Budi Mulya: Indonesian economy - recent developments and challenges
Address by Mr Budi Mulya, Deputy Governor of Bank Indonesia, at the Oversea-Chinese
Banking Corporation (OCBC) Global Treasury Economic and Business Forum, Singapore,
9 July 2010.
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First of all, I would like to thank OCBC Bank for the invitation to join in today's global
business community forum.
The event like what we have today, become more important recently since authorities as well
as business leaders worldwide, have been faced with one of the most challenging episodes
post 2008 and 2009 global crises. Authorities are facing high uncertain environment and
have to deal with more delicate policy dilemmas to ensure the sustainability of global
economic recovery process. Hence, it is always a benefit to exchange view with market and
business leaders to obtain a more convergence perception with regard to the stage of the
economy and authority's policy responds. This is because communication, such as through
dialogue we have today, in particular with regard to the nature, the scope and the objective of
policies taken by authorities, become more crucial to maintain market confidence and hence,
to reduce uncertainty.
Market confidence poses an important factor to ensure the efficacy of various policies taken
by authorities. It could be obtained when the rationality of the policies taken are well
understood as intended. Hence, it will gain in a convinced behavior with regard to the policy
implementation.
Further, maintaining market confidence is even more imperative in the aftermath of the onset
of Euro zone crisis early this year, where coordination among authorities globally has been at
the most challenging stage. This is because country specific factor, including political
involvement, become increasingly materialize. Yet, from various international coordination
forums, such as the latest G-20 meeting in Toronto last month, we all observe that the nation
leaders' awareness with regard of policy coordination is held firmly. The agreement to
together pursue a sustain path of global economic recovery and to achieve a more balance
global growth as reflected in "growth friendly fiscal consolidation plans", is a strong evidence
to that.
One thing that I would like to highlight, with regard to the communication aspect as I have
mentioned, is that the demand for policy clarity and transparency - without delay - is
increasing, including the demand for very details macro economic data or statistic. This fact
has also been one of Bank Indonesia's concerns to always improve the policy transparency
communication.
With that background I would like to briefly share what Indonesia has been through and the
macroeconomic strategy to ensure the sustainability of Indonesia's economic performance in
a very challenging and still fragile global economy and financial market environment.
Recent economic development
I will start my brief description on the development of the Indonesian economy by
emphasizing that what Indonesia has been through and achieved, particularly during the
most recent global turmoil, is mostly as a result of years of "post 1998 crisis" transformation
process. Indonesia is now transformed into one of the world largest democratic and
structurally different with what it was a decade ago. This is as a result of more than ten years
of consolidation and dynamic transition in almost all sectors. The extensive transformation
measures that became a continuing agenda with full commitment, despite its challenging
process, have provided a more resilience foundation into the Indonesian economic
development. Of course, there are still many agendas to be executed to improve and to
increase the efficiency of the whole business and economic activities. But, the progress so
far, particularly the consistent prudent practice of macroeconomic management, has proven
to contribute to shelter the domestic economy from further adverse impact of the most recent
global crisis.
Among few countries in the region, Indonesia was still experiencing a positive growth of 6.0%
in 2008 and 4.5% in 2009. While, in the first half of 2010, supported by a better than
expected global the economic recovery is expected to grow at 6%, which is higher than
previously estimated of 5.7%. In 2010, the Indonesian economy is expected to grow at 6%
and slightly higher in 2011 and 2012. These were mainly sustained by high and inclusive
growth of domestic demand, in particular consumption. Yet, export performance and
investment has also showed a slight increase and expected to sustain their upward trend.
Inflation has also moderated at 5.05 % (year-on-year) in June 2010, held by adequate supply
responses and rupiah exchange rate appreciation, despite that there was a hike in volatile
price component. Hence, the June inflation is slightly higher than previously estimated.
However the recent increase of the volatile food price is expected to be temporary and
inflation is expected to be maintained within target range of 5% +/- 1% in 2010 and 2011.
The core inflation figure is also supportive to Bank Indonesia inflation assessment. To this
respect, the latest monetary policy decision to keep BI Rate at 6.50%, is considered as
adequate to ensure the inflation expectation within the target range and supportive to
maintain the growth momentum, as well as to encourage bank lending.
Meanwhile, the balance of payment figure shows a strong indication of improvement, brought
about by strong domestic economic fundamental and conducive global economy. The current
account balance in the second quarter this year to be higher than previously estimated and
expected to be around USD 1.7 billion surplus. While, overall balance surplus will also
improve to be at around USD 4.3 billion, higher than previous estimation. These
developments have contributed to the increase of the foreign exchange reserve which now
amounted to USD 76.3 billion. The current foreign exchange reserve level is equivalent to
approximately 7.4 months of imported good, higher than what is observed in the peer group
countries.
Those progresses have contributed to the IDR, which continue in an appreciation trend,
despite some corrections in May with moderate volatility caused by market concern with
regards to the rescue package in Euro zone. Since early this year, IDR has been appreciated
at around 4% with a lower volatility in the second quarter this year. On this respect, Bank
Indonesia's policy, consistent with the free floating system, is to ensure that IDR fluctuates in
line with the economic fundamental and to avoid excessive volatility. The IDR movement
recently is considered still adequate into external sector while supportive into anchoring
inflation expectation.
In addition, I would like to convince you that in dealing with the mounting recent debate on
short term capital flows which always have such a "double edge sword" into small open
economy like Indonesia, the approach taken is consistent with the free capital mobility
regime as stated in the foreign capital system law (The Law No.24/1999). However, to
prevent from the negative impact of "hot money" flows, Bank Indonesia emphasize on the
banking prudential and financial market deepening measures, as well as directed to
encourage longer term investment. The six measures as in the latest Bank Indonesia's policy
package launched at June this year is also in view of this balance approach.
Further, the banking industry and the domestic financial market also show a continued sound
performance and maintained in well capitalized condition. In general, domestic financial
market has recovered well from pressures observed during the peak of the crisis, which
mainly triggered by liquidity scarcity perception and impact of flight to safety panic
phenomenon. All money market indicators have recently returned to their normal pattern.
The banking intermediation has also been showing an improvement. In the first half of this
year, bank lending grew at around 19% and for 2010 is expected to grow at 22%-24% range
which will ensure the economic growth. While non-performing loans (NPL) is well maintained
at low around 3% (gross) and capital adequacy ratio (CAR) in average at level of 18%.
On the fiscal side, the government also showed a strong consistent effort in budget
management efficiency and discipline. The fiscal deficit keeps low level of below 3% of GDP,
which this year is expected to be 2.1%, and will be in a declining trend for years ahead.
While, at the same time various measures are taken to continually improve its spending
mechanism. Prudent fiscal policy has resulted in a significant decline in the debt to GDP ratio
from 77% in 2000 to at below 30% recently.
The economic performance I have just described is an evidence that consistent prudent
macroeconomic policies taken by the Indonesian authorities, as part of the more than a
decade transformation process within the very dynamic political democratic development,
has provided a stronger foundation to sustain the further economic development.
Those achievements has partly also been reflected in a better investor risk perception as
shown in the decline of credit default swap (CDS) spread, which is now stable at around
180 bps for 5 years CDS, and recent sovereign rating improvement from major rating
agencies. Yet, with regard to the later, I believe that rating agencies still tend to be too
conservative in assessing Indonesia's risk profile. Hence, it is not yet fully reflects the result
of the significant transformation progress that Indonesia have been through within more than
a decade, while they still more in "traumatic" view relate to the 1998 crisis.
Outlook and challenge ahead
We are quite confident that the Indonesian economy is on track. The economy will move on a
faster pace compare with our previous belief and will be around 7% growth within the next
couple of years, given the already proven domestic resilience so far. Economic growth will
also be boosted by the upturn on export and investment. Improving external demand and
better risk perception toward domestic fundamental economy will also keep the current
account and financial account in a good shape, and contribute to the increase of foreign
exchange reserve.
However, there is of course a risk that has to be taken into account and monitored closely
with regard to global financial market and economic development. Despite the still ongoing
Euro zone crisis, in particular with respect to its banking sector and global financial market is
also still fragile, global economy has shown a quite significant improvement. Yet, we expect
that the risk will be moderate given strong world leaders commitment as I have previously
mentioned.
One thing that also ensures the prospect of domestic economy is a continuous strong
commitment of the Government to implement infrastructure projects, especially in
transportation and energy sectors, and reform measures in investment climate. With respect
to the later, it is important for us to note that the public check and balance mechanism in
ensuring more efficient bureaucracy and improving business climate, has been increasing
significantly compare to a decade ago.
While on inflation, we are quite confident to maintain within the target range of 5% +/- 1% up
to 2011 and expect a declining trend ahead. In this regard, monetary policy will be
consistently directed toward achieving low and stable inflation set by the Government. To
achieve this low and stable inflation, which is now become more a common concerns, the
Government and Bank Indonesia have taken measures to strengthen relevant policy
coordination to better monitor and control inflation.
I would like to convince you that our agenda is priorities on how to ensure that the economy
always move on the right track, despite some risk factors to take into account as I have
mentioned above. Also, I am optimistic in our strong commitment to implement, step by step,
some agendas to improve the environment to facilitate a sustainable growth and a better
quality of economic development.
Before I conclude, I would like to also share that with regard to the global agenda on the
financial sector reform and strengthening banking industry capital and risk management, as
well as to encourage market disclosure and the adoption of a more convergence
international accounting standard, Indonesia as a member of G-20 countries, also take step
in the same spirit. Yet, the implementation will of course consider the stage and the structure
of domestic financial market and banking industry. This is as partly can be observed in
Indonesia participation in financial sector assessment program (FSAP).
To conclude, I am optimistic into the prospect and the direction of the Indonesian economy
ahead. I do hope that you will share the same optimistic view.
Thank you.
References
Bank Indonesia, "Economic Report on Indonesia 2009". Available at www.bi.go.id.
Bank Indonesia, "Press Release No.12/31/PSHM/Humas, 5 July 2010". Available at
www.bi.go.id.
Bank Indonesia, "Press Release No.12/28/PSHM/humas, 16 June 2010". Available at
www.bi.go.id.
Bank for International Statements (BIS), "General Manager's statement". Statement by
Mr. Jaime Caruana, General Manager of the BIS, at the BIS press conference on the
occasion of the Bank's Annual General Meeting, Basel, 28 June 2010. www.bis.org.
G-20, "The G-20 Toronto Summit Declaration", June 26-27, 2010.