During November 2008, inflationary pressure in Indonesia began to ease in keeping with the onset of domestic economic slowdown triggered by the impact of the weakening global economy and falling international commodity prices. For 2009, Bank Indonesia predicts a drop in inflationary pressure, with the inflation trend at the lower end of the 6.5%-7.5% targeting range. In the view of Bank Indonesia, the impact of the global crisis on the domestic economy began surfacing in Q3/2008 and will become more strongly entrenched in 2009. The global financial crisis has similarly hit performance in the Indonesian financial sector, as indicated by increased yields on Government Securities, plunging share prices and the weakening of the exchange rate. In response, the Board of Governors of Bank Indonesia holds the view of the necessity for monetary policy to maintain equilibrium between measures to stimulate business activity and other actions to ease the vulnerability of financial markets, while continuing to safeguard long-term macroeconomic stability.
Bank Indonesia is keeping a close watch on the global financial market turbulence and the related impact on the Indonesian economy. The present global phenomenon is believed to be a process of deleveraging that has led to tightening of global liquidity and in turn portfolio capital flight, including from Indonesia. Repricing by foreign investors in response to perceptions of mounting risk has led to a growing wave of capital outflows from emerging markets. Regional stock indices have plunged considerably, while yield levels are up on bond markets in some countries. The mass exodus of investor capital has put pressure on almost all world currencies.
All these processes have borne down heavily on the rupiah exchange rate. During November 2008, the exchange rate recorded average 13.8% depreciation, markedly steeper than the 6.5% of the preceding month. The depreciation has been accompanied by heightened volatility fuelled primarily by falling market confidence amid the tightening domestic supply of foreign currency. The pressure has also been evident in the Indonesian Composite Stock Index. Nevertheless, actions taken by the Government and Bank Indonesia in anticipation of further crisis developments halted further index decline. Analysed over the month, the stock index weakened only 1.2% to close at 1,241 points, representing dramatically reduced decline compared to 31.4% one month earlier.
In a similar vein, inflationary pressure has begun to ease. External developments and weakening domestic demand have contributed to softening domestic inflationary pressure. Volatile foods inflation was down significantly from the preceding month consistent with the ongoing decline in international commodity prices. Deflation also took place in administered prices. While the present situation has eased, Bank Indonesia sees the potential for heightened pressure in core inflation, due to the weakening of the rupiah. Nevertheless, this pressure has been offset to some extent by the fall in international commodity prices. Amid these developments, November 2008 CPI inflation was recorded at 0.12% (mtm), down from 0.45% in the preceding month.
Despite the turmoil on various fronts, the fundamentals of the Indonesian banking system remain sound. Key banking indicators, such as the CAR and NPLs, reflect stable, strong resilience. Banking liquidity, which had undergone some tightening, has begun to ease. Even so, banks are demonstrating greater caution in lending, due to the escalation in future risks brought on by the weakening of the economy in the real sector.
Looking forward, the external turbulence is expected to impact Indonesia’s economic performance. Economic growth is predicted to weaken in Q4/2008 despite the overall growth forecast for 2008 at about 6.1%. In 2009, growth is set to drop further. A steeper decline in the global economy marked by economic contraction in various countries is expected to have significant impact on export performance. Exports will come under even greater pressure, especially if international commodity prices continue to slide in the coming year. At home, reduced export earnings and the tightening of bank financing sources will weaken public purchasing power. Consumer lending is predicted to decline due to rising perceptions of debtor risk, coupled with the tendency for banks to maintain high levels of liquidity in a climate of uncertainty.
CPI inflation in 2009 is forecasted near the lower end of the projected 6.5%-7.5% range (yoy). Inflationary pressure is predicted to ease with support from significant slowing in domestic demand and forecasts of further decline in international commodity prices. This forecast for world prices are expected to offset the negative impact of the rupiah exchange rate, which is set to weaken further in 2009, thus keeping imported inflation from having significant impact on the inflation rate.
Against the background of these developments, Bank Indonesia will maintain equilibrium within the policy framework with actions to prevent further slowing in the real economy balanced by unswerving orientation to achievement of the medium and long-term inflation target. To this end, on 4 December 2008, the BI Board of Governors decided to lower the BI Rate 25 bps to 9.25%. This easing in the policy rate is expected to sustain domestic economic momentum amid the world economic slowdown. In the real sector, the interest rate cut is necessary to deliver a much needed boost to business confidence in the Indonesian economy in order to reduce unemployment. In the financial sector, the BI Rate cut will also ease vulnerability to shocks, and thus mitigate risks.
In addition, this policy will again be pursued through optimum use of other monetary instruments, such as forex market interventions to minimise rupiah exchange rate volatility. Bank Indonesia will keep a close watch and monitor global economic developments and make policy adjustments as necessary to safeguard economic stability and achievement of the medium and long-term inflation target.
Bank Indonesia is keeping a close watch on the global financial market turbulence and the related impact on the Indonesian economy. The present global phenomenon is believed to be a process of deleveraging that has led to tightening of global liquidity and in turn portfolio capital flight, including from Indonesia. Repricing by foreign investors in response to perceptions of mounting risk has led to a growing wave of capital outflows from emerging markets. Regional stock indices have plunged considerably, while yield levels are up on bond markets in some countries. The mass exodus of investor capital has put pressure on almost all world currencies.
All these processes have borne down heavily on the rupiah exchange rate. During November 2008, the exchange rate recorded average 13.8% depreciation, markedly steeper than the 6.5% of the preceding month. The depreciation has been accompanied by heightened volatility fuelled primarily by falling market confidence amid the tightening domestic supply of foreign currency. The pressure has also been evident in the Indonesian Composite Stock Index. Nevertheless, actions taken by the Government and Bank Indonesia in anticipation of further crisis developments halted further index decline. Analysed over the month, the stock index weakened only 1.2% to close at 1,241 points, representing dramatically reduced decline compared to 31.4% one month earlier.
In a similar vein, inflationary pressure has begun to ease. External developments and weakening domestic demand have contributed to softening domestic inflationary pressure. Volatile foods inflation was down significantly from the preceding month consistent with the ongoing decline in international commodity prices. Deflation also took place in administered prices. While the present situation has eased, Bank Indonesia sees the potential for heightened pressure in core inflation, due to the weakening of the rupiah. Nevertheless, this pressure has been offset to some extent by the fall in international commodity prices. Amid these developments, November 2008 CPI inflation was recorded at 0.12% (mtm), down from 0.45% in the preceding month.
Despite the turmoil on various fronts, the fundamentals of the Indonesian banking system remain sound. Key banking indicators, such as the CAR and NPLs, reflect stable, strong resilience. Banking liquidity, which had undergone some tightening, has begun to ease. Even so, banks are demonstrating greater caution in lending, due to the escalation in future risks brought on by the weakening of the economy in the real sector.
Looking forward, the external turbulence is expected to impact Indonesia’s economic performance. Economic growth is predicted to weaken in Q4/2008 despite the overall growth forecast for 2008 at about 6.1%. In 2009, growth is set to drop further. A steeper decline in the global economy marked by economic contraction in various countries is expected to have significant impact on export performance. Exports will come under even greater pressure, especially if international commodity prices continue to slide in the coming year. At home, reduced export earnings and the tightening of bank financing sources will weaken public purchasing power. Consumer lending is predicted to decline due to rising perceptions of debtor risk, coupled with the tendency for banks to maintain high levels of liquidity in a climate of uncertainty.
CPI inflation in 2009 is forecasted near the lower end of the projected 6.5%-7.5% range (yoy). Inflationary pressure is predicted to ease with support from significant slowing in domestic demand and forecasts of further decline in international commodity prices. This forecast for world prices are expected to offset the negative impact of the rupiah exchange rate, which is set to weaken further in 2009, thus keeping imported inflation from having significant impact on the inflation rate.
Against the background of these developments, Bank Indonesia will maintain equilibrium within the policy framework with actions to prevent further slowing in the real economy balanced by unswerving orientation to achievement of the medium and long-term inflation target. To this end, on 4 December 2008, the BI Board of Governors decided to lower the BI Rate 25 bps to 9.25%. This easing in the policy rate is expected to sustain domestic economic momentum amid the world economic slowdown. In the real sector, the interest rate cut is necessary to deliver a much needed boost to business confidence in the Indonesian economy in order to reduce unemployment. In the financial sector, the BI Rate cut will also ease vulnerability to shocks, and thus mitigate risks.
In addition, this policy will again be pursued through optimum use of other monetary instruments, such as forex market interventions to minimise rupiah exchange rate volatility. Bank Indonesia will keep a close watch and monitor global economic developments and make policy adjustments as necessary to safeguard economic stability and achievement of the medium and long-term inflation target.
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