Looking ahead, Bank Indonesia will monitor a number of risks in the global and domestic economies as well as optimise their monetary and macroprudential policy mix. Furthermore, Bank Indonesia will also continue to strengthen policy coordination with the government, particularly in terms of inflation control and the current account deficit, including policies to improve the structural condition of the economy.

The global economy picked up during October 2013, despite the dark shadow of escalating uncertainty risk. The international economy recovered on the back of positive global financial market sentiment regarding delayed discussions on the US debt ceiling as well as postponement of tapering policy by the Federal Reserve. Meanwhile, the global economic outlook remains congruous with previous projections. A shift is underway in the international economic landscape as developing countries slow down and the re-emergence of advanced countries. In addition, the cycle of high commodity prices is coming to an end, which could undermine efforts to recover the domestic economy. Both those trends will affect the external performance of the Indonesian economy.

Economic growth slowed in quarter III-2013 in line with previous projections. The economy of Indonesia expanded 5.6 percent in the reporting quarter, sliding from 5.8 percent (yoy) posted in the previous quarter. The domestic economic downturn primarily stemmed from weak construction investment coupled with merely tepid non-construction investment. The performance of real exports improved despite an increase in total imports. Meanwhile, household consumption and government consumption followed upwards trend. Bank Indonesia feels that the domestic economic slowdown is also linked to stabilisation policy issued by the Indonesian government and Bank Indonesia in order to bring economic growth to a more balanced and sound level. With the ongoing developments throughout quarter III-2013, Bank Indonesia still projects economic growth in Indonesia to achieve 5.5-5.9 percent in 2013, rising thereafter to 5.8-6.2 percent in 2014.

Externally, the Indonesian balance of payments (BoP) continued to run a deficit in quarter III-2103. The current account deficit was projected to shrink to USD $8.4 billion in the reporting period compared to nearly USD $10.0 billion in the previous quarter. Improvements were recorded in the trade account for non-oil/gas commodities (fob) with a decline in non-oil/gas imports as domestic demand waned. Additionally, the services account and income account decreased. However, the trade account for oil and gas increased as domestic production declined and imports of oil and gas remained high for domestic consumption. Meanwhile, the surplus in the capital and financial account was eroded by evaporating inflows of foreign portfolio investment due to ubiquitous uncertainty on global financial markets. Notwithstanding, Foreign Direct Investment surged. Against this propitious backdrop, foreign exchange reserves in Indonesia reached USD $97.0 billion in October 2013, up USD $1.3 billion on the position at the end of September 2013 totalling USD $95.7 billion. Foreign exchange reserves in Indonesia are equivalent to 5.5 months of imports or 5.3 months of imports and servicing external debt. Bank Indonesia acknowledges that the level of foreign exchange reserves in Indonesia is adequate to underpin external sector resilience and is also well above international adequacy standards.

The rupiah exchange rate remained stable during October 2013, moving in line with its fundamentals. Point-to-point, the rupiah gained 2.73 percent (mtm) to IDR 11,273 per US dollar. On average, however, the rupiah slid 0.14 percent (mtm) to IDR 11.343 per US dollar. Such conditions were the result of improvements on international financial markets in October 2013 and a decrease in domestic inflation expectations, which ultimately trigged an influx of foreign capital to domestic financial instruments, in particular Bank Indonesia Certificates (SBI) and government bonds (SUN). The stable exchange rate owed to dampened demand for non-oil/gas imports in line with economic moderation. Looking ahead, Bank Indonesia will continue to maintain rupiah exchange rate stability in line with fundamentals.

| Source: Bank Indonesia

Inflationary pressures eased but endured in October 2013. Headline inflation in October was 0.09 percent (mtm) or 8.32 percent (yoy), thereby reinforcing indications that monthly inflation is returning to normal. Inflationary pressures eased primarily on foodstuffs, while inflation on administered prices and core inflation remained stable. Stable core inflation (4.73 percent, yoy) was due in part to less intense external pressures as international food prices continued to tumble. The impact of rupiah depreciation on inflation was relatively negligible. The easing of inflationary pressures has led to a projected rate of inflation for 2013 overall of slightly below 9.0 percent and lowered the target range to 4.5±1 percent in 2014.

Financial system stability was well maintained, buoyed by solid banking industry resilience. The Capital Adequacy Ratio (CAR) remained high in September 2013 at 18.0 percent, well above the minimum threshold of 8 percent, while Non-Performing Loans (NPL) were low at 1.86 percent. Moreover, credit growth reached 23.1 percent (yoy) in September 2013, up on the 22.2 percent (yoy) posted in August. The growth in credit was precipitated by rupiah revaluation after depreciation. When adjusted for exchange rates credit growth followed a downward trend from 20.2 percent (yoy) in August 2013 to 19.9 percent (yoy) in September 2013. Bank Indonesia sees the deceleration in credit growth as harmonious with the domestic economic slowdown and predicts credit growth in the range of 18-20 percent for 2013 overall.

The complete report on macroeconomic performance and monetary policy discussed at the November RDG meeting is available under the Monetary Policy Review posted on the official website of Bank Indonesia.

Jakarta, 12th November 2013
Department of Communication
Bank Indonesia

Difi A. Johansyah
Executive Director