Bank Indonesia decided to hold the key interest rate (BI rate) at 7.50 percent in October, with the Lending Facility and Deposit Facility rates kept at 7.50 percent and 5.75 percent, respectively. This level is expected to help control inflation at 4.5±1 percent in 2014 and 4.0±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level. Despite stable domestic conditions, Bank Indonesia sees risks: contagion risk stemming from US monetary tightening and possible higher subsidized fuel prices.
From the global perspective, economic recovery continues albeit at uneven pace. The US economy continues to expand on the back of increased manufacturing production activity, stronger retail sales figures, growing consumer confidence and improved employment indicators. Congruously, normalization of the Federal Reserve’s monetary policy is expected to commence earlier, namely in the second quarter of 2015, with a potential sooner-than-expected hike in the federal funds rate. Such sentiment has resulted in US dollar appreciation coupled with pressures on financial markets in emerging markets. On the other hand, the economies of Europe and Japan continue to decelerate, hence encouraging accommodative monetary policy by the corresponding central banks. In addition, slower economic growth is also expected in developing countries. Finally, economic activity in China continues to decelerate, as reflected by the indicator of retail, automobile and housing sales data. Moderating demand in developing countries is perpetuating the slump in international commodity prices.
From the domestic perspective, economic growth remains moderate. Despite more robust growth, private consumption has declined in the wake of the 2014 Presidential Election, reflected by slower growth in retail sales indicators. Furthermore, government consumption is yet to rebound in line with seasonal trends due to budget savings implemented to control the fiscal deficit. Even though, there is a positive growth on construction investment by the end of the year, non-construction investment performance slightly weakened along with declining of capital goods import. Although improving, export growth remains lower than projected as international commodity prices slump and trade volume in emerging market countries remains low. Accordingly, imports continue to decline. In general for 2014, growth is predicted at the lower end of the previous projection, namely 5.1-5.5 percent.
The non-oil & gas trade surplus continued in August 2014, despite contracting in comparison to the preceding month. The smaller non-oil & gas trade surplus was blamed on an increase in non-oil & gas imports that exceeded the increase in non-oil & gas exports. Meanwhile, the oil and gas trade balance improved in August 2014 due to oil and gas export growth, in particular exports of crude oil. In general, the trade balance of Indonesia recorded a deficit of USD $0.31 billion in August 2014, subsequent to a USD $0.05 billion surplus in the preceding month. Bank Indonesia considers the August 2014 trade balance in accordance with the projected current account performance during the third quarter of 2014. In terms of the financial account, the positive perception of investors concerning the domestic economic outlook helped maintain the influx of foreign capital. Accumulatively up to September 2014, foreign portfolio inflows to financial markets in Indonesia amounted to USD $14.6 billion. Consequently, the foreign exchange reserves of Indonesia totalled USD $111.2 billion at the end of September 2014, equivalent to 6.5 months of imports or 6.3 months of imports and servicing foreign debt, which is well in excess of international adequacy standards of around three months of imports.
The rupiah depreciated slightly during September 2014 in line with US dollar appreciation, which placed pressures on nearly all global currencies. On average, the rupiah depreciated 1.57 percent (m/m) from the previous month to IDR 11,898 per US dollar. Point-to-point, the rupiah depreciated 4 percent and closed at a level of IDR 12,185 per US dollar. Fluctuations in the rupiah were congruent with shifts in other currencies in the region, with rupiah deprecation the result of external and domestic sentiment. External factors stemmed from the normalisation policy of the Fed, indications of an economic downswing in China as well as global geopolitical dynamics. Domestically, however, sentiment was linked to the wait-and-see attitude of investors concerning the formation of the new Cabinet as well as future government work programs, including policy related to fuel subsidies. Moving forward, Bank Indonesia will continue to maintain rupiah stability in accordance with its fundamental value.
Inflation declined in September 2014 compared to the preceding month to a level lower than projected. Consumer Price Index (CPI) recorded inflation was 0.27 percent (m/m), below the 0.47 percent (m/m) posted in the previous month. In addition to falling below the previous BI projection, inflation in September was lower than the historical average over the past five years as a result of low inflation of volatile foods and controlled core inflation. Furthermore, core inflation remains under control as external pressures ease, domestic demand moderates and inflation expectations are anchored. Notwithstanding, inflationary pressures on administered prices escalated in line with corrections to energy prices, such as electricity rates and 12 kg canisters of LPG. Moving ahead, Bank Indonesia will continue to monitor various inflation risks, particularly those associated with price corrections to subsidised fuel, as well as reinforce coordination with the Government to control inflation at the central and local levels in order to minimise second-round effects and control inflation towards the national target.
Banking system resilience and relatively sound financial market performance bolstered solid financial system stability. The banking industry remained resilient, with credit risk, liquidity risk as well as market risk well mitigated and supported by a strong capital base. In August 2014, the Capital Adequacy Ratio (CAR) was high at 19.23 percent, well above the minimum threshold of 8 percent, while non-performing loans (NPL) were low and stable at around 2.00 percent. Meanwhile, credit growth to the private sector decelerated to 13.4 percent (y/y) from 15.0 percent (y/y) in the previous month in line with the ongoing economic rebalancing process. On the other hand, liquidity position of the bank improve as the government adopted expansive financial operations. Such conditions were reflected in M2 and third-party deposit growth, respectively achieving 11.0 percent (y/y) and 11.6 percent (y/y) in August 2014. Furthermore, a number of banks began to lower their deposit rates. In addition, the capital market also performed well in September 2014, amid the global financial market pressures. Bank Indonesia will remain vigilant of risks that could threaten financial system stability, including an increase in corporate foreign debt.