Bank Indonesia’s Board of Governors decided to hold the BI Rate at a level of 7.25 percent, with rates on the Lending Facility and Deposit Facility held respectively at 7.25 percent and 5.50 percent. Bank Indonesia will continue to monitor global and domestic developments and further synergise the monetary and macroprudential policy mix in order to ensure that inflationary pressures remain under control, that rupiah exchange rate stability is maintained according to its fundamentals and the current account deficit is reduced to a sustainable level.
Bank Indonesia will also continue to redouble coordination with the Indonesian government, particularly in terms of inflation control and the current account deficit. Bank Indonesia believes that such policies, coupled with existing policies, will expedite efforts on reducing the current account deficit to a level considered more sound and guiding inflation to within its target corridor of 4.5±1 percent in 2014.
Bank Indonesia recognizes that the global economy is cooling off and remains overshadowed by ubiquitous uncertainty. The economies of developed countries, such as the United States (US), countries in Europe and Japan are not performing well amid tepid signs of recovery. Meanwhile, the economies of emerging market countries are marred by the risk of weaker economic growth, weaker current accounts and weaker exchange rates. Concomitantly, commodity prices continue to slide, with the exception of oil. On financial markets, risks stem from the Fed tapering its stimulus policy, the ongoing debate on the debt ceiling and the US government shutdown. Overall, unfavourable global economic performance is placing additional pressures to emerging countries’ exports, through the trade channel, including Indonesia. Furthermore, non-resident funds are flowing into regional stock and bond markets in the very short term, thereby appreciating currencies in Asia.
Congruent with the protracted global economic slowdown, the domestic economy is also displaying some signs of an ongoing downward trend. The national economy is projected to expand by 5.6 percent during the third quarter of 2013 and achieve growth in the range of 5.5 to 5.9 percent for the year 2013. The sluggish global economy, coupled with falling commodity prices, is limiting domestic export performance. Furthermore, weaker purchasing power due to mounting inflationary pressures in the wake of fuel subsidy reductions is expected to erode household consumption and investment. Notwithstanding, the national economy is forecast to rebound in 2014 in line with a global economic recovery and prevailing commodity price trends. As a whole, economic growth in Indonesia is projected to accelerate to 5.8-6.2 percent next year.
Externally, Indonesia’s balance of payments is predicted to improve during the third quarter of 2013. The current account deficit will narrow as a result of slower import in harmony with weaker domestic demand and rupiah depreciation. On the other hand, the capital and financial account surplus is expanding, through foreign investors’ placement to Bank Indonesia Certificates (SBI) and sovereign bonds (SUN) instruments, and a decrease in net foreign sales of domestic shares in response to Bank Indonesia and government policy as well as tapering policy in the US. Consequently, foreign exchange reserves totalled USD $95.7 billion at the end of September 2013, up from USD $93 billion at the end of August. Foreign exchange reserves at the end of September were equivalent to 5.2 months of imports and servicing external debt.
Depreciatory pressures plagued the rupiah exchange rate during the third quarter of the current year in line with economic fundamentals. On average, the rupiah weakened 8.18 percent (qtq) to IDR 10,652 per US dollar, or point-to-point the rupiah depreciated by 14.29 percent (qtq) to a level of IDR 11,580 per US dollar. In line with a number of countries in the Asian region beset with currency depreciation, the weaker rupiah was blamed on a correction by non-residents in their domestic financial assets triggered by the tapering off of monetary stimuli by the Fed. Fundamentally, depreciatory pressures on the rupiah are escalating with the relatively large current account deficit in Indonesia. At the end of Quarter III-2013, pressures on the rupiah eased in line with improvements in terms of inflation and the trade balance along with positive sentiment stemming from the Fed’s tapering policy. Confidence of the foreign exchange market is beginning to recover, due to the active and balanced supply and demand in shaping the rupiah’s exchange rate. Bank Indonesia believes that current exchange rate performance successfully illustrates economic fundamentals in Indonesia.
Inflationary pressures eased in September 2013 with a 0.35 percent (mtm) rate of deflation recorded, or 8.40 percent (yoy). Abundant supply of several salient horticultural commodities, in particular shallots and chilli peppers, prompted a sufficiently deep correction in food prices. In addition, the start of lower beef prices also led to further deflation with volatile foods experiencing deflation of 3.38 percent (mtm) or inflation of 13.94 percent (yoy). Ebbing inflationary pressures, in terms of core inflation and administered prices, amounting to 0.57 percent (mtm) or 4.72 percent (yoy) and 0.34 percent (mtm) or 15.47 percent (yoy) respectively, are due to the less intense impact of fuel subsidy reductions and price corrections after the Muslim Idul Fitri festivities in early August. The successful control of such prices is in accord with Bank Indonesia’s projections that the rate of inflation will be extremely low and return to normal commencing in September and during the months thereafter. The prospect of diminishing inflation pressures is also the result of weaker domestic demand along with measures taken to strengthen coordination between Bank Indonesia and the government in terms of inflation control. Accordingly, the rate of inflation in 2013 is projected in the range of 9.0 to 9.8 percent before subsequently returning to its target corridor of 4.5±1 percent in 2014.
Financial system stability was maintained, underpinned by a solid banking industry resilience in the face of various pressures. The capital adequacy ratio (CAR) remained high at 17.89 percent, well above the minimum requirement of 8 percent, while the ratio of non-performing loans (NPL) was low at just 1.99 percent in August 2013. The results of stress testing also provides clear evidence of solid banking industry resilience to the variety of risks faced, including an economic downturn, higher interest rates as well as rupiah depreciation. Additionally, credit growth has finally showed early signs of slowing down, despite remaining high at 22.2 percent (yoy) in August 2013. This credit growth is mainly attributable to credit withdrawal from previous commitments, the exchange rate, as well as the decrease in new credit commitments. In the future, Bank Indonesia expects credit growth to continue decelerating in line with higher lending rates, weaker domestic demand and the macroprudential policy instituted by Bank Indonesia.
Jakarta, 8 October 2013
Difi A. Johansyah