Last Thursday [11/7]
Bank Indonesia made a daring and aggressive decision by increasing BI rate and
Fasbi rate by 50 basic points respectively to become 6.5% and 4.75%. The policy
was rated as an aggressive step, because normally the increased interest was
only 25 bps. This time it was different, BI directly increased by 50 bps.
It seemed that BI was
trying to be more aggressive in taming inflation which tend to turn wild after
oil price increase last June which coincided with the Ramadhan fasting month
which, cycle wise, was a time of high consumption.
BI also acted promptly
to rescue Rupiah from sinking any deeper from the feared psychological level of
Rp10,000 per USD. Moreover in the past one month BI had spent around USD 7
billion to project Rupiah without satisfactory result.
In the recent
development it was worthwhile to see macro economic indicators of the second
semester till year end. As reference, result of the meeting of the Board of
Governors [RDG] on July 11, 2013 last decided to increase BI rate by 50 bps to
become 6.5% with Deposit Facility Interest increasing by 50 bps to become 4.75%
and Lending Facility Interest to stay at 6.75%.
The policy was adopted
to make sure that inflation after increased of subsidized oil could be brought
back on the right track. In tandem with the said measures, BI also strengthened
policy mix.
Firstly, to continue
stabilization of Rupiah value in accordance with the fundamental economy and
maintain liquidity sufficiency in the forex market. Rupiah value would be
maintained to be below Rp10.000,- per USD and implicitly BI was moving in that
direction.
Secondly, to improve
rules on loan-to-value [LTV] ratio of the property sector related to mortgage
of houses and apartments certain types. This was follow up policy to prevent
bubble in the properry sector to consider that pricing of houses of type 70 and
up was getting out if control. In case of houses below type 70, it should be
regulated more intensively to prevent bubble in this sector.
Thirdly to foster
coordination with the Government with objective of easing inflation and
maintain macro-economic and financial stability. BI felt certain that the
policy mix was right and proper to control inflation, maintain stability of
Rupiah and financial system so economic growth could be maintained and move on
the right track.
BI saw that global
economy still tend to slowdown and full of uncertainty. US economic growth was
predicted not to be as strong as estimated, although production and consumption
was showing improvement.
Economic problem in
Europe had not shown any notable improvement; meanwhile economic growth in
China and India was seen as lower than projected although still notably high.
Based on the
assumptions, it might be concluded that world’s economic growth in 2013 would
be less than prediction to become 3.2% as foreseen by IMF. At the same time the
world’s commodity prices also tend to drop except oil.
Speculation in regard
to tapering of monetary stimulus by the fed had also influenced global economic
condition resulting in capital reversal in the emerging markets.
Although the Governor
on the Fed, Ben Bernanke, corrected his initial statement on May 22 last [to gradually
reduce fiscal stimulus package] by continuing the stimulus package with buying
bonds of the Government, response from the global moneymarket was still not
clear. Evidently in Indonesia through June last month there was release of SBN
State Promissory Notes [SBN] to foreign investors worth USD 4.1 billion.
BI also projected
Indonesia’s economic growth 2013 in the range of 5.8% - 6.2%, lower than the
previous forecast of 6.2% - 6.6%. Beside slow economic growth in quarter II and
III – 2013 i.e. 5.9% respectively, the low on account of low performing export
due to global economic slowdown and falling price of global commodities.
Household consumption and investment were also predicted to be slightly held
back by lessened purchasing power due to low export growth was projected fuel
price. Indonesia’s economic growth was projected to recover by quarter IV –
2013 and to continue in 2014 which was expected to be in the range of 6.4% -
6.8%.
On the external side,
Indonesia’s balance of payment [NPI] in quarter II/2013 was predicted to book
lesser deficit compared to previous quarter. Improvement of NPI was supported
by sizable surplus in capital and financial transaction [TMF] after having
deficit in quarter I/2013. Surplus of TMF was supported by inflow of direct
investment and portofolio investment in line with better economic prospect of
the future. On the other hand, by its seasonal platform deficit in current
transaction was predicted to increase against the previous quarters.
Export was still under
pressure due to low buyer’s demand and downturn of world’s commodity price
while import, including that of oil-gas was still on the upturn. Forex reserves
by end of June 2013 was posted at USD 98.1 billion or equal to 5.4 months of
import and payment of Government’s overseas debt, which was thankfully still
above international CAR standard of 3 months.
Meanwhile Rupiah
exchange rate value in quarter II-2013 was being depreciated according to its
fundamental value. By point-to-point, Rupiah weakened by 2.09% [qtq] to become
Rp9,925 per USD or on the averages weakening by 1.03 qtq to become Rp9,781 per
USD.
Just like currency
depreciation some Asian countries, depreciation of Rupiah was on account of
ownership adjustment of non residential areas in the domestic financial asset
as related to tapering off of monetary stimulus by the Fed. This development
resulted in Asia. BI saw that development of monetary exchange rate today still
reflected today’s fundamental economic condition of Indonesia.
In June 2013 inflation
went up significantly at 1.03% [m t m] or 5.90% [y o y]. This inflation
increase, which was in accordance with BI’s estimate was triggered by increased
fuel price which coincided with Idul Fitri which also jacked up prices of
administered prices and volatile foof prices.
Meanwhile core
inflation was still under control at 3.98%. BI estimated that the effect of oil
price increase was only temporary, i.e. around 3 months, the peak being July
2013, and down again by August 2013 to be back to normal platform in September
2013.
Bi had been observing
and responding accurately inflation pressures after oil price increase, and
together with the Government intensifying measures in strengthening mitigation
of the after effect of fuel price increase on inflation. All the measures taken
were expected to shockbreak inflation pressures whereby to move down to the
targeted 4.5% - 1% level in 2014.
Noteworthy was the
projection of Indonesia’s economic growth this year about which most of The
Forum for Financial Stability and Coordination System [FKSSK] was not as
optimistic as the Government in setting growth of 6.3% this year. Beside the
Government as represented by the Ministry of Finance, FKSSK also consisted of
BI, Financial Service Authority [OJK] and Deposit Insurance Body [LPS].
OJK saw that
Indonesia’s economic growth this year would only be 6%. Meanwhile BI projected
economic growth of 2013 would only be around 5.8% - 6.2%. BI was constantly revising
their projections. Initially BI projected economic growth 2013 at around 6.3% -
6.8% in January. Furthermore in April BI revised again their projection to 6.2%
- 6.6%. This June again BI revised economic growth projection to 5.8% - 6.2%.
Meanwhile LPS as member of FKSSK was the most pessimistic in projection Indonesia’s
economic growth this year. By end of June, LPS disclosed they believed
Indonesia’s economic growth would be only 5.8% in 2013.
The reason was that
Indonesia’s economic growth this year was facing a great challenge which was
even greater than that of last year. Like it or not household consumption
should be the main supporter of economic growth, in spite of the potential to
weaken as purchasing power of the low income group was burdened by higher fuel
price and commodity prices.
Nevertheless household
consumption was still the main supporter to growth as other propeller factors
like Government’s consumption, investment, and international trading were not
so reliable this year. Only thing was contribution by consumption would
probably lessen due to reduced people’s purchasing power after oil price
increase. Purchasing power for goods after fuel price increase was lowered by
around 30%. Such would certainly lower economic growth by end of year.
It seemed reasonable
that performance of household consumption would be suppressed by inflation
which was predictably high. Through 2013, BI projected inflation held the risk
of reaching 7.8%. LPs even predicted this year inflation had the risk of
reaching 8.1%. Inflation tend to reduce people’s purchasing power which would
eventually suppress household consumption.
BI estimated that
inflation of July 2013 could reach 2.38%. The increased inflation was on
account of increased price of oil which was effective on June 22, 2013.
Inflation of July 2013 was the highest level this year, because increased fuel
price would trigger inflation for the next 4 months. Somehow inflation in
August 2013 would be predictably inch down to 0.93%, while inflation in
September 2013 would only be 0.1%.
For that matter in one
year inflation would come to 7.2% - 7.8%. The predicted inflation of 7.8% was
the worst prediction if the Government failed to procure food and keep up with
increased transportation cost and availability of LPG gas fuel in the market;
but if Government was able to tackle the said problems, inflation this year
would be controlled at 7.2%.
In terms of
Government’s consumption, low realization of Government expenditure until
Semester I/2013 was hard to bring extra push to economic growth. In Semester I
this year, state’s expenditure was only realized at 39.9% which was lower than
that of the same period last year which was 40.7%.
The Minister of
Finance through the Evaluation Team of Budget Absorption Control must
constantly remind ministries and institutions to enhance absorption of budget
already allocated for some development projects.
This step must be
followed by budget spenders who still had their budget suspended by the
paymaster to clear the blockade. The Ministry of Finance as the State’s
Treasurer must actively pursue the requirements not fulfilled by budget users
which caused their budget to be blockade.
On the investment side,
this year the Government was pessimistic about investment growth. This was
indicated by the sullen import performance of capital goods. On the
export-import side, there was still deficit in trade balance to the amount of
USD 2,53 billion through January – May 2013. The economic condition Europe and
the USA, also posed as handicap to Indonesia’s economic growth on the export side.
Somehow BI and the
Government must focus effort on economic growth while controlling inflation and
Rupiah value to be on the new equilibrium after oil price increase so the
indicator of macro economy being set could be credible in the eyes of the public,
including market players. (SS)
Business News - July 17,2013
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