BANK INDONESIA

BANK SENTRAL REPUBLIK INDONESIA

Governor's Address

SYNERGY FOR RESILIENCE
AND GROWTH

BANK INDONESIA'S
ANNUAL MEETING
JAKARTA, November 27'"

2018

Table of Contents

Greetings

Introduction

Global Economic Divergence and Uncertainty

Solid Domestic Economic Performance in 2018 ......

Bank Indonesia's Policy Mix in 2018

Three Salient Lessons

A Promising Domestic Economic Outlook .....

Bank Indonesia's Policy Mix Direction for 2019

A Synergy in National Economic Policy Mix

Closing Remarks


Synergy For Resilience
And Growth

Speech of the Governor of Bank Indonesia
Bank Indonesia's Annual Meeting

Jakarta, 27" November 2018

His Excellency,
e The President of the Republic of Indonesia, Mr. Joko Widodo

Honourable guests,

e Leaders and Members of the House of Representatives (DPR)

and House of Regional Representatives (DPD) of the Republic of Indonesia
Leaders of State Institutions

Cabinet Ministers

Provincial Governors from throughout Indonesia

Former Governors and Board Members of Bank Indonesia

Leaders of the Banking Industry

Corporate Sector and National Media

Ladies and Gentlemen

BANK INDONESIA'S
ANNUAL MEETING
2018

Assalamu'alaikum Warahmatullahi Wabarakatuh,
May peace be upon us all,

Om Swastiastu,

Namo Buddhaya.

First of all, let me begin by praising God Almighty for His blessings that we may congregate here
today at the 2018 Bank Indonesia Annual Meeting. I would like to express my heartfelt
appreciation to the President of the Republic of Indonesia and all guests for attending this
event.

I would like to congratulate and thank the bankers, businesses and individuals who received a
total of 40 awards in 4 areas and 14 categories of the Bank Indonesia Awards 2018, covering
monetary stability and financial system management, the payment system and Rupiah currency
management, those supporting Indonesia policies as well as individual contributions.
In particular, I would like to express my highest appreciation of MSMEs in various regions who
have contributed greatly to control inflation. These awards are presented annually and this year,
we have combined the ceremony with the Bank Indonesia's Annual Meeting as a form of
appreciation and national recognition to our partners who have supported Bank Indonesia in
conducting its tasks.

Please allow me t to take this opportunity to deliver our evaluation of economic performance in
2018 as well as the outlook and policy direction for 2019 under the theme "Synergy For
Resilience and Growth". Against the backdrop of global economic and financial uncertainty,
synergy is the key for us to strengthen economic resilience to global spillovers and to maintain
economic growth momentum towards a prosperous and advanced economy. My remarks today
also represent a form of accountability and transparency as mandated by the Bank Indonesia Act.


Global Economic Divergence and
Uncertainty

The past year of 2018 has been replete with
onerous challenges, beset by global economic
divergence and uncertainty. Such dynamics
could persist into 2019 and beyond. There are
at least three salient issues that demand
vigilance.

First, global economic growth, which is
projected at 3.73% in 2018, could
moderate to 3.70% in 2019. The United
States (US) economy has posted solid gains in
2018 but is expected to decelerate in 2019.
The European Union and China's economic
growth is projected to decline from 2018 to
2019 (Table 1). Such inauspicious develop-
ments will continue to supress world trade
volume and international commodity prices
and, therefore, represent a key challenge for us
to ensure exports become a primary source of
national economic growth. Meanwhile,
inflational pressures in the US has begun to
rise, and is expected to also increase in the
European Union and several other countries.

Second, the policy rate hikes implemented
by the US Federal Reserve will be followed
by monetary policy normalisation in
Europe and several other advanced
economies. Rising inflationary pressures and
increasingly solid economic performance
have precipitated a tightening in the
monetary policy stance of the United States.
After hiking the Federal Funds Rate (FFR)
(which is predicted to be) four times this year
by a total of 100 basis points, the US Federal
Reserve is expected to raise its reference rate
another three times in 2019 by a further 75
bps. The European Central Bank (ECB), which
has begun to normalise its monetary policy

Global Economic Divergence and Uncertainty

I I Table1. Global Economic Growth

Global Economy 37 3.73 370 +
Advanced Economies 23 23 24 +
USA 22 3.0 25 +
Euro area 24 20 19
Japan 7 1.0 09 +
Emerging Markets 47 47 48
China 69 66 65 +
India 67 75 76

Source: World Economic Outlook Database

stance by reducing liquidity injections to the
markets, is expected to signal its tighter policy
orientation in the middle of 2019, with the
actual policy rate hikes predicted towards the
end of 2019 or beginning of 2020. The
propensity amongst advanced economies to
hike policy rates is a challenge for central
banks in emerging market economies (EMEs),
including Indonesia, in terms of formulating
an optimal monetary policy response that
bolsters external resilience to mitigate global
financial spillovers.

Third, higher global financial market
uncertainty has increased risk premium for
investment in emerging markets (EMs).
At the beginning of 2018, we were surprised
by the emergent trade tensions triggered by
the US Administration against several trading
partners, including Canada, México, the
European Union and China. Trade
negotiations continue between the United
States and China, which could persist into
2019. The economic crises that occurred in
Argentina and nearly happened in Turkey
have exacerbated risk perception in the global
financial markets, including _ negative
sentiment blighting several emerging
markets. Global economic uncertainty has

ns > I

BANK INDONESIA'S
ANNUAL MEETING
2018

also been stoked by various geopolitical
issues, such as the ongoing Brexit negotiations
between the United Kingdom and European
Union, the economic issues plaguing Italy as
well as other political developments that we
must keep an eye on.

These three recent global economic
developments have fed through to broad
US dollar appreciation and a capital
reversal from emerging markets, including
Indonesia. The US Dollar Index climbed to
92.12 in 2017 before spiking to 96.8 in 2018.
Furthermore, the benchmark yield of 10 year
US Treasury Bills has also increased from 2.41%
at the beginning of 2018 to 3.06% recently
(Graph 1). The deluge of foreign capital inflows
to emerging markets reached USD101.16
billion in 2017 but have since fallen
dramatically to around USD6.54 billion in 2018
(Graph 2). Similarly, portfolio investment
inflows to Indonesia reached USD24.7 billion
in 2017 before a sudden capital reversal

occurred in June 2018. The subsequent
stabilisation measures taken by Bank
Indonesia in conjunction with the

Government saw portfolio investment flows
gradually return, however, totalling USD7.6

I I Graph 1. US Treasury Bond Yield and US Dollar Index I

Index Yield
105 4

100

billion for the current year. Uncertain global
economic dynamics have reemphasised the
need for synergy to strengthen resilience in
the face of global spillovers, while sustaining
domestic economic growth momentum.

Solid Domestic Economic Perfor-
mance in 2018

Despite inauspicious global economic
dynamics, the domestic economy has
performed well with stability maintained
as growth momentum endures (Graph 3).
We project economic growth at 5.1% in 2018,
backed by strong domestic demand that is
expanding at 5.5%. Non-building investment
growth of 10% and building investment
growth of 5.7% have contributed to robust
investment growth recorded at 6.8%.
Furthermore, household consumption has
also maintained solid growth at 5.2%, buoyed
by public purchasing power and expansion of
the Government's social assistance programs.
In real terms, exports have grown by 6.9% but
imports have experienced a 12.3% growth
surge, implying that external demand has
contributed adversely to economic growth
in 2018.

I Graph 2. Portfolio Investment Flows Emerging Markets

Billions USD

= Us Dollar index

= 10 yr US Treasury Bond yield

Source: Bloomberg, processed

May-16

Jan-i6
Mar-16

mm equity Debt - Total

Source: The Institute of International Finance

rr

Spatially, stronger economic growth has
been recorded in all regions of the
archipelago (Graph 4). Economic growth in
Java is expected at 5.7% in 2018, induced by
strong consumption and investment as well as
improvements in the manufacturing sector.
Solid export performance, particularly in
terms of palm oil, has sustained economic
growth in Sumatra at 4.6%. Meanwhile,
mining sector gains have edged up growth in
Sulawesi as well as in Maluku and Papua
Region, reaching 6.8% and 9.7% respectively.
Finally, economic growth in Bali and Nusa
Tenggara Region as well as Kalimantan stood
at 2.6% and 3.6% in 2018. In addition to
exports and commodity prices, economic
growth divergence in Indonesia is the result
of investment intensity, particularly in
infrastructure.

The national economic gains have been
complemented by efforts to reduce the
current account deficit to within a
manageable threshold. A range of policies
have been introduced, including fiscal, real
sector and monetary policies. However, the
tangible benefits of those policies would need
some times to trickle down. The current
account deficit was relatively large in the third

I Graph 3. Economic Growth Path

Percent (yoy)
57

Td ed Cd Cd

2013 2014 2015 2016 2017 I 2018

- GOP Growth

= Sixperiod moving average

Source: BPS-Statistics Indonesia, processed

Solid Domestic Economic Performance in 2018

quarter of 2018 in line with strong domestic
demand, recorded at USD8.8 billion (3.37% of
GDP) compared with USD8.0 billion (3.02% of
GDP) in the previous period (Graph 5). The
current account deficit increased on a growth
surge of imports to fuel government
infrastructure projects, which will enhance
economic productivity moving forward.
Meanwhile, the significant capital and
financial account surplus was maintained at
USD4.2 billion in the third quarter of 2018 as
foreign investment flows increased. For 2018,
Bank Indonesia forecasts the current account
deficit to remain within a manageable
threshold, namely below 3% of GDP.

Rupiah exchange rates have moved in line
with market mechanisms and support
external sector rebalancing towards
sustainable economic growth. Depreciatory
pressures on the Rupiah have stemmed from
the strong US dollar and a reversal of foreign
capital flows as a corollary of global economic
uncertainty. Nonetheless, the monetary policy
response and __ stabilisation © measures
implemented by Bank Indonesia through
close coordination with the Government have
dampened pressures on the Rupiah. In fact,
the Rupiah has defied depreciatory pressures
and tended to appreciate as a result of
non-resident portfolio investment inflows,
policy to deepen the money market, a
conducive domestic economy and a slight
easing of trade tensions between the United
States and China. Year to date (ytd), the Rupiah
depreciated by 7% as of 19th November 2018,
which is less severe than that reported in
other emerging markets such as India, South
Africa, Brazil, Russia and Turkey (Graph 6).
Furthermore, Rupiah exchange rate stability
has been bolstered by the strong position of
reserve assets, recorded at USD115.2 billion at
the end of October 2018.

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BANK INDONESIA'S
ANNUAL MEETING
2018

I I Graph 4. Regional Economic Growth in Q3/2018 I

[ee

Q

403

Sumatera (22%) Kalimantan (7.9%)

NORTH
KALIMANTAN.

NORTH
SUMATERA,

RAD
ce >> eee": I

7-<
EAST
KALIMANTAN Ml

WEST
KALIMANTAN

cenrra.s0vA

Pere = I =

[Bh 50% < crop <60%

TE cow < cror <70%

HE cor > 20%

Source: BPS-Statistics Indonesia, processed
Description: the number in (...) is the share or regional GDP to the national

Low inflation has been maintained through-

Graph 5. Current Account
out 2018, which has helped to increase I P

public purchasing power. As of October, Suo"¥%? %
Bank Indonesia predicts year end inflation at ¢
3.2% in 2018, which is below the midpoint of 2
the 3.5+1% target corridor (Graph 7). All 2
inflation components, including core inflation, S
volatile food and administered prices, have °
12

remained under control. Low inflation in 2018
has been supported by managed inflation
expectations anchored to the target corridor,
minimal demand-side pressures and the
limited impact of Rupiah depreciation.

i

I=

2017

Jo fa fo

2015,

mm Trade Balance
rimary Income Account
Current Account

mm Service Balance
Secondary Income Account
'CAVGOP (2) (ths)

Source: Bank Indonesia

Solid Domestic Economic Performance in 2018

Sulawesi (6%)

'NORTH
SULAWESI

EEE covornno

CENTRAL
SULAWESI

WEST
SULAWES!

SOUTHEAST
SULAWESI

'SOUTH
I 737 en

4.0% -< GRDP <5.0%

[Bh ow = cnor <a0%

Furthermore, close coordination between
Bank Indonesia and the Government through
the Inflation Control Team (TPI) and Regional
Inflation Control Team (TPID) has also
controlled price pressures on volatile food
and administered prices.

The maintained availability of the cash and
noncash payment systems has further
supported solid domestic economic perfor-
mance. In terms of cash payments, the
position of currency in circulation grew 10.7%
(yoy) as of the third quarter of 2018. Regarding
the wholesale noncash payment system,

NATIONAL

wiz ig wis

$

ae BB

Bali-Nusa Maluku-Papua (2.5%)

Tenggara (3.1%) 1830

531 687
a7 439
065

wie ane

Bl cor <ox

wi iene

the average daily transaction value of the
Bank Indonesia - Real Time Gross Settlement
(BIFRTGS) system declined 2.3% (yoy) in the
reporting period. In contrast, retail payments
settled through the National Clearing System
(SKNBI) enjoyed 7.3% (yoy) growth.
Meanwhile, retail transactions through ATM,
debit and credit cards as well as e-money
accelerated in the third quarter of 2018
to 12.1% (yoy). Furthermore, e-money
transactions soared 300.4% (yoy) in the third
quarter of 2018 as consumers are becoming
more inclined to transact through FinTech
and e-commerce platforms.

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BANK INDONESIA'S
ANNUAL MEETING
2018

I I Graph 6.Exchange Rate Depreciation in Selected CountriesI

Percent
30 ) 285

25

20

I I Graph 8. Bank Liquidity Resilience

Trion
ia %

1.500

1300

«00 °
s
sa
mo 700 85% I 9
os
0 Bas sx ;
TRY BRL ZAR INR IDR KRW PHP «MYR SGD THB SeEEE
biae
- LiuidtyAsets (LA) ee LAT Party Fuh) «seen LATHE Thal)

Source: Reuters, Bloomberg, processed

Bank Indonesia's Policy Mix in 2018

Positive domestic economic performance is
also linked to strong policy synergy between
the Government, Bank Indonesia, Financial
Services Authority (OJK) and other authorities
to strike an optimal national economic policy
mix. Support and optimism from the banking
industry, business community and investors
have been forthcoming. Considering the
interminable shocks shaking the global
economy, the near-term priority is to
strengthen external resilience by maintaining
macroeconomic and financial system stability,

I Graph 7. National Inflation Realisation and Target

Percent (yoy)
1741

Source: Financial Services Authority (OJK), processed

particularly Rupiah exchange rate stability,
and reduce the current account deficit. At the
same time, various structural reforms have
been strengthened in order to build growth
momentum in the medium-long term.

From a BI perspective, we are focusing
monetary policy on
macroeconomic stability, Rupiah exchange
rate stability in particular. Bank Indonesia
has already raised the BI 7-Day Reverse
Repo Rate by 175 basis points to 6.00% in
order to bolster the attractiveness
of domestic financial assets
emptive and ahead-of-the-curve
to the current global

as a_pre-
response
trend of higher

I I Graph 9. Credit Growth and NPL Ratio

Percent (yoy) Percent

e " as
16 B
" R 30
2 ha n
25
10 84 84 ®
8 6856 70 ee x0
6 oo bd 43,
7
3a 30032
28 e Be a)
' ee? eeee 6 15
2 5
° 'ow nneneees see"
2s e882 28 £e e228 ® EESSR8E55 533
RRR RRR RR FR RE RR BEE S528 gre
Target © Realisation Credit Grown NPL Gross

Source: BPS-Statistics Indonesia, Bank Indonesia, processed

Source: Financial Services Authority (OJK), processed

2

policy rates. Furthermore, the reference
rate hikes also represent an integral part of the
coordinated efforts to reduce the current
account deficit. Policy to stabilise the Rupiah
in line with the currency's fundamental value
has been implemented through dual interven-
tion in the foreign exchange market and
government bond purchases in the secondary
market, especially when foreign capital has
flowed out of the markets. To ensure the
monetary stabilisation measures remain
consistent with financial system stability, and
to simultaneously increase liquidity flexibility
and distribution in the banking industry, Bank
Indonesia has raised the (conventional and
sharia) average reserve requirements from 2%
to 3% of deposits.

Monetary stabilisation policy is backed by
efforts to accelerate financial market
deepening. In the foreign exchange market,
breakthrough policy has been instituted in the
form of more efficient FX swaps and Domestic
Non-Deliverable Forward (DNDF). The policy
aims to support market mechanisms when
determining Rupiah exchange rates and
expand the hedging instruments available to
domestic and foreign corporations and
investors. Seeking to further deepen the
Rupiah money market, Bank Indonesia has
issued new rules concerning Rupiah interest
rate derivatives, namely Interest Rate Swap
(IRS) and Overnight Index Swap (OIS), thus
enriching the hedging instruments and
facilitating transparent yield curves for the
money market and bond market. We believe
this policy will strengthen monetary policy
transmission and deepen the government and
corporate bond markets.

The position of reserve assets has been
maintained, thereby reinforcing Rupiah
exchange' rate stabilisation _ policy.

Bank Indonesia's Policy Mix in 2018

FX reserves currently stand at USD115.2
billion, equivalent to 6.2 months of imports
and servicing government external debt. In
addition, the reserve assets serve as an
anticipatory measure against a possible
foreign capital reversal. Recently, Bank
Indonesia entered into swap arrangements
with other central banks to the tune of around
USD80 billion, including China (USD30 billion),
Japan (USD22.76 billion), South Korea
(KRW10.7 billion), Australia (AUD10_ billion)
and Singapore (USD10 billion). The bilateral
swap arrangements are in addition to existing
crisis prevention and recovery efforts through
regional financial cooperation, namely the
Chiang Mai_ Initiative Multilateralization
(CMIM).

While we have focused monetary policy on
stabilisation, Bank Indonesia has also
instituted accommodative policy in the form
of macroprudential policy, the payment
system, financial market deepening and
development of the sharia economics and
finance to catalyse economic growth
momentum. In terms of macroprudential
policy, Bank Indonesia has relaxed the
loan-to-value (LTV) ratio to facilitate first-time
jome buyers and stimulate investment in the
property sector. In addition, Bank Indonesia
as also relaxed the Financing to Funding
Ratio (FFR), now known" as_ the
Macroprudential Intermediation Ratio (MIR),
by expanding the bank intermediation
function through economic financing from
loans to purchases of quality securities issued
by the corporate sector (wholesale), after
previously expanding retail funding based on
deposits to wholesale funding in 2015.
Bank Indonesia strengthened __ liquidity
management flexibility in the banking
industry through the Macroprudential

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BANK INDONESIA'S
ANNUAL MEETING
2018

Liquidity Buffer (MPLB), set at 4% of deposits
in the form of securities holdings that can be
repurchased to Bank Indonesia. Furthermore,
Bank Indonesia has maintained the
Countercyclical Capital Buffer (CCB) at 0%
and strengthened system
surveillance, targeting important banks and
corporations, in conjunction with the Financial
Services Authority (OJK).

financial

Regarding the payment system, policy is
constantly oriented towards enhancing the
availability, security and efficiency of the
various economic and financial transaction
mechanisms. We continue to strengthen
clearing and infrastructure,
including wholesale transactions through the
Bank Indonesia - Real Time Gross Settlement
(BI-RTGS) system as well as retail transactions
through the National Clearing System (SKNBI)
and National Payment (NPG).
Furthermore, Bank Indonesia also directs
payment system policy towards accelerating
the electronification of noncash payments for
applications, including social
assistance disbursements by the Government,
public transportation and financial operations
by various provincial governments. Support
for the development of digital economy and
finance has also through
regulations concerning electronic money and
FinTech development, particularly with
regards to the payment system.

settlement

Gateway

various

manifested

We are accelerating financial market
deepening in order to strengthen the
effectiveness of Bank Indonesia policy

transmission and expand economic financing
alternatives. In conjunction with the Ministry
of Finance and Financial Services Authority

(OJK), Bank Indonesia launched the National
Financial Market Deepening Strategy in
October 2018. In addition to the swap
transactions earlier, namely
Domestic Non-Deliverable Forwards (DNDF),
Overnight Index Swap (OIS), and Interest Rate
Swap (IRS), Bank Indonesia has also issued
several new regulations pertaining to financial
instruments such as Negotiable Certificates of
Deposit (NCD) and Commercial Papers (CP).
Bank Indonesia also coordinated with the
Government, Services Authority
(OJK) and other financial institutions to
develop to finance
infrastructure, which resulted in the signing of
21. strategic infrastructure projects worth
USD13.6 billion in October 2018.

mentioned

Financial

several instruments

Bank Indonesia is a stalwart supporter of
sharia economics and financial develop-
ment, either unilaterally or in conjunction
with the National
Finance of the Republic of Indonesia (KNKS). In
the monetary sector, a number of sharia
instruments have been released, including
Bank Indonesia Sukuk (SUKBI), Sharia NCD and
CP as well as sharia-compliant hedging
instruments. In terms of macroprudential
policy, Bank Indonesia has relaxed the Sharia
Macroprudential Intermediation Ratio (MIR)
and Sharia Macroprudential Liquidity Buffer
(MPLB) in
instruments. In addition, Bank Indonesia has
developed the zakat core principles and social
financial instruments, such as Zakat Infaq
Shodaqoh and Waaf (Ziswaf), to further
empower the economy. Halal economic
chains are also being developed through the
empowerment of Islamic boarding schools as
well as in various sectors and for different

Committee on Sharia

line with similar conventional

commodities, including tourism, food, fashion
and MSMEs. campaigns
regarding development of the sharia
economics and finance as well as the halal
lifestyle have been organised through the
annual Sharia Economic Festival (FeSyar) in
three Indonesian cities as well as the Indonesia
Sharia Economic Festival (ISEF).

Educational

We are well aware that synergy is key to policy
effectiveness in order to strengthen resilience
and build economic growth momentum.
To that end, Bank Indonesia
committed to maintain synergy with the
Government, Financial Services Authority
(OJK) and various other stakeholders.
Therefore, we would like to extend our
appreciation to the Government for the
concrete measures taken to control inflation
through the Inflation Control Team (TPI) and in
terms of managing the current account deficit.
We also wish to thank the Regional Adminis-
trations for their various programs to control
inflation through the Regional
Control Team (TPID). Synergy with respect to
maintaining financial system stability has also
been strengthened through the Financial
System Stability Committee and bilaterally
between Bank Indonesia and the Financial
Services Authority (OJK) as well as Bank
Indonesia and the Deposit
Corporation (LPS). I would also like to express
appreciation to the banking industry and
institutions for accelerating
financial market deepening efforts.
making at Bank Indonesia is also based on the
various inputs from the business community,
investors and the The House of Representative
(DPR). The mass media also plays an important
role in communicating Bank
policies to the public.

remains

Inflation

Insurance

various financial
Policy-

Indonesia's

Three Salient Lessons

Three Salient Lessons

The economic lessons of 2018 provide
invaluable insight into strengthening synergy
to bolster resilience and build economic
growth momentum moving forward despite
unfavourable global economic dynamics. As in
everyday life when leaning against the wind,
we must ensure three important things,
namely a strong body, a healthy diet and
exercise, as well as friends to help brace
against the strong wind. Based on that
analogy, the synergy we have built up
throughout 2018 must be expanded upon in

2019 and beyond.

First, we must strengthen economic stability
and resilience. Our economic history since
independence shows periods of boom and
bust that relate closely to a lack of monetary,
banking and fiscal policy prudence, fluctuat-
ing exports in line with the international
commodity price cycle, or
external debt and an unsupervised property
sector. Consequently, we must strive to ensure
low inflation, stable Rupiah exchange rates, a
small fiscal deficit and maintained financial
system stability. Moreover, we must reduce
the current account deficit to within a
manageable threshold, namely not more than
3% of GDP.

uncontrolled

Second, we must improve our competitive-
ness and productivity in order to stimulate
growth momentum. We need to transform our
economy from a dependence on exports of
primary commodities to manufacturing and
tourism, while enhancing domestic
production to reduce imports and drawing
more direct investment from domestic and
abroad.

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BANK INDONESIA'S
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2018

We must continue to strengthen the structure
of the national economy through downstream
industries, which will increase value added by

processing natural resources in various
sectors, including mining, plantations,
agriculture and fishing. Manufacturing

industries should be developed in the
automotive sector, electronics, textiles and
footwear to increase exports and exploit the

global and regional supply chains.

Third, policy synergy between the authorities
is key to strengthen the structure of the
national economy. Meanwhile, monetary,
fiscal and financial sector policies will
be oriented towards maintaining macro-
economic and financial system stability. Real
sector structural reforms should be expanded

and accelerated to further enhance
competitiveness, productivity, investment,
trade, employment, and legal certainty.

Improvements in the business climate and
investment climate need to be encouraged
through On-line Single Submission (OSS) and
acceleration of bureaucratic efficiency at the
central and regional levels. Infrastructure
development that has succeeded in increasing
connectivity so far needs to be expanded and
directed to encourage the development of
economic and tourism areas. The potential
demographic bonus must be exploited
through the mentoring of entrepreneurs.
Meanwhile, the digital economy and finance
should focus on MSME development and
financial inclusion.

A Promising Domestic Economic

Outlook

Moving forward, the domestic economic
outlook is promising, with stronger growth
and maintained stability expected. Despite
the flagging global economy, national
economic growth in Indonesia is predicted to

achieve 5.0-5.4% in 2019, backed by strong
domestic demand, including consumption
and investment, while the contribution of net
exports is forecast to improve as exports
increase and imports moderate. Bank
Indonesia predicts headline inflation to
remain under control in 2019 within the
3.541% target corridor, supported by
contained price pressures on the demand side,
volatile food (VF) and administered prices
(AP), anchored inflation expectations and
stable Rupiah exchange rates. The current
account deficit will decrease to around 2.5% of
GDP in 2019 as a result of measures to control
imports as well as stimulate exports and
tourism. The bank intermediation function
and economic financing through the capital
market will continue to Bank
Indonesia projects credit growth in 2019 to
reach 10-12%, with deposit growth expected
in the 8-10% range and adequate liquidity
maintained.

increase.

In the medium term, we project stronger
economic growth at 5.5-6.1% in 2024. Rapid
infrastructure development and deregulation
policy will increase economic productivity
moving forward. Furthermore, structural
reforms will catalyse faster economic growth
with a focus on: (1) economic competitiveness,
particularly in terms of human capital and
productivity; (2) industrial capacity and
capability to increase exports and reduce the
current account deficit; and (3) exploiting the
digital economy to stimulate broad and
equitable economic growth. By accelerating
the structural reforms, Bank Indonesia expects
economic growth to hit 6.1% in 2024, with the
current account deficit below 2% of GDP. We
predict income per capita to increase from
USD3,500 currently to USD4,800 in 2024,
thus confirming Indonesia's status as an
upper-middle income country.


Bank Indonesia's Policy Mix Direction
for 2019

Surrounded by inauspicious global economic
dynamics, we will therefore strengthen
Bank Indonesia's policy mix in 2018 for
2019. National economic resilience must be
bolstered to confront the risk of global
spillovers. Consequently, monetary policy will
remain focused on stability, particularly in
terms of controlling inflation in the 3.5+1%
target corridor and maintaining Rupiah
stability in line with the
fundamental value. I Meanwhile,
Indonesia will maintain and expand
accommodative policy with respect to
macroprudential policy, the payment system,
financial market deepening as well as sharia
economics and financial development to build
economic growth momentum moving

currency's
Bank

forward.

Bank Indonesia will maintain a pre-emptive
and ahead-of-the-curve monetary policy
stance in 2019. The policy rate will still be
calibrated in accordance with domestic and
global economic developments to ensure
inflation remains under control and Rupiah
exchange rates are in line with the currency's
fundamental value. Bank Indonesia will strive
towards Rupiah exchange rate stability
through efficient market mechanisms, while
applying dual intervention policy as needed.
We will maintain adequate reserve assets and
cooperate bilaterally with other central banks,
whilst strengthening regional _ financial
arrangements, including cooperation to
expand the use of local currencies for bilateral
trade and investment in the region. Bank
Indonesia will maintain adequate liquidity in

Bank Indonesia's Policy Mix Direction for 2019

the money market and banking industry
through optimal monetary operations and
periodic assessments of economic and money
market liquidity.

Bank Indonesia will continue accommoda-
tive macroprudential policy to stimulate
the bank intermediation function in terms
of economic financing. We will periodically
review the Macroprudential Intermediation
Ratio (MIR) in order to catalyse credit growth
and simultaneously expand economic
funding and financing through offerings of
securities. Similarly, we will also review the
Macroprudential Liquidity Buffer (MPLB) to
support flexible liquidity © management
in the banking industry. Accommodative
macroprudential policy will also be taken to
help strengthen the bank intermediation
function in terms of MSME and priority sector
development, including exports and tourism,
through adjustments to the MSME financing
ratio and development of financing ratios for
the priority sectors. We also plan to orient
macroprudential policy towards sustaining
financial system resilience through better
surveillance of systemically important banks
(SIB) and conglomerates, with a focus on
primary commodities, property and
corporations highly indebted with foreign
loans.

We will continue to develop payment
system policy towards ensuring efficient,
available and secure cash and noncash
payment systems, including support for the
digital economy and finance. In terms of the
noncash payment system, Bank Indon