In the midst of legislative and presidential elections, the economic outlook for Indonesia is estimated to be relatively better than last year’s achievements. This also takes into account external factors (global economy). In 2014 and 2015, the International Monetary Fund projected that the U.S. economy will strengthen and will withstand the weakening of global economy in emerging markets, such as Brazil and Russia.
The U.S. economy, in the long run, will benefit from low interest rates designed by the Federal Reserve (the fed). The U.S. economy will be also be supported by strong private demand and the end of fiscal cliff, which last year caused slower economic growth.
Recovery of the U.S. economy is the strongest in the developed countries that will lift the global economy. The country will be the main driver of global growth, which is slow due to the economic slowdown in Japan, China and parts of Europe. By the time England and Germany strengthen the momentum, developing countries are facing new risks and the Crimea takeover by Russia has sparked geopolitical tensions that make the growing market region to slump.
IMF predicted that global economic growth in 2014 is 3.6%, lower that the January 2014 estimate at 3.7%. While, global expansion next year is estimated at 3.9% or the same as the previous projection.
Potential of global economic growth is hampered by the crisis in Ukraine and slowing growth in major emerging market countries. Another risk is the unequal policy treatment in countries, such as Brazil, and the threat of deflation in the euro zone. Global economic activity, in general, is strengthening and continues to improve throughout 2014-2015, which is largely driven by the developed countries. Activities in most emerging markets are disappointing because external financial conditions are less favorable.
In this case, the Indonesian economy will be affected by global economic development which is likely to improve this year. If economic growth in the first quarter of 2014 ranged from 5.6 to 5.7%, then in the second quarter it will be better in the range of 5.7 to 5.9% due to a boost from government spending activity triggered by political activities. As a result, economic growth projections in the first half of 2014 will range from 5.7 to 5.8%. This is taking into account the performance of direct investment in first quarter of 2014 which reached Rp106 trillion.
In general, the Indonesian economy is now starting to improve, marked by inflation that slopes back to normal pattern, trade balance back to surplus, and the strengthening of the rupiah against the U.S. dollar. Foreign capital inflows also increased and current account deficit (DTB) in 2014 is estimated to be reduced to below 3.0% of the gross domestic product (GDP).
So, it is appropriate if Bank Indonesia (BI) decided to keep BI rate at level 7.5%. While, interest rate of lending facility and deposit rate remains at 7.50% and 5.75%, respectively. Inflation in 2014 is targeted at 3.5-5.5% and at 3.0-5.0% in 2015. Bank Indonesia considered that the Indonesia’s economy is now moving toward a positive direction and in accordance with previous estimates. It was marked by lower inflation and trade balance which is back to surplus.
However, Bank Indonesia should look at the growth of the world economy and observe external risks, such as the policy normalization plan of the U.S. central (the Fed) and the condition in some developing countries which is still quite vulnerable.
In the first quarter of 2014, some macroeconomic indicators indicate that household consumption (KRT) increased since the 2014 elections activities. This will encourage the domestic economy in terms of consumption of government and society. Exports are also expected to be in the improving trend, mainly driven by manufacturing exports along with economic recovery of the developed countries. Meanwhile, private investment in the first quarter of 2014 was growing. New investment is expected to increase in the second half of 2014.
Bank Indonesia (BI) predicted that Indonesia’s economic growth in the first quarter of 2014 is at 5.77% (y-o-y), or lower than economic growth in the first quarter of 2013 at 6.02%. from the balance sheet, foreign capital inflows continues in March 2014, so that cumulatively in the first quarter of 2014 foreign portofolio inflows into Indonesia’s financial markets reached USD 5.8 billion.
With this positive development, Indonesia’s foreign exchange reserves at the end of March 2014 is recorded at USD 102.6 billion, equivalent to 5.9 months of imports of goods, or 5.7 months of imports of goods and payments of government’s foreign debt, and above the international adequacy standard about three months of imports.
Bank Indonesia predicted that in future, improvement in the external sector will continue, supported by current account deficit (DTB) in 2014 which cab be reduced to below 3% of GDP and a surplus in foreign capital inflows which remain large. Thus, economic growth until the end the year is projected at 5.6-5.95. It not yet reached 6% because the government is still trying to stabilize the economy by improving DTB and controlling inflation.
In February 2014 there was inflation at 0.26% with Consumer Price Index (CPI) at 111.28 and inflation rate (y-o-y) at 7.75%. Inflation occurs due to price increases as shown by increase of indexes of all expenditure groups, namely foodstuffs 0.36%; processed foods, beverages, cigarettes, and tobacco 0.43%; housing, water, electricity, gas, and fuel 0.17%; clothing group 0.57%; health group 0.28%; education, recreation, and sports 0.17%; and transportation, communication and financial services 0.15%.
Looking at inflation which tends to be controlled, BI rate will likely to remain at level 7.5% until the end of the year. That is, high interest rate policy or tight monetary policy will continue until the end of this year. All of this is intended to deal with two biggest problems in Indonesia today, which is to lower DTB to 2.5% of GDP and keep inflation low in the range of 4.5% +/-1%. Bank Indonesia’s attempt is also to anticipate the possibility of interest rate hike in the U.S. (The Fed rate) to 1% in mid-2014 and 2.5% in 2016.
Even through March inflation is quite low at 0.08%, trade balance in February is USD 785.3 million surplus, it does not mean that the central bank will directly lower the BI Rate. This is because the development of DTB and inflation in future still needs extra had work from Bank Indonesia and the government to normalize it. Meanwhile, the Fed is predicted to start processing macro and monetary data so that economic projections will be according to the target. Market players indicate this as an effort to make the Fed’s rate hike happen faster than expected.
Previously, market consensus (Federal Open Market Committee/FOMC) committed to keep its benchmark interest rate in the range of 0-0.25% so that unemployment rate will stand at 6.5%. In addition, FOMC will also consider broader economic data before raising the Fed’s rates.
The Indonesian economy, which is more balanced and encourages performance improvement of the external sector, has an impact on the strengthening of the rupiah. In March 2014, the rupiah was closed at Rp11,360 per U.S. dollar, up 2.19% compared to end of February 2014. On average, the rupiah in March 2014 was recorded at Rp11,420 per U.S. dollar, up 4.38% compared to the average rupiah exchange rate in February 2014 at Rp11,919 per U.S. dollar.
New Business - May 2, 2014