.7 -17.4 136.7

Surplus/Deficit of Financing 80.0 38.1


compliment regulations related to bank risk management, updated rules have also been introduced for banks conducting mutual fund-related activities.7 Alongside the issuance of the Bank Indonesia Regulation concerning implementation of risk management, prudential regulations have also been launched for banks conducting business in structured products.8 A key provision in the Bank Indonesia Regulation pertaining to structured products is the requirement for banks to obtain approval principle from Bank Indonesia before launching a structured product activity. In addition, banks must also implement internal policies and procedures to support the prudential principles when launching these structured products. Besides these two major policies, changes were also made to the institutional regulation of the banking system in response to the rapid pace of change and growing integration of the banking industry.9

Banking policies were also supported by policy actions in the payment system aimed at strengthening the reliability of the payment system infrastructure. Among these was the continuation of development of the BI-RTGS system and Bank Indonesia Scriptless Securities Settlement System (BI-SSSS) commenced in 2008. The more reliable, secure and efficient infrastructure and increased capacity is expected to mitigate risks in the BI-RTGS system and support financial system resilience.

Implementation of Risk Management for Commercial Banks7 Circular Letter No. 11/36/DPNP dated 31 December 2009 concerning

Implementation of Risk Management at Banks Conducting Mutual Fund-Related Activities.

8 Bank Indonesia Regulation No. 11/26/PBI/2009 concerning Prudential Principles for Structured Products Activities Conducted by Commercial Banks

9 Bank Indonesia Regulation No. 11/1/PBI/2009 concerning Commercial Banks

g Sectoral Policy Response

The Government also introduced a range of sectoral policies to strengthen the resilience of the real sector in the economy. In the mining sector, the Government announced major changes to the regulation on mining production and licensing with greater consideration to geographical conditions, the carrying capacity of the environment and regional autonomy.10 In agriculture, the Government issued regulations to assure availability of arable land for food crops and optimum use of fisheries resource potential.11 To provide more adequate infrastructure, the Government has opened the door for private sector in providing power supply and assigned an expanded role to regional governments in supplying of electrification.12 In regard to infrastructure financing, the Government set up a state owned company in 2009 specifically to assist the funding of infrastructure projects.

Other sectoral policies were also targeted at mitigating impact from the global financial crisis. To protect domestic manufacturing from illegal imports, the Government took action in January 2009 to tighten controls on imported goods. These measures included restrictions on certain imports such as food and beverages, footwear, garments, toys and electronics. Accompanying these policy actions were regulations for improving management of other general imports. The Government also took action to accommodate direct imports of used capital goods by industry actors.

10 Act No. 4 of 2009 concerning Mining of Minerals and Coal11 Act No. 41 of 2009 concerning Sustainable Protection of Land for

Food Crop Cultivation12 Act No. 30 of 2009 concerning Electricity


1.3

Performance of the Domestic Economy

Pressures on the global economy had inevitably impacted Indonesia’s economic performance in 2009 especially during Q1/2009. As an open economy, Indonesia felt the blow of the global economic downturn through a twofold transmission, the financial channel and trade channel. Through the financial channel, the lingering global financial market turbulence had kept risks in the domestic financial market and investment in Indonesia to remain high in Q1/2009. Heightened risk perceptions were evident from various financial market risk indicators for Indonesia such as CDS, the EMBIG spread and the yield spread for Indonesia Global Bond over US T-Notes. In Q1/2009, the CDS spread reached a high level of 713, well above the normal level of about 200. Similarly, the yield spread for Indonesia Global Bond over US T-Notes remained wide reaching 8.9% compared to the 3% pre-crisis average (Chart 1.12). The heightened perceptions of risk in turn prolonged the wave of short-term capital outflows with pressure bearing down on domestic financial system stability during Q1/2009. Impact from the trade channel was evident in the sizeable contraction in exports of goods and services, which slowed the overall growth of the economy.

The various policy responses launched by Bank Indonesia and the Government, including the policies of Q4/2008, contributed positively to the restoration of financial system stability from Q2/2009 and paved the way for renewed impetus in economic activity. Contributing to the ongoing financial system stability were the diminishing uncertainties in the global economy. Both factors had a role in lowering risk in the financial sector, as reflected


in the sharp drop in CDS to 160 and the narrowing of the yield spread for Indonesia Global Bonds over US T-Notes to the 1.7% level (Chart 1.12). In response, positive capital inflows resumed into the domestic financial market and the financial system began regaining ground. The improvement in financial system stability then set the stage for renewed confidence among economic actors in the real sector and provided a fresh boost to economic growth.

The slide in financial sector performance and economic growth amid the turmoil in the global economy was also mitigated through the positive contribution of a number of domestic13 factors that operated as an effective buffer absorbing the impact of the global economic downturn. The first domestic factor was related to the sizeable role of household consumption, which kept the Indonesian economy from becoming overly susceptible to global economic contraction. Healthy corporate balance sheets reflected in low levels of leverage and relatively strong cash flow also provided the economy with an extra measure of resilience to financial market shocks, such as exchange rate volatility. The second domestic factor was related to the characteristics of Indonesian banks and financial institutions, which still leaned towards a conventional stance of minimum exposure to problematic foreign securities. As a result, the direct impact of the

13 The effect of domestic factors in restraining the global economic turmoil was in line with the argument from Berkmen et. al (2009). By using cross-country data, the study of Berkmen et. al (2009) showed that domestic factors affected the differences in economic growth across countries during the period of global economy turmoil. Complete analysis of this matter can be seen in Berkmen P., Gelos, Rennhack, and Walsh (2009), ”The global Financial Crisis: Explaining Cross-Country Differences in the Output Impact ”, IMF Working Paper 280, December

global financial market turmoil was similarly constrained. Another factor bolstering the resilience of the banking system was the positive effect of the many actions for reinforcement and consolidation of the banking system in the aftermath of the 1997-1998 crisis.

g Balance of Payments

The strong impact of the global economic turmoil on the domestic economy was initially reflected in the current account and the capital and financial account. In 2009, the current account recorded a 10.6 billion US dollar surplus, up considerably from 126 million US dollars in 2008 (Table 1.4). The increased current account surplus resulted from strong exports, which despite contraction from reduced global growth did not diminish to the same extent as imports. A key factor in the export performance was demand for resource-based and particularly mining products, which maintained positive growth during the period of global economic contraction. Exports were also bolstered by demand for manufactured goods near the end of 2009 in response to the mounting pace of economic recovery in advanced economies led by the US and Japan. During this time, imports slowed significantly in response primarily to falling domestic demand as the impact of flagging domestic economic growth took hold. Imports also contracted from reduced demand for raw materials for export-oriented manufactured goods, which normally have high imported content. For the year as a whole, the capital and financial account posted a 3.7 billion US dollar surplus despite coming under considerable pressure from heavy private capital outflows during Q1/2009 (Table 1.4). The positive outcome in the capital and financial account was partly explained by Bank Indonesia and Government policies in restoring the market confidence that subsequently encouraged renewed inflows of short-term capital beginning in Q2/2009.

Merchandise exports plunged in 2009 in line with the powerful effects of global economic contraction. In 2009, these exports totalled 119.5 billion US dollar, or a negative growth of 14.4% compared to 2008. Growth turned negative for both oil and natural gas exports and non-oil and gas exports. Oil and natural gas exports underwent a 35.5% contraction from the 2008 levels to 20.5 billion US dollars. The dominant factor driving down oil and natural gas exports was falling world oil prices. Calculated by the index for Indonesia’s oil exports, oil was down by 34%. Meanwhile, total non-oil and gas exports in 2009 slipped to 99.1 billion US dollars,

Chart 1.12 Risk Perception Indicators

Source: Bloomberg

bpspercent

Yield Spread Global Bond RI vs US T-NoteCDS of Indonesia (rhs)

EMBIG Spread

150

300

450

600

750

900

1050

1200

1350

1.5

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6.0

7.5

9.0

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13.5

Higher Risk

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 122008 2009


Table 1.4 Balance of Paymentmillions USD

* Provisional Figures

ITEMS 20082009*

Q I Q II Q III Q IV TOTAL

I. CURRENT ACCOUNT 126 2,509 2,481 2,150 3,442 10,582

A. Trade balance 22,916 6,886 8,367 8,491 11,454 35,197

- Export, fob. 139,606 24,179 28,130 31,273 35,932 119,513

- Import fob. -116,690 -17,293 -19,763 -22,781 -24,478 -84,316

1. Non Oil and Gas, nett 15,130 5,335 6,436 6,647 8,442 26,860

1.1. Export, fob. 107,885 20,530 23,751 25,603 29,178 99,063

1.2. Import, fob. -92,755 -15,196 -17,315 -18,956 -20,736 -72,203

2. Oil, nett -8,362 -193 27 -819 -80 -1,064

2.1. Export, fob. 15,387 1,781 2,366 2,922 3,556 10,624

2.2. Import, fob. -23,749 -1,974 -2,338 -3,741 -3,635 -11,689

3. Gas, nett 16,147 1,744 1,903 2,663 3,091 9,402

3.1. Export, fob. 16,333 1,867 2,013 2,748 3,198 9,826

3.2. Import, fob. -186 -123 -110 -84 -107 -424

B. Services, nett -12,998 -2,743 -3,310 -3,517 -4,585 -14,155

C. Income, nett -15,155 -2,742 -3,776 -4,072 -4,742 -15,331

D. Current Transfer, nett 5,364 1,109 1,200 1,247 1,315 4,871

II. CAPITAL and FINANCIAL TRANSACTION -1,876 1,502 -1,757 2,523 1,405 3,673

A. CAPITAL TRANSACTION 294 19 29 34 14 96

B. FINANCIAL TRANSACTION -2,170 1,483 -1,785 2,489 1,390 3,577

1. Direct Investment 3,419 453 400 472 988 2,313

2. Portfolio Investment 1,721 1,859 1,959 2,988 3,298 10,103

3. Other Investment -7,309 -829 -4,144 -970 -2,896 -8,838

III. TOTAL (I+II) -1,750 4,011 724 4,673 4,847 14,255

IV. ERRORS and OMISSIONS -195 -56 328 -1,127 -893 -1,749

V. OVERALL BALANCE (III+IV) -1,945 3,955 1,052 3,546 3,954 12,506

VI. International Reserves and Other Related Item (A+B+C)

1,945 -3,955 -1,052 -3,546 -3,954 -12,506

Notes:

International Reserves Position 51,639 54,840 57,576 62,287 66,105 66,105

(Equivalent to Imports and Servicing of Official External Debt)

4.0 5.4 5.6 6.1 6.5 6.5

Current Account/GDP (%) 0.0 2.2 1.9 1.5 2.2 1.9


Table 1.5 Value of Non Oil and Gas Export by Sector FoB, millions USD

representing a negative 8.2% growth compared to 2008. The downturn in non-oil and gas exports resulted not only from the contraction in global economic activity, but also falling prices for Indonesia’s non-oil and gas export commodities. The developments of 2009 point to downward price movement for a wide range of Indonesian non-oil exports, with the steepest drop recorded for agricultural commodities at 24% (Chart 1.13). Falling prices for agricultural commodities in turn caused export revenues in the agriculture sector to contract by 6.6%. The contraction in exports was offset somewhat by the still robust demand for resource-based exports. During 2009, the mining sector charted positive 45.0% growth, partly on the back of coal exports that mounted by 33.6% (Table 1.5).

Based on the quarterly movement , the steepest decline in Indonesian exports took place in Q1 and Q2/2009. Oil and natural gas exports in the two periods came to only 3.6 billion US dollars and 4.4 billion US dollars, respectively, with an average growth of negative 54% (yoy) (Table 1.4). The dramatic contraction in oil and natural gas exports during these periods was explained by world oil prices that plunged to a low of 39.0 US dollars per barrel. Alongside

this, non-oil and gas exports also contracted by 22.2% in Q1/2009 due to the global economic slowdown and low commodity prices. Exports began regaining momentum in Q2/2009 in response to improving conditions in the global economy although annual growth remained negative. Driving this improvement was the onset of significantly rising global demand led by China and non-Japan Asia, in addition to the continued downward trend in the US dollar. In addition, price gains for some of Indonesia’s primary commodities, beginning in Q2/2009, provided significant lift that brought improvement in export performance until the end of 2009 (Chart 1.13). Strengthening world demand enabled Indonesia’s non-oil and gas exports to resume positive growth in Q4/2009 at 17.6% (yoy).

However, imports contracted sharply due to tumbling domestic demand. In 2009, merchandise imports reached 84.3 billion US dollars with a negative growth of 27.7%, a markedly steeper drop compared to the 14.4% contraction in merchandise exports. Imports contracted in both the oil and natural gas sector and the non-oil and gas products. Oil and gas imports reached 12.1 billion US dollars, tumbling 49.4% from levels reached in 2008 (Table 1.4). The drop in oil and gas imports resulted not only from falling world oil prices and flagging domestic demand, but also the positive impact of the government-sponsored kerosene to gas conversion programme. Similarly, non-oil and gas imports (f.o.b.) reached 72.2 billion US dollars, down 22.2% from 2008 (Table 1.4). The sharp drop in non-oil and gas imports during 2009 produced a widening in the growth differential between non-oil and gas exports and non-oil and gas imports to pre-2008 levels (Chart 1.14). The correction in merchandise import growth to pre-2008 levels was strongly influenced by the steep drop in imports of consumer goods and raw materials. In 2009, consumer goods and raw material imports contracted 32.0% and 27.4%, respectively, while the value of imported capital goods (c&f) eased only 1% from 2008 to 20.6 billion US dollars (Table 1.6).

Chart 1.13 Indonesian Exports Price Index

index (2006=100)

I II III IV I II III IV I II III IV60

80

100

120

140

160

180

200

2007 2008 2009

Non-Oil Oil & Gas Total

IHKEI Growth(yoy)

Non-Oil & Gas

Oil & GasTotal

AgricultureMiningManufacturing

2008

10.39.9

13.08.5

17.335.5

-15.2-24.6-12.4-14.5

-21.4-34.3

2009


Items

2008 2009*

Value Share (%)Growth% (yoy)

Value Share (%)Growth% (yoy)

Total Export 107,885 100 15.8 99,063 100 -8.2

I. Agriculture 4,667 4.3 24.6 4,358 4 -6.6

II. Mining 13,695 12.7 10.2 19,859 20 45.0

III. Manufacturing 89,523 83.0 16.3 74,846 76 -16.4


The services and income account in the balance of payments recorded an increased annual deficit of 29.5 billion US dollars (Table 1.4). The rise in the deficit was related mainly to high expenditure components related to freight services and repatriation of profits by foreign direct investment companies in Indonesia. Net payments on freight again accounted for a sizeable deficit of 5.9 billion US dollars, although somewhat less than in the preceding year as a result of declining volume of trade. On the other hand, tourism revenues slipped to a net 1.2 billion US dollars compared to the 1.8 billion US dollars recorded in 2008. Repatriation of profits by FDI companies produced a deficit of 8.9 billion US dollars following improvements in the performance of non-oil and gas mining companies. The current transfers account recorded another year of surplus, reaching 4.9 billion US dollars although down from the preceding year. A key factor in this decline was lower remittances from Indonesian workers employed overseas, illustrated in the net reduction in worker remittances from 5.2 billion US dollars in 2008 to 4.9 billion US dollars.

The performance of the capital and financial account in 2009 was significantly influenced by short-term capital

flows movements driven by global financial market players’ shifts in risk perceptions towards emerging markets.14 Despite recording an overall 3.7 billion US dollar surplus, the financial account came under heavy pressure from the wave of private capital outflows during Q1/2009 (Table 1.4). In Q1/2009, the drop in capital inflows was closely tied to heightened perceptions of investment risk in Indonesia in line with global financial market actors’ risk aversion towards the emerging markets. Amid the deleveraging process and strong risk perceptions, capital inflows became less sensitive to the attractive interest rate differential. These conditions produced a substantial Q1/2009 deficit in net private capital inflows within the financial account, recorded at 1.1 billion US dollars. The short-term capital outflows originated from rupiah securities, such as stocks, government securities and Bank Indonesia Certificates (SBIs) (Chart 1.15). The potential for a financial account deficit was forestalled, as capital

14 Kurniati and Permata (2009) showed that the increase of investment risk in financial markets contributed approximately 23% of short term private capital flows in Indonesia. Discussion on this matter covered in Kurniati, Yati and Meily I. Permata (2009), ”External Volatility Transmission to the Indonesian Economy, ”Bank Staff Working Paper Indonesia, WP/07/2009, September

c&f, millions USDTable 1.6 Value of Non Oil and Gas Imports by Group of Comodities

Chart 1.15 Foreign Capital Flows to Domestic MarketChart 1.14 Non-Oil & Gas Exports and Imports

millions of USD

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2008 2009

- 4000

- 3000

- 2000

- 1000

0.00

1000

2000

3000

4000

Stock Goverment Bond Bank Indonesia Certificates (SBIs)

millions of USD millions of USD


(1,0)

(0,5)

-

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4

5

6

7

8

9

10

11

12

Net Exports-Imports of Non-Oil & GasNon-Oil & Gas Exports INon-Oil & Gas Imports


Items

2008 2009*

Value Share (%)Growth

(%)Value Share (%)

Growth (%)

Total Imports 100,933 100.0 40.4 78,554 100.0 -22.2

I.Consumption Goods 9,061 9.0 25.1 6,162 7.8 -32.0

II.Raw Materials 70,425 69.8 39.5 51,151 65.1 -27.4

III.Capital Goods 20,763 20.6 53.8 20,550 26.2 -1.0


inflows from the issuance of government global bonds was also recorded during the same period. At the end of Q1/2009, the financial account still managed a surplus of 1.5 billion US dollars (Table 1.4).

The potential for improvement in the financial account emerged during Q2/2009 in line with renewed short-term capital inflows fuelled by more buoyant perceptions among global financial market actors. This was reflected in declining levels in the CDS, the EMBIG spread and swap premia. However, sizeable payments due on government debt tipped the financial account into a 1.8 billion US dollar deficit during Q2/2009. Permanent improvement in the financial account did not occur until the second half of 2009. Among the factors bringing this change were continued short-term capital inflows from foreign investor buying rupiah instruments such as stocks, government securities and SBIs. The second half of 2009 was marked by heavy foreign buying of government securities and SBIs, raising the foreign ownership position in these instruments to 11.3 billion US dollars and 4.7 billion US dollars in December 2009, or a 41.6% and 510.4% increase over the end-2008 positions. Furthermore, the financial account surplus in the second half of 2009 also resulted from increased direct investment, particularly residents’ overseas investments, which recorded a Q4 surplus in comparison to the consistent deficits in previous

periods. This surplus was generated by issuance of foreign currency bonds by private companies operating through overseas subsidiaries, with the funds from these issues then channelled into loans to their parent companies in Indonesia. Net direct investment in 2009 thus recorded a 2.3 billion US dollar surplus, less than in 2008.

Responding to the various developments in the financial account, Indonesia’s external debt position widened 11.5% in 2009 to 172.9 billion US dollars (Table 1.7). Increases were recorded in both official and private external debt at 6.7% and 7.5%, respectively. Private sector external borrowing was fuelled by non-bank private (corporation) borrowing that mounted 12.6% compared to 2008 reaching 64.1 billion US dollars by end-2009. Much of the increase in private external borrowing took place in the second half of 2009, due to a surge in corporate bond issues. In 2009, global corporate bond issues reached 4.3 billion US dollars, up considerably from 1.6 billion US dollars in 2008.

The balances in the current account and capital and financial account produced an overall 12.5 billion US dollars balance of payments surplus for 2009, well ahead the 1.9 billion US dollars balance of payments deficit in 2008. The balance of payments outcome for 2009 as a whole was markedly different from the concerns that had

Table 1.7 Indonesia’s Foreign Debtsmillions USD

2006 2007 20082009

Mar Jun Sep Dec

1. Government and Central Bank 75,820 80,615 86,600 85,520 88,146 96,941 99,265

1.1. Government 73,055 76,920 85,136 83,465 85,499 89,408 90,853

- Bilateral 31,833 32,141 35,751 33,241 33,103 35,104 33,715

- Multilateral 18,837 19,055 20,337 19,977 19,807 19,999 21,529

- Exports credit facility 11,220 10,983 10,553 9,939 9,871 10,085 9,508

- Commercial 62 58 45 43 230 236 268

- Leasing 70 16 2 2 1 1 0

- Securities/Bonds 4,945 6,370 10,446 13,366 13,964 14,354 14,343

- Domestic Securities owned by

non-Resident 6,089 8,298 8,001 6,897 8,523 9,630 11,489

1.2. Central Bank 2,765 3,695 1,465 2,055 2,647 7,533 8,412

2. Private 56,813 60,565 68,480 65,445 65,595 71,048 73,606

2.1 Banks 8,459 9,934 11,583 8,228 8,366 9,446 9,530

2.2 Non-Banks 48,354 50,631 56,897 57,217 57,229 61,603 64,075

- Financial Institution 2,017 2,114 3,891 3,836 3,641 2,937 3,066

- Non Financial Institution 46,337 48,517 53,005 53,380 53,588 58,666 61,009

Total 132,633 141,180 155,080 150,965 153,741 167,989 172,871


emerged early in the year, with the balance of payments projected to run a 2.8 billion US dollar deficit.15 Following these developments, the international reserves position at end-December 2009 reached USD66.1 billion, equivalent to 6.5 months of imports and servicing of official external debt. At this level, reserves were well above the conservative IMF calculation of about 3-4 months of imports or the peer nation average at 5.0 months of imports. Furthermore, the international reserves position was double the total short-term foreign debt burden and 5.7 times the official short-term external debt position.

g The Financial Market

Indonesia’s financial market performance was heavily influenced by the dynamics of the global financial system. Heavy pressures bearing down on the domestic financial market in Q4/2008 carried over into Q1/2009. These pressures impacted across all markets, including the stock market, government securities market, rupiah money market and forex market. For the most part, the pressures on the domestic financial market during the two quarters were influenced by stronger perceptions of investment risk on emerging markets, as demonstrated in the rise in various risk indicators. This diminished the flow of short-term capital into emerging markets, including Indonesia, which then broadly impacted performance on the markets for stocks, government securities, rupiah and forex (for an analysis of financial market pressures during the two quarters, see Box 1.1 Policy Response During the Global Financial Market Turmoil).

15 Preliminary estimates of the Indonesian economy in 2009 covered in the Bank Indonesia Economic Report 2008

On the stock market, the still heightened market perceptions in Q1/2009 of investment risk in emerging markets, including Indonesia, continued to weigh on market performance. During this period, the JSX Composite Index steadily lost ground to reach a low of 1,256 points in early March 2009 as foreigners offloaded stocks on the Indonesian Stock Exchange (Chart 1.16). Trading volume also fell significantly to Rp 1.57 trillion per day from the 2008 average of Rp 3.99 trillion per day. Stock market performance began to pick up in Q2/2009 upon renewed growth in investor confidence, with the trend carrying through to the end of 2009. These conditions paved the way for capital inflows that in turn strengthened the JSX Composite Index to about 2,349 on trading similar to pre-Q3/2009 levels. The growing foreign activity in the financial market followed by domestic actors spurred JSX index growth since Q2/2009, with the index closing the year at 2,534. This represents a steep ascent when compared to 1,355 at end-2008, as well as the highest gain posted by stock markets in Asia. The resurgence of the stock market was also bolstered by increased trading activity with average share trading volume climbing to Rp 3.99 trillion per day for the overall 2009. The dominant sectors driving share price gains were primary commodity-based sectors such as mining and plantation. The performance of these primary sectors was closely linked to the trend in international market commodity prices since Q2/2009.

The government securities market also moved in tandem with the stock market, which plunged sharply during Q1/2009. With still heightened risk perceptions during that period, net capital inflows to government securities in all tenors during Q1/2009 remained negative (Chart 1.17).

Chart 1.16 JCI and Net Foreign Buying Chart 1.17 Yield & Net Foreign Buying/Selling of Government Bond

Source: Bloomberg

indextrillions of rupiah

-

500

1.,000

1.,500

2,000

2,500

3,000

(4)

(2)

-

2

4

6

8

Net Foreign Buying/Selling JCI

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2008 2009

1 2 3 4 5 6 7 8 9 10 11 12

2007

Source: Bloomberg


percenttrillions of rupiah

Short Term Medium Term Long Term Total

Average Yield (rhs)

4

6

8

10

12

14

16

18

(20)

(15)

(10)

(5)

0

5

10

15

20


As a result, the government securities price index tumbled to 81.32 in March 2009. Falling prices for government securities also widened yield on all tenors with average government securities yield in February 2009 touching as high as 12.7%. Turnover in government securities trading during that period also dropped to about Rp 79.9 trillion, compared to Rp 105.5 trillion before the global economic downturn. Performance on the government securities market showed renewed improvement in Q2/2009 in line with improving risk perceptions that subsequently had a positive influence on foreign capital inflows. In response, the government securities price index improved to 94.37 at end-2009 or up 6.98% from the end of 2008. This positive development also led to improved yield on government securities in all tenors (Chart 1.18). During 2009, the average monthly prices for medium and long tenor government securities mounted significantly by 1,362 bps (up 13.98%) and 1,632 bps (a rise of 18.83%). By comparison, prices on short tenors climbed only 407 bps (up 4.03%). Average trading volume in government securities also fell to Rp 3.39 trillion per day, which compares to the 2008 average at Rp 4.49 trillion per day.

Corporations took advantage of the improving performance on the government securities market to issue bonds. The decline in government securities yield, frequently used as a benchmark in bond issues, encouraged companies to issue bonds to finance business activities. An added factor in the surge in corporate bond issuances was the drive to secure financing sources, which could potentially become less available due to the large numbers of bonds reaching maturity and sluggish credit growth in 2009. Against this background, corporate bond issues mounted by 18.4% during 2009 to Rp 175 trillion.

Similarly, market capitalisation also widened by 37.3% over 2008.

The developments of these foreign capital flows in the stock market and government securities market and changes in the foreign portfolio holdings of SBIs in turn influenced the rupiah value in the forex market. In Q1/2009, the still heavy exodus of foreign capital from stock, government securities and SBI portfolios placed sustained heavy pressure on the rupiah. The prolonged high uncertainties prompted forex market participants to hold US dollars, producing a liquidity crunch on the domestic forex market. Forex market liquidity then tightened further due to the rise in counterparty risk among market participants and particularly with foreign banks. These conditions sent forex market trading volume tumbling from a monthly average of 2,799 billion US dollars to 1,323 billion US dollars during Q1/2009 (Chart 1.19). Tight liquidity and thin forex transaction volume also produced a widening in the rupiah bid-offer spread to about Rp 100 from the approximately Rp 10 norm before September 2008.

As a whole, the uncertainty and risk perceptions on the forex market put considerable pressure on the rupiah during Q1/2009. The rupiah touched a low of Rp 12,020 to the US dollar in early March 2009, a time also marked by increased volatility (Chart 1.20). The correlation between risk and exchange rate movement was seen in the parallel movement between the rupiah and various risk indicators such as CDS and yield spread (Chart 1.21). The correlation between CDS and the exchange rate mounted to about 0.8 during 2008-March 2009 from about 0.6 in the 2006-2007 period. In contrast, the correlation between the interest

Chart 1.19 Trade Volume in Forex MarketChart 1.18 Yield of Government Securities

millions of USD millions of USD

0

100

200

300

400

500

600

0

500

1,000

1,500

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-08

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-09

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09

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09

Average Monthly Forex Trading VolumeAverage Outflow Volume of Foreigner (rhs)

Source: Bloomberg

100 bpspercent

Changes, yoy (rhs) 31 Dec 2009 Dec 2008

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

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6

8

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12

141Y

R

2YR

4YR

5YR

6YR

7YR

8YR

9YR

10YR

15YR

20YR

30YR


rate differential and the exchange rate was negative at about 0.7 during the crisis period, indicative of the magnitude of foreign investors risk aversion despite the steep interest rate differential at the time (Graph 1.21).

Bank Indonesia responded to this adverse development in Q1/2009 with a measured policy for stabilising the exchange rate by ensuring adequate levels of liquidity in the domestic forex market. This policy response successfully curbed expectations of excessive depreciation amid the mounting uncertainty. The current account surplus, a fundamental factor, also kept the rupiah from steeper decline. At the same time, positive sentiment on the global financial market that had surfaced from the middle to end of March 2009 eased downward pressure on the rupiah throughout Q1/2009. Positive sentiment also emerged in relation to improved external resilience after the sale of the Government of Indonesia Global Medium Term Notes (GMTN) and the impact of increases in the BSA commitment with Japan and the Bilateral Currency Swap Arrangement (BCSA) with China. These developments converged to weaken the rupiah 5.7% during Q1/2009, a comparatively modest rate of depreciation compared to the final quarter of 2008 when the rupiah plunged 15.5%. These developments were also accompanied by reduced volatility in the rupiah.

The rupiah exchange rate resumed an appreciating trend in Q2/2009 on the strength of improving risk perceptions of emerging markets and the secure condition of domestic fundamentals. Optimism over global economic recovery combined with the secure condition of domestic fundamentals provided impetus for steady growth in forex supply from foreign investors in the domestic financial

market. Further support for the strengthening of the rupiah came from the continued surplus in the current account. In response to these developments, the rupiah closed 2009 at Rp 9,425, having appreciated 18.4% from the end-March 2009 position (Chart 1.20). Accompanying the rupiah gains was renewed growth in forex market trading volume (Chart 1.19). Added to this, the buy/sell spread on the rupiah fell back to a normal Rp 10 with the easing of counterparty risk on the forex market. Measured for the year as a whole, the rupiah closed 2009 at a level 15.7% higher than end-2008. Despite the appreciating trend, the level of the rupiah continued to support Indonesia’s export competitiveness.

The influence of uncertainties related to global financial market risks subsequently spilled over on to the rupiah money market. The uncertainties of Q4/2008 carried over into Q1/2009, along with increased counterparty risk on the interbank money market. The supply of interbank funds from banks holding excess liquidity also tightened. Instead, banks preferred to place funds in central bank monetary instruments such as SBIs and the Bank Indonesia Facility (FASBI) even in spite of the aggressive lowering of the BI Rate during Q1/2009. The overall effect of these conditions was to carry forward the Q4/2008 decline in overnight interbank transaction volume into early Q1/2009. Reinforcing this were the wide variations in distribution of liquidity among interbank market participants.

The issues of Q4/2008 that spilled over into Q1/2009 caused some banks to face increased counterparty risk, mainly from foreign bank branch offices (FBBOs) and small-scale banks. FBBOs, traditionally a channel for

Chart 1.21 Risk Premium, UCIP, CDS, and Exchange RateChart 1.20 Rupiah Exchange Rate: Level and Volatility

Source: Bloomberg

bps Rp/USD


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inflows of foreign capital and also net borrowers on the interbank money market, saw their rupiah liquidity needs soar due to the high volume of capital outflows as foreign investors withdrew funds.16 However, financial woes experienced by the parent banks in other countries meant that local banks, traditionally net lenders on the interbank money market, had to reassess their credit lines and credit limits. As a result, the FBBOs found themselves in difficulty accessing funds on the interbank money market. In similar developments, small banks carrying substantial risk due to the scale of their banking business were impacted by the heightened risk aversion among interbank market participants.

Risks on the rupiah money market that carried over into Q1/2009 were reflected in various interbank market indicators. Interbank transaction volume at end-January

16 Because some of them act as a standby buyer

2009 was still low at about Rp 6 trillion compared to the normal average at about Rp 13 trillion, due to the effect of these heightened risks (Chart 1.22). Similarly, end of day liquidity in the interbank money market narrowed further in Q1/2009. The number of interbank market participants also fell from an average of 98 banks to 61 banks (Chart 1.23). This coincided with increased segmentation in the interbank market that widened the differential between the highest and lowest overnight interbank rates. In further developments, liquidity risk between tenors also deteriorated as illustrated in the spread for the 1-week to 6-month JIBOR over the overnight rate that climbed to 136 bps, compared to the normal level of 63 bps (Chart 1.24).

The various issues on the interbank money market eased during Q2/2009 as uncertainties on financial markets began to recede and the positive impact from monetary relaxation gathered momentum. The diminished uncertainties on the rupiah money market were to a large extent the result of positive impact from the improving global economic outlook that eased counterparty risk in dealing with FBBOs and small-scale banks. With lower risks, transaction volume then recovered to around pre-crisis levels at Rp 13 trillion, also reflected in total liquidity and number of participants in the interbank money market. Positive impact was also visible in the narrowing of the spread for the 1-week to 6-month JIBOR over the overnight rate to the pre-crisis level of 56 bps.

g The Banking System

Domestic financial market risk contributed to increased market risk in the banking industry. Although contained within safe limits, market risk surged during Q1/2009 in

Chart 1.24 JIBOR and O/N Interbank Rates

percent

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Chart 1.23 O/N Interbank Transaction Volume and ParticipantsChart 1.22 Interbank Average Transaction Volume


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line with the high level of interbank rates, weakening of the rupiah and decline in government securities prices. High interest rates and exchange rate depreciation carried potential for increasing banks burden, given the maturity profile of the net rupiah and foreign currency funds in the banking system was greatly concentrated in short-term deposits of below 1 month. In addition, the drop in government securities prices may potentially reduce bank revenues, although in general no excessive decline occurred due to the modest share of government securities in bank asset portfolios.

Financial market developments also influenced credit risk and liquidity risk in the banking system. The still considerably high level of credit risk in Q2/2009 resulted in part from accelerated growth in non-performing loans (NPLs) (Chart 1.25).17 Similarly, liquidity risk also mounted in Q1/2009 due to the pressure bearing down on the domestic financial market, although conditions were generally under control. Liquidity risk remained high during Q1/2009 in response to the impact of the liquidity crunch on the interbank market fuelled by heightened uncertainties. As explained earlier, the liquidity crunch originated from the increased counterparty risk among interbank market participants that in turn prompted risk aversion in the banking system. Also exacerbating the crunch was the lingering problem of market segmentation. Worsening this market segmentation was

17 There are two concepts of NPL, the Gross NPL and Net NPL. Gross NPL is the ratio between the amount of nonperforming loans to total loans without taking into account provision to anticipate the risk of losses, while net NPL is ratios that have formed a provision to anticipate the risk of loss. In that case, the provision referred to the provision on Earning Assets (PPAP).

the diminishing supply of funds from risk averse banks that actually still held excess liquidity, but preferred to hold funds as a safety measure. Overall, the increased uncertainty that exacerbated counterpart risk plunged some banks into difficulty in meeting their short-term liquidity needs.

The difficulties with liquidity then influenced bank behaviour in lending. After a year of aggressive credit expansion in 2008, which peaked in October that year, banks began acting with greater caution. On one hand, the cautious stance of banks and concerns over rising NPLs prompted banks to increase their fund placements in SBIs and the FASBI. This was visible in the expanding share of SBI and FASBI placements compared to earning assets, while the proportion of lending declined. On the other hand, fund placements in SBIs and FASBI reflected moves by banks to reduce liquidity risk by safeguarding their liquidity. As a result the ratio of liquid instruments to depositor funds climbed back to about 20%.

Banking risk generally eased beginning in Q2/2009 from improvements in financial market performance. The renewed gains in the bond and stock markets and appreciation in the rupiah diminished the level of market risk in the banking system. In similar developments, credit risk, which had spiked earlier in 2009, resumed a downward trend in line with the declining NPLs ratio that carried through to the end of 2009. In December 2009, NPLs gross stood at 3.79%, down from the high of 4.71% in May 2009. The steepest rise in nominal NPLs occurred in credit to agriculture and trade, both being sectors that had recorded credit expansion ahead of other sectors. The upward trend in loan loss provision on NPLs that

Chart 1.26 BI Rates and Banking Interest RatesChart 1.25 Nonperforming Loan (NPL)

percent

2006 2007 2008 2009I II III IV I II III IV I II III IV I II III IV4

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trillions of rupiah percent

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commenced in early 2008 lasted to the end of 2009 (Chart 1.25).

Various risks that surfaced during the global economic downturn prompted renewed caution in the banking system and considerably slowed bank responses in interest rate cuts, particularly for lending rates. Despite the downward trend of banks interest rates up to the end of 2009 in line with the reductions in the BI Rate, the cautious stance adopted by banks resulted in asymmetric decline in these rates. The 1-month deposit rates generally came down more quickly than lending rates, resulting in a widening of the bank interest rate spread. Compared to conditions in November 2008, when first reduction was announced in the BI Rate, 1-month bank deposit rates had fallen by 324 bps, while the average lending rate was down only 73 bps (Chart 1.26). The slowest response in the reductions in lending rates came from consumer credit. Other factors, such as less than optimum banking efficiency and the setting of high margins on loans, also contributed to the slow pace of lending rate decline.

High lending rates charged by banks and the slowing pace of economic activity acted to reduce banks loan disbursements. Bank lending growth reached only 10.0% in 2009, down sharply from the 2008 credit expansion recorded at 30.5% (Chart 1.27). In line with exports contraction during 2009, the fall in credit expansion resulted from a drop in foreign currency lending during the year, with a negative growth recorded at 17.4% (Chart 1.27). Component-wise, the slowing down of total credit expansion was largely influenced by a sharp 2.7% drop in working capital credit, while consumption credit and investment credit grew by 19.0% and 16.4%, respectively. Meanwhile, sector-wise, the strongest contraction in

lending was recorded in manufacturing at 8.8%, while trade, transport and communications and the agriculture sector maintained positive lending growth of 16.1%, 17.0% and 15.2%, respectively.

g Economic Growth

The global economic contraction unavoidably slowed Indonesia’s economic growth in 2009.18 This was closely linked to the negative growth in exports that resulted from the contraction in world economic growth. The slowdown in the domestic economy caused by tumbling exports and the high level of bank interest rates contributed to slow investment growth. With exports and investment in decline, economic growth in 2009 was driven more by domestic consumption involving both household and government spending. Overall, consumption was sufficient to keep economic activity in Indonesia at a level supporting a 4.5% growth . Although down from 6.1% in 2008, the 2009 growth figure still outperformed the original 4.0% forecast at the beginning of the year.19 Economic growth in 2009 was also ahead of other nations, many of which were still mired in contraction.

As described in the sub-chapter on the balance of payments, Indonesia’s exports sustained rapid contraction in the first half of 2009 due to the impact of the ongoing decline in the global economy.20 In real terms, exports of goods and services contracted by a steep 18.73% (yoy) and 15.52% (yoy), respectively in the first two quarters of 2009. Exports began improving only in Q3/2009, a period marked by reduced export growth slowdown bolstered by the strengthening of global economic recovery. The steady improvement in the global economy even helped exports rebound with positive growth in Q4/2009 at 3.7% (yoy). Overall, the strong impact of the world economic slowdown resulted in a 9.7% contraction in exports of goods and services during 2009, the worst export performance in the past decade.

18 Kurniati and Permata’s studies (2009) showed that the decline in global economic growth and behavioral global risk aversion explains about 8.5% of global economic growth variation in the short term and about 17.7% variation in the long term growth economy.

19 Preliminary estimates of the Indonesian economy in 2009 covered in the Bank Indonesia Economic Report 2008

20 In more detail, Kurniati and Permata (2009) also showed that the decline in global economic growth, particularly U.S., contribute approximately 27% of Indonesia’s exports performance in the long term. The study showed that the decline in global economic growth began to degrade the performance of exports in the second quarter with the highest decline in seventh quarter.

Chart 1.27 Credit Expansion Growth in rupiah and foreign currency

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percent, yoy

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The fall in exports and still strong perceptions of risk on financial markets contributed to slowing investment. Investment showed a downward trend during the first half of 2009 in line with the consolidation process under way in the banking industry and real sector in response to economic uncertainties. The real sector consolidation acted as a continued restraint on investor interest, as reflected in the low business tendency index in Q1/2009 (Chart 1.28). A survey by the Central Statistics Agency (BPS) found that business tendencies were still down due to slackened orders for input goods and foreign orders, in addition to lower real selling prices. In addition to these structural factors, the slow pace of investment is also explained by the low levels of expenditure absorption in government infrastructure projects. In response, non-construction investment contracted by 4.33% and 7.71% during Q1 and Q2/2009 (Chart 1.29).

The investment growth trend began to improve in the second half of 2009. This positive development was closely linked to a more robust outlook for domestic and global demand fuelled by early signs of recovery in the world economy. In addition, the upbeat investment growth was explained by more rapid decline in lending rates, although these rates remain at generally high levels. In response to these developments, investment growth in 2009 reached 2.8%, having weakened from the preceding year. Analysed by category, the slumping investment growth was explained by a downturn in FDI, recorded at Rp 133.8 trillion in 2009 or down 27.2% from the 2008 level. In contrast, domestic investment mounted from Rp 20.4 trillion in 2008 to Rp 37.8 trillion in 2009.

The strong influence of the global economic downturn dampened the positive business perceptions from

Table 1.8 GDP Growth by Expenditures percent, yoy

* Provisional Figures, ** Very Provisional Figures, *** Very Very Provisional FiguresSource: BPS-Statistics Indonesia

Chart 1.29 Construction and Non-construction InvestmentChart 1.28 Business Tendency Index (BTI)

Source: BPS



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index index

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BTI Domestic Order Foreign Order

Order for Input Goods Real Selling Price (rhs)

Components 2007*2008** 2009***

I II III IV Total I II III IV Total

Total Consumption 4.87 5.47 5.49 6.34 6.42 5.94 7.28 6.27 5.44 5.91 6.21

Private Consumption 5.01 5.67 5.52 5.33 4.84 5.34 5.95 4.80 4.75 3.96 4.85

Government Consumption 3.89 3.62 5.26 14.06 16.35 10.43 19.25 16.97 10.32 16.97 15.72

Investment 1.93 18.58 10.88 9.65 11.22 12.42 (0.92) 3.01 4.35 4.49 2.77

Domestic Demand 4.11 8.74 6.88 7.23 7.62 7.60 5.05 5.40 5.15 5.55 5.29

Net Exports 6.46 (1.67) (1.92) 8.38 27.69 7.61 5.34 9.38 25.24 10.63 12.37

Exports of Goods & Services 8.54 13.64 12.36 10.63 1.99 9.53 (18.73) (15.52) (7.79) 3.67 (9.70)

Imports of Goods & Services 9.06 17.99 16.11 11.10 (3.73) 10.00 (24.42) (21.04) (14.67) 1.62 (14.97)

GROSS DOMESTIC PRODUCT 6.35 6.21 6.30 6.25 5.27 6.01 4.53 4.08 4.16 5.43 4.55


improvements achieved in the 2009 business climate. Improvement in the investment climate in Indonesia was reflected in part by the healthier rating for Indonesia in the annual Doing Business survey by the World Bank.21 Indonesia’s rating benefited largely from the reduction in business start-up time from 154 days in 2008 to 60 days. Obstacles still cited in the survey findings were tax regulation, labour regulations and the legal system for investor protection. Improved competitiveness was also depicted in the findings of the IMD Competitive Centre study that ranked Indonesia in 42nd place, up from the 51st position one year earlier.22 Key factors in the upward revision of the competitiveness rating in the IMD Competitive Centre study were economic resilience, improvement in business efficiency and the Government of Indonesia. On the policy side, improvements to the business climate resulted in part from the government

21 Doing Business 2010, World Bank, 200922 IMD World Competitiveness Yearbook, IMD, 2009

decision in 2009 to revoke Regional Regulations with significant potential to hinder investment. By October 2009, a total of 688 Regional Regulations had been revoked in such areas as taxes and levies in the transport, industry and trade, agriculture and culture and tourism sectors.

Amid conditions of diminishing exports and slowing investment, household consumption maintained healthy expansion, bolstering economic growth as a whole. During 2009, household consumption grew at a brisk 4.85%, albeit down slightly from 5.34% in the preceding year (Table 1.8). With household consumption accounting for a sizeable 58% share of GDP, the sustained overall high growth in household consumption had a significant role in supporting economic growth in 2009.

Rapidly growing household consumption was fuelled in part by the positive contribution of the national election activities in 2009 and improvement in consumer confidence and incomes from Q2/2009. The significant role of the election activities pushed household consumption growth in Q1/2009 to a fairly high level of 5.95% (yoy), despite the pessimistic mood prevailing in consumer confidence at the time (Chart 1.30). Analysed by component, election-related household consumption in Q1/2009 was driven to a large extent by the high growth in non-food household consumption at 7.63% (Chart 1.31).

The improvement in household consumption beginning in Q2/2009 was largely fuelled by strengthening consumer confidence in response to the positive influence of continued low inflation and improvement in public purchasing power. On one hand, the remarkably low

Chart 1.30 Consumer Survey-Bank Indonesia Chart 1.31 Household Consumption Growth

index

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Chart 1.32 Farmer Term of Trade and Real Labour Wages


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inflation in 2009 helped preserve purchasing power and consumer confidence to maintain levels of consumption. On the other, the salary increases and improvement in farmer terms of trade bolstered public purchasing power with the effect of supporting strong consumption. A survey by BTI Consultants found that salaries paid to office staff up to Chief Executive Officers (CEO) went up in 2009 by an average of 8.39% (Table 1.9). In other developments, farmer terms of trade and labour wages also showed an improving trend beginning in Q3/2009 (Chart 1.32).

The strong role of household consumption is also explained by the positive impact of high government consumption. The steepest rise in government consumption took place in Q1/2009 at 19.25%, driven in part by heavy spending related to the national elections (Table 1.8). In other quarters, government consumption was also high in line with the government commitment to boost the fiscal stimulus. Fiscal stimulus items that had bolstered government consumption and subsequently delivered multiplier effects on household consumption and the wider economy include the operation of the social

safety net with the Direct Cash Transfers programme, income tax cuts and a pay increase and 13th month salary payment for civil servants and members of the military. Growth in government consumption for 2009 overall reached 15.7%, ahead of the 10.4% growth in 2008.

The sizeable role of consumption in driving economic growth in 2009 was also reflected in sectoral GDP. Economic growth in sectoral GDP was spurred to a large extent by non-tradable sectors, such as electricity, gas and water utilities, construction, the transport and communications sector and services. The electricity, gas and water utilities sector and transport and communications grew by 13.78% and 15.53%, respectively (Table 1.10). The buoyant performance in electricity, gas and water utilities was explained among others by the government decision to fast track the kerosene to LPG conversion programme for completion in 2009 rather than in 2010 as originally planned. In the transport and communications sector, continued strong performance was driven by ongoing market penetration in the communications subsector. In contrast to performance

Source : BTI Consultants

Table 1.9 Development of Salary Increased

Year

Sectors Average of In-

creasedFMCGTelecommu-

nication Information Technology

Pharmacy Banking Oil & Gas Insurance Logistic Plantation

2007 10%-12% 12%-17% 9%-11% 8%-12% 10%-15% 12%-15% 8%-12% 9%-12% 10%-12% 11.44%

2008 9%-12% 10%-12% 8%-10% 8%-11% 9%-12% 12%-15% 11%-15% 9%-12% 9%-12% 10.89%

2009 3%-11% 0%-9% 6%-9% 7%-10% 8%-12% 8%-12% 9%-13% 7%-10% 7%-10% 8.39%

Table 1.10. GDP Growth by Sectorspercent,yoy

S E C T O R 20072008 2009

I II III IV Total I II III IV Total

1. Agriculture 3.47 6.44 4.81 3.25 5.12 4.83 5.91 2.95 3.29 4.61 4.13

2. Mining and Quarrying 1.93 -1.62 -0.37 2.32 2.43 0.68 2.61 3.37 6.20 5.22 4.37

3. Manufacturing 4.67 4.28 4.23 4.31 1.85 3.66 1.50 1.53 1.28 4.16 2.11

4. Electricity, Gas and Water Supply 10.33 12.34 11.77 10.41 9.34 10.92 11.25 15.29 14.47 13.99 13.78

5. Construction 8.53 8.20 8.31 7.76 5.88 7.51 6.25 6.09 7.73 8.03 7.05

6. Trade, Hotel and Restaurant 8.93 6.75 7.68 7.59 5.47 6.87 0.63 -0.02 -0.23 4.17 1.14

7. Transportation and Communication 14.04 18.12 16.57 15.64 16.12 16.57 16.78 17.03 16.45 12.22 15.53

8. Financial, Rental and Business Services 7.99 8.34 8.66 8.60 7.42 8.24 6.26 5.33 4.90 3.77 5.05

9. Services 6.44 5.52 6.51 6.95 5.93 6.23 6.70 7.19 6.04 5.69 6.40

GROSS DOMESTIC PRODUCT 6.35 6.21 6.30 6.25 5.27 6.01 4.53 4.08 4.16 5.43 4.55

* provisional figures ** very provosional figures *** very very provisional figures Source: BPS - Statistics Indonesia


percent,yoyTable 1.11. Growth of MSME’s Credit by Sectors

Sector 2007 20082009

Mar Jun Sep Nov Dec

MSME's Credit 22.50 26.1 22.9 17.0 13.0 14.9 16.3

Agriculture 15.7 20.5 20.5 17.4 11.6 14.7 16.3

Mining 16.5 19.4 2.6 161.6 145.8 170.1 133.7

Industry 3.1 21.8 12.7 -0.1 -8.8 -7.8 -4.3

Electricity -80.7 95.6 40.2 40.2 -10.8 27.5 25.9

Construction 30.8 29.2 26.8 12.8 9.3 9.9 12.7

Trade 25.4 16.8 20.4 16.8 17.0 18.2 19.6

Transportation 9.0 20.0 12.2 5.8 2.7 7.4 7.7

Business Services 29.8 33.9 27.2 13.7 5.0 6.9 8.0

Social Services 10.8 13.7 12.3 9.2 11.3 16.3 15.3

Others 25.2 31.4 25.8 19.9 15.0 17.1 18.4

Non MSME's Credit 30.7 35.0 29.1 15.5 6.3 -3.1 4.0

in these non-tradable sectors, tradable sectors such as manufacturing were significantly impacted by external turbulence. Growth in the manufacturing sector, which accounts for a 45% share of national exports, fell in 2009 to 2.1%. As a result, manufacturing growth stood at only about 1.5% in Q3/2009, well below the average of about 4% before the crisis. Further decline in manufacturing was somewhat prevented by buoyant growth in the food and beverages, textiles and printed goods subsectors, consistent with their mainly domestic market orientation. The trade sector also slowed considerably, slipping into contraction in Q2 and Q3/2009 due to depressed activity in international trade. In contrast to these two sectors, performance in the mining sector mounted significantly with growth rising to 4.37% in response to the positive impact of expanding coal exports.

One factor that has consistently bolstered the strength of domestic demand is the positive role of MSMEs. This is explained to a large degree by the nature of MSMEs, many of which are domestically oriented but have comparatively little dependence on imported inputs. One indicator of the sizeable MSME role is the robust growth in lending to MSMEs, recorded in 2009 at 16.3% (Table 1.11). In contrast, non-MSME lending recorded only 4.0% expansion. Analysed by sector, the major beneficiaries of MSME credit were agriculture, trade and services, all of which recorded brisk lending growth (Table 1.11). Mining also saw aggressive credit expansion consistent with the strong business performance in that sector. In contrast, MSME lending for the manufacturing sector contracted 4.3% due to the declining performance of the manufacturing sector as a whole. MSME lending growth was accompanied by lower NPLs in the MSME category compared to NPLs for non-MSME lending, also reflecting the strength of MSME activity amid the global economic downturn (Chart 1.33).

The strong role of domestic demand was also supported by changes in domestic private sector behaviour. On one hand, domestic business responded to the global economic turmoil by boosting efficiency. Higher efficiency was reflected in part in Bank Indonesia survey findings indicating the prioritising of efficiency among MSMEs in responding to the impact of the global economic downturn. On the other hand, adjustments were also made using internal funds, which were not sensitive to

Chart 1.33 NPLs on Credit of MSME and Non-MSME

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interest rates, to cope with the persistently high level of bank lending rates.23 Business turned more to drawing down inventories on hand to satisfy the still vigorous household demand. The switch to using inventories was reflected in the decline in the inventory to total assets ratio at some companies operating in manufacturing, infrastructure, agriculture and mining (Chart 1.34).24 Use of internal funds was also reflected in the tapping of

23 The indication is in line with Widayat and Mochtar studies (2005). The studies, using the flow of funds balance, shows that in a period of high interest rates, households will liquidate their stock investment as a source of financing for economic activity. Meanwhile, the business sector will again utilize the funds that previously had been placed on various components such as accounts receivable from affiliated companies, receiving long-term leases, deferred costs, debt dividends, and other current assets. Complete analysis of these findings see Widayat, Wiwiek S. and Mochtar, Word (2005), ”Indonesian Monetary Policy Transmission Behavior of Flow of Funds Perspective”, Staff Working Paper, Bank Indonesia, December.

24 Data using a sample of 170 companies listed on Indonesia Stock Exchange

other liquid asset portfolios and expansion in retained earnings as a source of additional capital, such as in the manufacturing and plantation sectors. On the other hand, adjustments by households tend more towards drawing on or liquidating other assets. The use of other assets by households was reflected, among others, in the use of pawn services, which showed a rising trend during 2009 (Chart 1.35).

Adjustments by domestic business in responding to the global economic downturn were also reflected in imports of goods and services. As explained in the sub-chapter on the balance of payments, imports of oil and gas and non-oil and gas merchandise dropped sharply in response to falling domestic demand and diminished need for inputs for export production. The drop in imports can also be linked to drawing down of inventories by business during the period of the global economic downturn. Taken together, the adjustment process contributed to 14.97% real contraction in imports of goods and services during 2009, which compares to the positive growth in domestic demand at 5.29% (Table 1.8).

The various adjustments by the domestic private sector during the period of the economic downturn are closely related to intertemporal decisions in maintaining sustainability of purchasing power. In this regard, these decisions involved the transfer of a portion of the potential future consumption to present consumption. This process operates by drawing down deposits or inventories held and using them as sources of financing or production inputs for satisfying domestic consumption demand. Such intertemporal decisions in turn help keep domestic consumption at stable levels over the long-term.

Chart 1.35 Pawn ActivityChart 1.34 Inventory to Corporate Assets Ratio at IDX

Source: Perum Pegadaian

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV2004 2005 2006 2007 2008 2009

billions of rupiah percent, yoy

Loans Growth (rhs)

10

0

20

30

40

50

60

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Source: IDX

2007 2008 2009

I II III IV I II III IV I II

percent percent

Mining (rhs) Manufacturing

18

20

22

24

26

11

12

13

14

15

16

Agriculture

Chart 1.36 CPI Inflation



percent, yoy

Core (exclusion)CPI Volatile Food Administered Price

-7

-1

6

12

18

24


Global Condition Domestic Condition

CPI InflationImported Inflation ↓

• Domestic Demand ↓

• Sufficient Supply

• rupiah exchange rate:- Rupiah was on appreciation trend since

the 2nd quarter, although it depreciated in the 1st quarter.

• Export Performance ↓(especially in the 1st semester)

• World Economic Growth andWorld Trade Volume ↓

• World Price Commodity (food and Energy) ↓

• Global Inflation andTrading Partner Inflation↓

• Capital Flows to Emerging Marketsince the 2nd quarter start

to increase • Expectation Inflation ↓

• There was no unfavorable shocks- volatile food and administered

prices was manageable

Diagram 1.1 Inflasi 2009 dan Faktor yang Memengaruhi

g Inflation

Inflationary pressure in 2009 was generally minimal. CPI inflation plunged to 2.78% from 11.06% in 2008 (Chart 1.36). CPI inflation in 2009 also came below the 2009 inflation target set at 4.5% ± 1% (see Box 1.2: Accountability for Achievement of Inflation in 2009).25 Similarly, core inflation dropped to 4.28% from the 2008 level of 8.29%.

The minimal inflation in 2009 is explained largely by Bank Indonesia policies in restoring market confidence that subsequently paved the way for appreciation in the rupiah. This in turn helped to shape improved inflation expectations. The milder inflation expectations were also

25 Based on the Minister of Finance Rules No. 1/KMK.011/2008 about ”Inflation Target for 2008, 2009 and 2010,”. The inflation target for 2008-2010 was set each 5.0%, 4.5% and 4.0% with a deviation of +/- 1%.

explained to a large extent by lower administered prices and volatile foods inflation (Diagram 1.1). Administered prices inflation fell below the historical trend as a result of the positive influence of the Government decision to lower subsidised fuel prices in early 2009. At the same time, modest volatile foods inflation below the historical trend owes much to successful government measures in securing the supply and distribution of vital food staples and energy.

The low CPI inflation in 2009 resulted from the decline across all inflation components and categories of goods. In disaggregation by component, not only was core inflation maintained at 4.28%, but volatile foods inflation fell sharply from 16.48% in 2008 to 3.95% (Table 1.12). Similarly, administered prices underwent 3.26% deflation after a year of very high inflation in 2008 at 15.99%. Analysed by category of goods, the steepest decline was recorded first in transportation, followed by

Tabel 1.12 Core and Non-Core Inflation and Its Contribution

Source: BPS

percent

YearCore Volatile Food Administered Price

CPI InflationInflation Contribution Inflation Contribution Inflation Contribution

2005 9.75 5.66 15.51 2.79 41.71 9.59 17.11

2006 6.03 3.50 15.27 2.75 1.84 0.42 6.60

2007 6.29 3.48 11.41 2.75 3.30 0.37 6.59

2008 8.29 5.48 16.48 2.59 15.99 2.99 11.06

2009 4.28 2.74 3.95 0.67 -3.26 -0.62 2.78


housing, water, electricity, gas and household fuels and the foodstuffs categories. The reduced inflation in the transportation category was linked primarily to the effect of the 18%26 cut in subsidised fuel prices and reductions in urban and intercity transport fares.27 The subdued inflation in housing, water, electricity and utilities and household fuels was achieved with the kerosene to LPG conversion programme placed back on track after setbacks in 2008 that triggered an inflationary surge in this category. Similarly, the lower inflation in the food stuffs category was the result of security of food supplies,

26 The cut of fuel prices in January 15, 2009 (Gasoline and Kerosene prices were cut to Rp 4500,) was the third time fuel prices reduction. Two previous announcement made on December 1, 2008 (Gasolineto Rp 5500,- from the original price of Rp 6000,-) and December 15, 2008 (Kerosene price dropped to Rp 4800, from Rp Rp 5500,- and the price of Gasoline to Rp 5000,-). Since December 1, 2008, the total reduction of Gasoline price was 25%, from Rp 6000,- to Rp 4500,-. Meanwhile, for kerosene price have decreased by approximately 18.2%, from Rp 5500,- to Rp 4500,-.

27 urban transportation fares was decreased by 13% in February 2009.

particularly for rice, and the positive impact of declining global food commodity prices (Table 1.13).

Core Inflation

Core inflation fell in response to reduced imported inflation and the appreciating trend in the rupiah. Imported inflation eased in line with falling inflation in Indonesia’s major trading partners, including the US, Singapore, Germany, China, Japan and Korea. Trading partner inflation in composite figures maintained a steady decline to a low of -1.29% (yoy) in July 2009. The lower imported inflation was also explained by falling inflationary pressure from imported commodities, as illustrated in the sharp drop in imported wholesale price index inflation to a low in July 2009 of -11.55% (yoy) (Chart 1.37). However, upward pressure on core inflation through the exchange rate channel was also mild due to the appreciating trend in the rupiah exchange rate since Q2/2009.

Chart 1.38 Capacity Utilization of ManufacturingChart 1.37 Exchange Rate, Inflation Rate of Trading Partner, and Imported WPI Inflation

percent

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2008 2009

1 2 3 4 5 6 7 8 9 10 11 12

20072006

7 8 9 10 11 12

Source: CEIC

percent, yoy percent, yoy

Trading Partner InflationImported WPI Inflation (rhs)

Appreciate/Depriciate (Rp/USD)

-14

-4

6

16

26

36

46

-10

-5

0

5

10

15

20

25

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2008 2009

1 2 3 4 5 6 7 8 9 10 11 12

2007

Tabel 1.13. Inflation by Group of Commodities

Source: BPS

No GroupsWeight

(2007=100)

Based on 2007=100 (%)

2007 2008 2009

1 Food Stuff 19.57 10.74 16.35 3.88

2 Prepared Food, Beverages, Cigarettes and Tobacco 16.55 5.70 12.53 7.81

3 Housing, Electricity and Water Supply 25.41 4.85 10.92 1.83

4 Clothing 7.09 7.53 7.33 6.00

5 Medical Care 4.44 3.52 7.96 3.89

6 Education, Recreation and Sport 7.81 6.94 6.66 3.89

7 Transportation, Communication and Financial Services 19.12 0.46 7.49 -3.67

CPI Inflation 100.00 5.61 11.06 2.78


Chart 1.39 Inflation Expectation 2009 Chart 1.40 Retailer Price Expectation

Source: Consensus Forecast

percent, yoy

6,8 6,8

6,4

6,9

7,6

8,0 7,9

8,38,5

8,2

7,7 7,6

6,86,5

6,25,9 5,8

5,45,2

4,9 4,8 4,84,9 4,9

4

5

6

7

8

9

Inflation Forecasting Period

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2008 2009I II III IV I II III IV I II III IV I II III IV I II III IV

2005 2006 2007 2008 2009

percent, yoyindex

0

5

10

15

20

25

105

115

125

135

145

155

165

175

3 months in forward 6 months in forwardCPI Inflation (rhs)

Slowing domestic demand alongside adequate domestic production had also acted to bring down core inflation pressure. The adequate level of the domestic production response was reflected, among others, in capital utilisation in the manufacturing sector at sufficient levels to respond to demand. Survey findings indicated that manufacturing capacity utilisation resumed an upward trend in Q2/2009, reaching 79% at the end of the year (Chart 1.38).

The softened pressure in core inflation was also explained by lower inflation expectations. Among the factors easing inflation expectations were the appreciating trend in the exchange rate, slowing economic activity and positive developments in administered prices and volatile foods inflation. Declining expectations of inflation were also reflected in a number of surveys. In the Consensus Forecast (CF), inflation forecasts by various agencies were progressively lowered in 2009 after the September 2008 inflation projection at 8.5% and the 6.8% projection at the beginning of 2009 (Chart 1.39). These survey results were

also consistent with a survey of traders, which showed a downward trend in price expectations over the coming 3 and 6 months (Chart 1.40).

Administered Prices Inflation

Administered prices inflation fell sharply in 2009 with deflation recorded at 3.26%. Key to this was the reduced inflation in strategic administered prices. During 2009, administered prices for strategic items recorded 6.24% deflation (Chart 1.41). The steep drop in administered prices inflation represents a positive outcome from the Government response in lowering subsidised fuel prices on 15 January 2009 in line with the positive impact of declining world oil prices. The cuts in subsidised fuel prices had immediate impact, bringing down CPI inflation in January-February 2009 by 0.50%. This significant fall in prices then produced a second round effect with urban transport fares in January-March 2009 easing by 0.44% (Table 1.14). Under this policy action, gasoline

Tabel 1.14 The First and Second Round Impact of Fuel Price Cutting on January 2009

Source: BPS - Statistics Indonesia (processed)

Impacts Weight (Dec 2008)

Fuel Price Cut

Price, Rp/litre (10 Dec 2008)

Price, Rp/litre (15 Jan 2009)

percentages of cutting (%, Jan

2009)Contribution to Inflation

First Round Impact

Gasoline 3.52 5,500 4,500 -18.18 -0.50

Kerosene 0.08 4,800 4,500 -6.25 -0.01

Second Round Impact

Inter City Transportation 3.30 -13.32 -0.44

Intra City Transportation 0.74 -2.49 -0.02

Total -0.97


produced the largest deflationary contribution in 2009 at -0.52%, a result of cuts in subsidised and non-subsidised prices. Household fuels (bottled LPG and kerosene) also underwent price correction in a positive response to the smooth operation of the kerosene to LPG energy conversion programme. In a similar vein, other non-strategic administered items such as toll road charges and water billing rates also had minimal impact on inflation (Chart 1.41). The 15% hike in toll road charges on 11 toll sections on 28 September 2009 and increases in water billing rates announced in some regions did not generate significant inflationary pressure. Cigarette excise was raised 7%, resulting in a contribution to inflation of about 0.17%.28

Volatile Foods Inflation

Inflation in volatile foods fell sharply to 3.95% in 2009, largely from the positive effect of government policies to

28 Ministry of Finance Rules (PMK) No. 203/PMK.011/2008 of Tobacco Excise Tariff.

safeguard the supply and distribution of strategic food commodities and the positive impact of continued low international commodity prices. The favourable conditions thus created paved the way for remarkably low volatile foods inflation in 2009 compared to historical levels of about 8%-10%. Analysed by commodity, the major commodities contributing to low volatile foods inflation were rice, chicken and eggs, beef and cooking oil. Prices for cooking oil, eggs and red chilli peppers moved lower in 2009 (Table 1.15). The low inflation resulted among others from increased rice production. Based on the BPS forecast III figures for 2009, production of dried unhulled rice reached 63.84 million tons in 2009, up 5.83% over the level reached in 2008 (Chart 1.42). For cooking oil, the steep reduction in world CPO prices and price stabilisation polices and establishment of progressive rates of export tax had caused this commodity to experience deflation.29

29 The supply and price stabilisation policy for domestic cooking oil is pursued through progressive Customs Exit implementation based on domestic and international price fluctuations.

Chart 1.41 Inflation of Strategic and Non-strategic Administered Chart 1.42 Production and Consumption of Rice

Source: BPS

percent, yoy

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2008 2009

-15

-10

-5

0

5

10

15

20

25

30

35

Strategic Administered Inflation Non-Strategic Administered InflationAdministered Inflation

Source: Ministry of Agriculture

millions of kg

Rice Rice Consumption Domestic Surplus/Deficit

0

5

10

15

20

25

30

35

40

45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Tabel 1.15 The Contribution of Volatile Food Commodities to Inflation percent

Source: BPS - Statistics Indonesia

Volatile Food Com-modities

Historical Inflation 2003-2008

2007 2008 2009

Inflation Contribution Inflation Contribution Inflation Contribution

Rice 13.31 8.49 0.43 6.82 0.29 6.70 0.27

Onion 6.19 -22.28 -0.06 -18.64 -0.04 147.56 0.18

Broiler Chicken 8.10 12.34 0.21 21.90 0.27 5.05 0.06

Meat 7.76 3.44 0.04 18.47 0.15 1.92 0.02

Cooking Oil 11.77 41.36 0.54 6.51 0.08 -3.34 -0.04

Chicken Eggs 9.11 19.04 0.17 28.99 0.17 -1.63 -0.01

Red Pepper 15.92 -28.61 -0.15 49.65 0.20 -10.14 -0.05


g Economic Growth and Inflation at the Regional Level

The differing economic structures among the regions widened the interregional disparities in economic growth during the global economic downturn. Economic growth was down in many regions reliant on exports as the major source of growth. In contrast, regions with economies driven largely by household consumption continued to record higher growth, despite some decline compared to 2008. The differing magnitude of influence from the global economic turmoil led to increased interregional disparities in economic growth during 2009, despite growth slowing in nearly all regions (Chart 1.43).

The Sumatra and Kalimantan regions saw a significant drop in economic growth, with exports playing a dominant role in GRDP formation at 63% and 84%, respectively. Growth in the Central Sumatra economic zone plunged from 6.1% in 2008 to 3.2%, while in Kalimantan growth eased from 5.3% in 2008 to 2.5% (Table 1.16).30 The more robust economic growth visible in Jakarta and the Java-Bali-Nusa Tenggara (Jabalnustra) region was in line with the major contribution of household consumption in both regions. Although a downturn in manufacturing exports unavoidably slowed the rate of economic growth, this heavily populated area still managed to achieve growth above 4%. Economic growth in the Bali-Nusa Tenggara region appears to have been driven by the favourable mining developments in West Nusa Tenggara province. The buoyant growth in the region is also attributable to a vibrant services sector. Another region also reporting stronger growth in 2009 is Sulawesi-Ambon-Papua

30 In making the economic assessment, Bank Indonesia divides the analysis areas into four groups. Each group consists of several zones economy (except Jakarta), namely: Sumatra (North Part of Sumatera Zone: NAD and North Sumatra, Central Part of Sumatra Zone: West Sumatra, Riau, Kepulauan Riau, and Jambi, Southern Part of Sumatra Zone : Bengkulu, South Sumatera, Bangka Belitung, and Lampung), Jakarta, Jabalnustra (West Part of Java Zone: Banten and West Java, Central Part of Java Zone: Central Java and DI Yogyakarta; Eastern Part of Java Zone: East Java; Balnustra Zone: Bali, West Nusa Tenggara, and East Nusa Tenggara), Kali-Sulampua (Borneo Zone: West Kalimantan, Central Kalimantan, South Kalimantan, East Kalimantan, North Sulawesi, Gorontalo, Southeast Sulawesi, Central Sulawesi, South Sulawesi, West Sulawesi, Maluku, North Maluku, Papua and West Irian Jaya)

Tabel 1.16 GDP Growth by Region and Zonepercent, yoy

Source: BPS - Statistics Indonesia* provisional figures

Regions/Zones 2007 2008 2009

1 2 3 4 Total 1* 2* 3P 4P TotalP

Sumatera 5.0 5.0 4.9 4.8 3.9 4.7 3.1 3.3 3.3 3.9 3.4

Northern part of Sumatera 4.2 3.1 1.9 1.9 3.2 2.5 2.1 2.7 3.3 3.9 3.0

Central part of Sumatera 5.0 5.2 7.1 6.8 5.4 6.1 4.0 3.0 2.7 3.0 3.2

Southern part of Sumatera 5.8 7.1 5.4 5.4 2.6 5.1 2.8 4.4 4.1 5.3 4.2

Jakarta 6.4 6.3 6.1 6.1 6.2 6.2 5.2 5.0 5.1 5.4 5.2

Java, Bali & Nusa Tenggara 6.1 6.4 5.2 6.3 4.9 5.7 4.4 4.3 4.7 4.8 4.6

Western part of Java 6.4 7.3 4.5 6.6 4.7 5.8 4.4 3.7 4.1 4.8 4.3

Central part of Java 5.5 6.0 5.2 6.4 4.0 5.4 4.1 4.4 5.1 4.7 4.6

Eastern part of Java 6.1 6.0 6.3 6.2 5.4 5.9 4.5 4.6 5.1 4.9 4.8

Bali - Nusa Tenggara 5.7 3.3 3.7 4.8 6.6 4.6 3.9 6.0 5.4 4.3 4.9

Kali-Sulampua 4.7 3.8 5.1 7.6 5.9 5.6 4.9 5.4 5.5 4.3 5.0

Kalimantan 3.5 6.1 6.4 5.9 2.8 5.3 0.8 1.7 3.6 3.8 2.5

Sulampua 6.4 0.5 3.3 10.2 10.4 6.1 11.0 10.8 8.4 5.0 8.7

Chart 1.43 Regional Economic Growth Disparity

standard deviasi

Source: BPS-Statistic Indonesia & Bank Indonesia (processed)

Note:Disparity was calculated from the standard deviation of regional economic growth every year

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

2001 2002 2003 2004 2005 2006 2007 2008 2009P


(Sulampua), which has benefited largely from upbeat performance in the mining sector.

The interregional disparities in economic growth have influenced inflation within the regional dimension. Conditions in 2009 demonstrated a positive correlation between regional economic growth and inflation. Inflation in some zones, such as Central Sumatra and Western Java, which ran below national inflation, was linked to the flagging economic growth in the two regions (Table 1.17). In contrast, other regions with growth above national average, such as Jakarta and Jabalnustra but not West Java and Sulampua, also report above

national average inflation. In the Northern Sumatra zone, inflation was close to the national inflation figure in line with the improving economic growth in that region. A slightly different phenomenon was observed in the Kalimantan zone. Within the zone, inflation remains above the national average, despite a considerable drop in economic growth. The inflation trend in Kalimantan was thought to be related to the issue of volatile commodity prices, driven largely by dependence on outside regions for supply of staple needs, load factor constraints in maritime transportation and the inadequate condition of infrastructure.

g Unemployment and Poverty

During the economic slowdown, MSMEs played a major buffer role in absorbing new entrants to the workforce.

millions of people


Tabel 1.18 Labor Force and Unemployment Rate in Indonesia

Type of Activity2007 2008 2009

Feb Aug Feb Aug Feb Aug

1 Population 15+ 162.4 164.1 165.6 166.6 168.3 169.3

2 Labor Force 108.1 109.9 111.5 112.0 113.7 113.8

Employed 97.6 99.9 102.1 102.6 104.5 104.9

Unemployed 10.6 10.0 9.4 9.4 9.3 9.0

3 Non-Labor Force 54.2 54.2 54.1 54.7 54.5 55.5

4 Labor Force Participation Rate (%) 66.6 67.0 67.3 67.2 67.6 67.2

5 Unemployment Rate (%) 9.8 9.1 8.5 8.4 8.1 7.9

6 Underemployment 30.2 30.4 30.6 31.1 31.4 31.6

percentTabel 1.17 Inflation by Region

Source: BPS - Statistics Indonesia (processed)

Regions/Zones 2007 2008 2009

Sumatera 6.96 11.37 2.44

Northern part of Sumatera 7.04 10.84 2.72

Central part of Sumatera 6.73 10.51 1.93

Southern part of Sumatera 7.08 13.00 2.75

Jakarta 6.04 11.11 2.34

Java, Bali & Nusa Tenggara 6.31 10.57 2.84

Western part of Java 5.84 11.27 2.27

Central part of Java 6.49 9.60 3.26

Eastern part of Java 6.33 9.51 3.41

Bali - Nusa Tenggara 7.18 11.02 4.39

Kali - Sulampua 7.78 12.10 3.80

Kalimantan 8.15 12.10 3.95

Sulampua 7.42 12.10 3.67

NATIONAL 6.60 11.06 2.78

Chart 1.44 Number of formal and Informal Labour.

Source: BPS

millions of worker millions of worker

88

90

92

94

96

98

10

102

104

106

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Feb Nov Feb Aug Feb Aug Feb Aug Feb Aug

2005 2006 2007 2008 2009

Formal Informal Total Worker (rhs)


Area/YearPoverty Line (Rp/person/month) Number of Poor

People (millions)Percentage of Poor

PeopleFood Non Food Total

Urban

2006 126,527 48,797 175,324 14.49 13.47

2007 132,259 55,683 187,942 13.56 12.52

2008 143,897 60,999 204,896 12.77 11.65

2009 155,909 66,214 222,123 11.91 10.72

Rural

2006 103,180 28,076 131,256 24.81 21.81

2007 116,265 30,572 146,837 23.61 20.37

2008 127,207 34,624 161,831 22.19 18.93

2009 139,331 40,503 179,834 20.62 17.53

Urban + Rural

2006 114,619 38,228 152,847 39.30 17.75

2007 123,993 42,704 166,697 37.17 16.58

2008 135,270 47,366 182,636 34.96 15.42

2009 147,339 52,923 200,262 32.53 14.15

Tabel 1.19 Poverty Line and Number of Poor People by Area


Open unemployment fell slightly from 8.1% in February 2009 to 7.9% in August 2009 (Table 1.18). Workers employed in the informal sector in August 2009 mounted to 72.7 million from the August 2008 level of 71.4 million (Chart 1.44).

The decline in open unemployment and relative stability in prices contributed to reduction in poverty levels in 2009. Numbers of impoverished Indonesians fell in 2009 to about 14.15% (32.53 million). This compares with 15.42% of the population (34.96 million) in 2008 (Table 1.19). The reduction in poverty was more pronounced in rural areas at 1.57 million, while numbers of urban poor diminished by 0.86 million. Among the factors helping to bring down poverty were higher real daily wage levels for

farm workers, lower national average prices for rice and stable inflation. Also contributing to poverty reduction was improvement in purchasing power resulting from distribution of Direct Cash Transfer aid, higher provincial minimum wage levels, reduction in fuel prices and a harvest season that peaked in March 2009.

Poverty reduction was observed in both rural and urban areas. Percentages of urban and rural poor eased to 10.72% and 17.35%, respectively in March 2009 from the previous year’s levels of 11.65% and 18.93% (Table 1.19). In analysis by location, impoverished citizens in rural areas continue to outnumber the urban poor. Since 2006, the ratio of rural poor to total poor remained relatively constant at 63%.


Box 1.1: Policy Responses Amid Global Financial Markets Turbulence

The global economic crisis that erupted in mid-2008 unfolded with growing intensity, setting off a wave of contagion that also spread to Indonesia at the end of 2008 and in early 2009. During this period, the Indonesian economy came under heavy pressure from instability in the global financial system and persistently high uncertainties in the global economy. Pressure from these events bore down on the performance of various Indonesian financial market indicators, producing a sharp rise in CDS, a tumbling JSX Composite Index, increased yield on Indonesian government securities and downward pressure on the rupiah accompanied by high volatility.

Among the indications of deteriorating risk perceptions in Indonesia was the soaring CDS for Indonesia from 154 bps in early 2008 to 691 bps at end-2008 that included a spike to 1,248 bps in October that year (Chart 1). Around almost the same time, another risk indicator, namely the yield spread for Indonesia Global Bonds over US Treasury Notes (T-Notes), also rapidly widened, touching a high of 1,247 bps in October 2008 (Chart 1). This condition arose from deleveraging, with investors pulling funds out of high-risk assets invested mainly in emerging markets, including Indonesia.

Under these conditions of high uncertainty, deteriorating risk perceptions also triggered a surge in portfolio capital outflows that disrupted the stability of the rupiah and

impacted the international reserves position. The rupiah came under heavy downward pressure, falling from Rp 9,160 to the US dollar in July 2008 to a low of Rp 11,238 to the US dollar in December 2008 with depreciation recorded at 22.7% (Chart 2). The rush of portfolio capital outflows also produced a significant drop in the level of international reserves for stabilising the rupiah exchange rate from 60.56 billion US dollars in July 2008 to 51.6 billion US dollars at end-2008 (Chart 2). The downward pressure on the rupiah carried over into Q1/2009, with the rupiah weakening 5.25%1 to Rp 11,827 to the US dollar. Due to this pressure, the international reserves position slipped to 50.56 billion US dollars in February 2009.

On the bond market, the excessive surge in risk perceptions was also reflected in the significant widening of the risk spread on Indonesian securities. This triggered capital reversal with foreign investors pulling considerable funds out of Indonesia, mostly from placements in government securities and the stock market. Prices tumbled for government securities. This condition lasted throughout Q1/2009, a period marked by steep decline in the government securities market. Net capital inflows for government securities during Q1/2009 were negative in all tenors. As a result, the

1 From July 2008 to March 2009, the rupiah weakened by a total of 28%.

Source: Bloomberg

bpspercent

Indonesian CDS (rhs) RI Global Bond vs US T-Note Yield Spread

150

300

450

600

750

900

1,050

1,200

1,350

1.5

3.0

4.5

6.0

7.5

9.0

10.5

12.0

13.5

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2008 2009

Chart 1. CDS and RI Global Bond vs US T-Note Yield Spread

Source: CEIC Data

Rp/USD billions of USD

Internatioanal Reserves (rhs) Monthly Average Exchange Rate

0

10.00

20.00

30.00

40.00

50.00

60.00

70.00

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

2008 2009

Chart 2. Exchange Rate and International Reserve


government securities price index fell to 81.32 in March 2009. With prices falling for government securities, yield widened in all tenors, with average yield across all tenors in November 2008 touching 16.18% before settling to 13.21% in March 2009 (Chart 3). Turnover in government securities trading during this period also dropped to about Rp 79.9 trillion, compared to Rp 105.5 trillion before the outbreak of the global economic crisis.

The stock market, still buoyant in early 2008 with the index soaring as high as 2,830, subsequently came under heavy correction during the second half of 2008. At the end of 2008, the IDX Composite closed at just 1,355 points, down 50.64% from the preceding year. The IDX thus became the fifth lowest performing stock market in the Asia Pacific after Vietnam at -66%, Shanghai at -64.81%, Shenzen at -60.65% and Mumbai with -53.83%. Pressure continued to bear down on the stock market during Q1/2009 with foreign investors still jittery over the outlook for emerging market investments, including Indonesia. During this period, the JSX Composite Index declined further to a low of 1,256 points in early March 2009 as foreigners offloaded stocks in net selling on the IDX. Trading volume also fell significantly to Rp 1.57 trillion per day from the 2008 average of Rp 3.99 trillion per day.

Policy Responses from Bank Indonesia and the Government

To restore stability to the domestic financial market, Bank Indonesia relaxed its monetary policy stance to

overcome the liquidity crunch and prevent further loss of economic growth. In the final quarter of 2008, the statutory reserve requirement was lowered from an effective 9.1% to 7.5%,2 releasing about Rp 55 trillion added liquidity into the economy. In view of the indications of future easing in inflationary pressure, monetary relaxation was followed by aggressive cuts in the BI Rate from November 2008 to March 2009. In addition to reducing the BI Rate, Bank Indonesia built on actions taken at the end of 2008 in moves to resolve the tight short-term banking liquidity condition by carrying out further operational improvements in monetary policy. Among these were extension of the FTO tenor, lowering of the overnight repo rate and swap transactions in foreign currencies. These actions were sufficient to stabilise the rupiah money market, as reflected in the growth in interbank market transaction volume to around the pre-crisis level at Rp 13 trillion, as well as total liquidity and number of participants on the interbank market. Positive impact was also visible in the narrowing of the spread for the 1-week to 6-month JIBOR over the overnight interbank rate to pre-crisis levels at 56 bps.

At the same time, to counter heavy pressures from depreciation and strong volatility in the rupiah, Bank Indonesia launched a series of measured interventions on the forex market to maintain adequate level of international reserves. This rupiah stabilisation policy proved vital to maintaining monetary stability and financial stability, with both areas facing the looming threat of systemic risk from the global economic and financial crisis. Over time, this policy progressively stabilised movement in the rupiah. In fact from early Q2/2009, the rupiah charted 18.4% appreciation to close December 2009 at Rp 9,425. This earned the rupiah a distinction alongside South Korea as one of the world’s high performing currencies.

In regard to measures for building banking system resilience, from the end of 2008 to early 2009 Bank Indonesia and the Government introduce a series of key policies such as a new regulation on collateral for the Short-Term Funding Facility (FPJP), an increase in

2 The 5% primary statutory reserve requirement came into force on 24 October 2008 and the secondary 2.5% reserve requirement on 24 October 2009.

Source: CEIC Data

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the level of bank depositor funds guaranteed by the Indonesian Deposit Insurance Corporation (LPS) from Rp 100 million to Rp 2 billion and a regulation concerning the Indonesian Financial Safety Net stipulating, among others, the mechanism for resolution of a systemic crisis in the financial system.

On its part, the Government took further measures in a series of fiscal stimulus actions to strengthen and maintain public purchasing power and reinforce business competitiveness in the face of the global financial crisis, taking the fiscal deficit to 1.6% of GDP. Complementing this were sectoral policies in such areas as mining, agriculture and infrastructure essentially aimed at promoting activity in these sectors.

Concluding Remaks

The various measures pursued by Bank Indonesia and the Government have bolstered national economic resilience against the threat of a systemic global economic and financial crisis and in turn stirred fresh optimism for stronger economic recovery in the future.

In specific terms, these measures brought quick recovery to monetary and financial system stability in Indonesia, both essential for sustainable recovery in the economy. At end-2009, a range of indicators pointed to significant improvement in the financial sector. The CDS dropped quickly to the 160 level while yield spread for Indonesian Global Bonds over US T-Notes shrank back to 1.7%. The JSX Composite Index maintained a steady climb to close at 2,534. The government securities price index improved to 93.47, while exchange rate appreciation enabled the rupiah to close at Rp 9,425 to the US dollar. Interbank money market transaction volume rose to pre-crisis levels at Rp 13 trillion and the spread for 1-week to 6-month JIBOR over the overnight interbank rate dropped to the pre-crisis level of 56 bps.


Box 1.2: Accountability for Achievement of the Inflation Target

Achievement of the Inflation target

CPI inflation in December 2009 reached 2.78% (yoy), below the Government-set target of 4.5%±1% (yoy). The lower than targeted inflation was largely attributable to the policy actions instituted by Bank Indonesia and the Government and changes in macroeconomic conditions in comparison to the underlying assumptions in the inflation projection. Bank Indonesia maintained a consistent stance in setting the BI Rate for achievement of the inflation target and promoting economic recovery while intervening on the forex market to bolster the value of the rupiah. Likewise, the Government lowered fuel prices, which then paved the way for reductions in transport fares and other prices.

Downward movement in global commodity prices and especially energy prices created opportunity for the Government to reduce fuel prices and subsequently lower transport fares. During 2009, the Government cut fuel prices and transport fares by 14.1% and 12.1%. Both factors were key to the 3.26% deflation in administered prices (yoy) during 2009, which resulted in a -0.62% contribution to inflation. This was far below the historical average of approximately 4% during periods with no changes in strategic administered prices.

Low CPI inflation during 2009 was also supported by volatile foods inflation. At home, the low inflation in this category was explained by reductions in fuel prices and transport fares and adequate supplies of foodstuffs, most importantly rice. Externally, falling global food prices and the appreciation in the rupiah also contributed to softened pressure in volatile foods inflation. Inflation in this category reached only 3.95% (yoy) resulting in a contribution to inflation at 0.67%. This was far below the approximately 8% historical average under normal conditions.

Analysed by fundamentals, support for the low CPI inflation in 2009 came from the steady appreciation in the rupiah since early Q2/2009, in addition to slowing domestic demand and improving expectations of inflation. The strengthening trend in the rupiah was closely linked to renewed foreign investor confidence in

the consistency of macroeconomic policy and relative strength of Indonesia’s economic fundamentals, conditions that encouraged substantial capital inflows. Appreciation in the rupiah in combination with secure supplies of food staples acted to improve inflation expectations. In regard to the output gap, the slowing pace of domestic economic activity meant that economic growth achieved in 2009 remained below the potential level. The combination of these three developments brought core inflation down to 4.28% (yoy) while representing an inflationary contribution of 2.74%.

Policy Coordinator for Inflation Control

Low, stable inflation is not only achieved with policies instituted by Bank Indonesia, but also with support from Government policies designed to maintain equilibrium between demand and supply. For this purpose, the Government and Bank Indonesia have taken measures to bolster the necessary policy coordination for inflation control. This coordination was put into place, among others, with the establishment of the Inflation Monitoring and Control Team (TPI) under Minister of Finance Decree No. 635/KM.1/2009. This coordination is aimed at controlling sources of inflationary pressure on both supply side and demand side, and is also bolstered by regional level coordination of inflation control.

Coordination for control of demand and supply side sources of inflationary pressure

On the monetary side, Bank Indonesia had instituted a range of policies. In this regard, Bank Indonesia launched policies for maintaining financial system stability and macroeconomic stability particularly during the period from Q4/2008 to early 2009 while preventing further loss of economic growth. To respond to the global financial crisis, Bank Indonesia took action to minimise volatility in the rupiah exchange rate through management of forex supply and demand. These policy actions were also intended to restore market confidence in the domestic economy. A further objective was to improve inflation expectations. Following this, with macroeconomic conditions under relative control and inflationary pressure predicted to ease, Bank Indonesia


launched an accommodative monetary policy to prevent even further slowing in the economy.

On the supply side, the Government took action to control inflation by securing adequate supply and distribution of food and energy. Specific actions include the following:

(i) Increasing production of staple foods, most importantly rice. Supporting this were BULOG actions to expand the rice buffer stock and maintain smooth distribution of subsidised rice to the poor. It is noteworthy that rice procurement by BULOG reached a record high in 2009.

(ii) Expediting the kerosene to LPG energy conversion programme to prevent significant inflationary impact.

Stronger coordination of inflation control at the regional level

National level efforts for inflation control require the support of inflation control in the regions, for which coordination between the central and regional levels is absolutely essential. This is due to the importance of regional inflation in shaping national inflation. To respond to this need, initial steps were taken to establish Regional Inflation Control Teams (TPIDs) in 2008. Nine TPIDs were set up in 2009, bringing the total at year end to 22.

One of the key achievements in regional level inflation control is the success in building awareness of regional government leadership in the importance of regional level inflation control measures. This is reflected, among others, in the enthusiasm and support extended by regional governments and relevant agencies in setting up the TPIDs and implementation of the established programmes. A high level meeting of the Central Inflation Control Team with several TPID heads including the Yogyakarta Governor, convened in Solo on 14 October 2009, resulted in an agreement to support the establishment of the TPIDs and optimisation of their role. The Bank Indonesia Board of Governors also took this opportunity to strengthen coordination between central and regional level Inflation Control Teams by consulting with regional governments from throughout Indonesia in the meeting of the All-Indonesia Provincial Government Association (APPSI) held in Palangkaraya on 3 December 2009. The technical coordination between the TPI and TPIDs operates through direct contact (TPI visits to TPIDs, TPI working committee meetings with TPIDs) and indirectly through submission of reports on the inflation control coordination meetings in the regions.

Documents

Move on with Grace - bi.go.id · subsidised premium gasoline and automotive diesel. In addition the government has implemented sectoral policies to bolster the resilience of the domestic