Tuesday, 30 September 2014


Toward succession of leader shop from President Susilo Bambang Yudhoyono [SBY] to Joko Widodo as elected President for the period of 2014 – 2019, national economy was in the period of transition.

Only trouble was that toward succession on October 20 2014 next, the United Indonesia II cabinet [KLB II] was no longer solid. Some ministers had changed profession to become House members by October 1, 2014. Even before that period some ministers had resigned either for political or legal reason.

Under such circumstances President Jokowi would take office as new President. Indeed this would not be easy. The problems willed by the past Government were hard, among others the price increase of subsidized oil, infra structure building and swelling deficit in current transaction. All the three problems were strategic but not easy to tackle, while economic growth this year was predicted to be only around 5,2% way below the targeted 5.5%.

To healthen economy, tight money policy seemed to be still adopted till of year. This was evident when meeting of the Board of Governors of BI [RDG] on September 11, 2014 decided to maintain BI rate at 7.50% with Lending Facility and Deposit Facility at 7.50% and 5.75%.

The policy was synchronous with efforts to control inflation toward the targeted 4.5% + 1% in 2014 and 4% + 1% in 2015 and to minimize Deficit in Current Transaction. The Central Bank rated that the process of adjustment of economic structure toward well balance condition was still underway supported by stable macro economy.

In the future BI saw a number of domestic and external risk to be watched on which would disturb macro economic stability. For that matter BI must strengthen monetary and macro prudential policy mix and policy to strengthen domestic economy structure.

BI must also foster coordination of policies with the Government in controlling inflation and deficit so the process of economic adjustment could run well to maintain sustainable and inclusive economic growth.

Meanwhile on the global side, BI’s assessments showed that global economy was constantly showing significant recovery. America’s economy was constantly growing, being supported by progressed manufacturing industry although by structure still weak as indicated by the still low contribution of labor and productivity.

In regard to that matter, normalization of the Fed’s monetary policy was predicted to be executed gradually in spite of the possibility of increased Fed’s fund Rate in Q II or III in 2015. On the other hand, Europe’s economy was showing slowdown as indicated by domestic demand which was relatively low and low export due to Ukraina-Russia political tension.

The ultra low bank interest, run in tandem with stimulus package by ECB was expected to help economic recovery process in Uni Europe to increase liquidity excess at the global market. In developing countries, economic growth was predicted to be limited which would lower commodity prices.

Amidst China’s economic growth which was relatively stable at around 7.5%, India’s was posting betterment with projected growth at 6%. Meanwhile some central banks in Southeast Asia increased their bank interest for the sake of controlling inflation. It was right if in they the future must keep watch on some global and regional risks so as not to disturb national economic growth and stability.

On the domestic side, economic growth was still having moderation. Although still growing high household consumption was still on the slowdown zone. The weakness was indicated among others by downturn of retail sales and automotive sales.

On the other hand, Government’s consumption was predicted to increase in Q III IV in line with budget absorption platform although at lower level in line with austerity plan toward year end. Investment performance was also predicted to improve although at limited level. The condition was among others influenced by limited export progress in line with skuggish growth among emerging markets.

In line with moderation in domestic demand, import activities was also downturning. As a whole in 2014 growth was still in line with previous estimate around 5.1% - 5.5% with tendency moving toward lower margin around 5.2% - 5.3%.

Trade Balance posted surplus especially from surplus in non-oil gas trade balance. Indonesia’s trade balance on July 2014 posted surplus of 0.13 billion after posting deficit of USD 0.29 billion the month before. The good trade performance was supported by bettered surplus of trade balance in non oil gas commodities which increased to become USD 1.60 billion.

In the future non oil-gas trade balance was predicted to rely on export in line with bettered global economy and re opening of export valve for raw mineral ores, although deficit in oil gas trading would still continue.

On the financial side, inflow of foreign capital would remain high, being driven by positive perception of domestic economic prospect which was healthier and also due to policy ultra low interest policy by banks in Europe. By August 2014 last, inflow of foreign porto folio to Indonesia’s moneymarket came to USD 14.4 billion.

Under such circumstances Indonesia’s forex reserves increased to USD 111.2 billion or equal to 6.5 month of import plus payment of Government overseas debt which was above the international Adequacy ratio of 3 months importing.
So far Rupiah had been stable, although being under pressure in Q 3. Rupiah on the average weakened by 0.24% [mtm] against the month before to become Rp11,710 per USD. By point-to-point Rupiah was depreciated by 1.03% and was closed at Rp11,698 per USD. 

Rupiah was weakened by sentiment, domestic or external. The external factor included geo political turbulence, economic development in China and the possibility of the Fed acting sooner than expected. The domestic sentiment came from investors who were anxiously waiting for the Government’s policy including the energy subsidy policy. In the future, BI must stive to maintain stability of Rupiah Value.

Inflation as indicator in August tend to descend in line with the anti-climax process of post Idul Fitri price upturn. Consumer’s Price Index [IHK] in August posted inflation of 0.47% [mtm] or 3.99% [y o y] was lower than inflation of the month before at 0.93% [yoy].

Descending inflation was on account of inflation by volatile food and administered prices, and core inflation being under control. Inflation was cooling off to 4.47% [y o y] as inflation expectation was maintained. BI rated that inflation by August 2014 was still within tolerable inflation target of 4.5% + 1% in 2014 and 4.0% + 1% 2015.

Still in the future BI watch on various risks which would affect the pursuit of inflation target, especially inflation caused by administered prices which would foster coordinative measure of controlling inflation.

The macro-economic development was still in line with the condition of financial system. So far BI was still certain about stability of financial system, Such was supported by resilience of the banking system and well protected performance of the moneymarket. The banking industry was still strong against credit risk, liquidity and well guarded market and strong capital support.

Strong confidence in the condition of the banking sector in Indonesia, was strengthened by outcome of the stress test exercised on bank’s capital capacity. Considering the factors of economic slowdown, high increase of bank interest, downturn of asset of the moneymarket and currency weakening, generally speaking bank’s capital was still safety way above the minimum required standard.

The condition of liquidity was also emitting positive signal. BI’s monitoring unveiled that the risk of bank’s liquidity was improving till end of year. Such was supported by inflow of post Lebaran banknotes and Government’s finance which started to expand.

BI estimated that in the future bank’s liquidity would improve with increased Government’s expenditure. Simulation based on scenario of credit growth of 17%, return of capital and increase of oil price bank’s liquidity ratio in 2014 was predicted to be still above safe level. In terms of bank intermediacy, credit for the private sector slowed at 17.2% [y o y] in tandem with economic slowdown.

Meanwhile bank’s credit risk was still at safe level. Cases of NPL was still at 2.24% way below the safe level of 5%. Still BI must monitor high NPL in 4 sectors, i.e. construction, mining, trading and social service.

In July 2014, NPL of the construction sector was posted at 4.43%, an increase against previous month at 4.42%. in the mining sector, NPL was posted at 3.09% against 2.49% at previous month. The Trading sector postred NPL of 3.06% of 2.92% and social service 2.96% against 2.48% of the previous month.

Beside NPL, BI must also develop indicators based on historic data to see the potential of changing credit quality from well performing to become non performing. Based on the said indicator and latest development, there were 3 sectors worthy of attention, i.e. construction, mining and trading.

Today BI was also watching on the development Third Party Fund [DPK] which slowed down in July 2014 to become 11.36% against 13.63% the month before. Slowdown of DPK growth was predicted to be only temporary in line with high demand for banknotes during Lebaran and was predicted to grow again till end of year in line with Government’s growing expansion.

In tandem with bettered liquidity, some big banks already lowered their deposit interest in August 2014. The condition was expected to continue until Third Party Fund Competition lessened.

Finally for the future BI felt there were some domestic and external risks to be watched on which would disturb macro stability and financial system. For that matter BI must monitor all aspects of the banking sector and strengthen macro-prudential policy. BI must foster coordination with other financial authorities to maintain stability of the banking and financial sector. (SS)

Business News - September 17, 2014

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