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
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