2008 ECONOMIC REPORT ON INDONESIA

�2008 Economic Report on Indonesia

2008 ECONOMIC REPORTON INDONESIA

�� 2008 Economic Report on Indonesia

“To be recognized, domestically and internationally, as a credible bank through the strength of our values and achievement of low, stable rates of inflation.”

“To achieve and maintain price stability by maintaining monetary stability and by promoting financial system stability for Indonesia’s long term sustainable development.”

“Competence, Accountability, Integrity, Cohesiveness, Transparency.”

VISION

MISSION

VALUES

��2008 Economic Report on Indonesia

“As an open economy, Indonesia is obviously in no position to isolate itself from the fallout of slowing global economic activity. Nevertheless, in relative terms, Indonesia’s overall position is not as precarious as for other countries. Alongside this, fundamentals in the external, fiscal and banking sectors are still adequately strong to withstand the fallout from the global crisis ...”

(Boediono, Governor of Bank Indonesia, 2008)

�v 2008 Economic Report on Indonesia

CONTENTS

CHAPTER I

CHAPTER II

CHAPTER III

Performance of the Indonesian Economy, Outlook and Policy Direction 1

Economic Integration and the Challenges of the Global Crisis 81

Exploring the Outlook for Global Economic Recovery 53

Contents �v Tables and Charts v� Board of Governors of Bank Indonesia x� Foreword x�� Overview x�v

1.1 Condition of the Economy 4 1.2 Economic Outlook and Policy Direction 34 Box: Evaluating Achievement of the Inflation Target 47Box: Indonesia’s External Debt and Repayment Plan for 2009 49

2.1 Introduction 56 2.2 The Financial Crisis and Resulting Impact 61 2.3 Global Policy Role in Resolution of the 2008 Crisis 67 2.4 Outlook for Global Economic Recovery 74 Box: The Fall of Lehman Brothers 76Box: Credit Default Swaps (CDS): Mechanism and Development 78

3.1 Introduction 84 3.2 Flows of international Trade 86 3.3 Integration of Capital Flows 93 Box: Latest Developments in Economic Integration of Asia 103

v2008 Economic Report on Indonesia

CHAPTER IV

CHAPTER V Policy Response of Bank Indonesia 137

Domestic Financial Sector Performance amid the Ongoing Global Crisis 105

Appendices 159

4.1 Domestic Financial System: Resilience and its Role in Financing the Economy 108 4.2 Payment System 126 Box: Knowing the Structured Products 133

5.1 Monetary Policy 140 5.2 Banking Policy 148 5.3 Payment System Policy 152 5.4 Coordination of Monetary, Fiscal, and Real Secor Policies 155

List of Bank Indonesia Regulations in 2008 160 Various Important Regulations and Policies in Economic and Finance Areas in 2008 163 Statistics Table 169 Abbreviations 199 Editorial Team 204

v� 2008 Economic Report on Indonesia

TABLES AND CHARTS

TABLES

TABLES

TABLES

Chapter I. Performance of the Indonesian Economy, Outlook and Policy Direction

Chapter III. Economic Integration and the Challenges of the Global Crisis

Chapter II. Exploring the Outlook for Global Economic Recovery

Table 1.1. GDP Growth and Distribution by Expenditures 7 Table 1.2. GDP Growth and Distribution by Sector 9 Table 1.3. Poverty Depth Index 12 Table 1.4. Poverty Level Index 12 Table 1.5. Employed Population and Unemployment Rate by Region 14 Table 1.6. Rural Poverty Rate 15 Table 1.7. Indonesia’s Balance of Payment 16 Table 1.8. Non-Oil and Gas Main Exports Commodities 17 Table 1.9. Oil and Gas Exports Imports 18 Table 1.10. Indicators of BOP 19 Table 1.11. Indonesia’s Outstanding Foreign Debts 19 Table 1.12. Indonesia’s Foreign Debts Withdrawal 20

Table 1.13. Foreign Debts Repayment 21 Table 1.14. Inflation and Its Contribution by Categories 25 Table 1.15. Core and Non-Core Inflation and Its Contribution 25 Table 1.16. The Impact of First and Second Round Fuel Price Hike 26 Table 1.17. Administered Commodities Contribution to Inflation

in 2008 26 Table 1.18. Volatile Food Commodities Contribution to Inflation

in 2008 26 Table 1.19. Increase in International Commodity Prices and Related

Domestic Commodity Prices 27 Table 1.20. Economic Growth Outlook by Expenditures 36 Table 1.21. Economic Growth Outlook by Sector 38 Table 1.22. Balance of Payments Outlook 41 Table 1.23. Government Foreign Debt Withdrawal Plan for 2009 43

Table 2.1. Comparison of the Impact of Global Crisis in 2008 with Previous Crisis 64

Table 2.2. Summary of Policy to Overcome Crisis in 2008 70

Table 2.3. World + G3 Economic Growth Outlook 75

Table 3.1. Exports Share by Sector 86 Table 3.2. Three Largest Contributor to Exports Commodities in

Several Countries 87 Table 3.3. Exports Composition by Destination Country 87 Table 3.4. Productivity of 20 Indonesia’s Major Exports

Commodities 88 Table 3.5. Non-Oil and Gas Imports 90 Table 3.6. Capital Goods Imports 90 Table 3.7. Share of the Final Demand of the Imports Industry 91

Table 3.8. Imports Composition by Country of Origin 91 Table 3.9. Three Largest Imports Contributor in Several Asian

Countries 92 Table 3.10. Comparison of International Investment Position 94 Table 3.11. Japan’s FDI in Several Asian Countries 98 Table 3.12. Ranking of Infrastructure in Several Countries, GCI 2008 98 Table 3.13. FDI in Indonesia by Economic Sector 100 Table 3.14. USA’s FDI Historical-Cost Basis, 2007 100

v��2008 Economic Report on Indonesia

TABLES

TABLES Chapter V. Policy Response of Bank Indonesia

Chapter IV. Domestic Financial Sector Performance amid the Ongoing Global Crisis

Table 4.1. Indicators of Commercial Banks 110 Table 4.2. Banks Credits 110 Table 4.3. Deposits 111 Table 4.4. Sharia Banking Performance 113 Table 4.5. Composition of Sharia Banking Deposits 114 Table 4.6. Sharia Financing 114 Table 4.7. Rural Banks Indicators 116 Table 4.8. Sharia Rural Banks Indicators 117

Table 4.9. MSMEs Credits 118 Table 4.10. Indicators of Finance Companies 123 Table 4.11. Average of Currency in Circulation and Growth

in 2005-2008 127 Table 4.12. Cash Position and Ratio to Outflow 127 Table 4.13. Share of Currency in Circulation 127 Table 4.14. Inflow/Outflow and Netflow of Currency 128 Table 4.15. BI-RTGS Transactions by Type of Transaction 129

Tabel 5.1. Series of Measures on Improvement of Monetary Policy Operation 143

Table 5.2. Rupiah Exchange Rate Stabilization Policy 145

v�� 2008 Economic Report on Indonesia

CHARTS

CHARTS

Chapter I. Performance of the Indonesian Economy, Outlook and Policy Direction

Chapter II. Exploring the Outlook for Global Economic Recovery

Chart 1.1. Exports Growth by Region 8 Chart 1.2. Exports Share by Region 8 Chart 1.3. Capacity Utilization,(BTI-BPS) 9 Chart 1.4. Capacity Utilization (SKDU) 9 Chart 1.5. Company Sales and Inventory in Agriculture Sector 10 Chart 1.6. Company Sales and Inventory in Manufacturing Sector 10 Chart 1.7. Labor Use 11 Chart 1.9. Labor Force by Sector 11 Chart 1.8. Economic Growth and Open Unemployment Rate 11 Chart 1.10. Labor Productivity 11 Chart 1.11. Labor Force by Education Level 12 Chart 1.12. Farmers Term of Trade in Sumatera 13 Chart 1.13. Farmers Term of Trade in Kali-Sulampua 13 Chart 1.14. Inflation by Region 15 Chart 1.15. Current Account 17 Chart 1.16. Commodity Price Index 18 Chart 1.17. Capital and Financial Account 18 Chart 1.18. Indonesia Debt Indicators 19 Chart 1.19. Comparison of Debt Service Ratio 20 Chart 1.20. Comparison of Debt to GDP Ratio 20 Chart 1.21. International Reserve 21 Chart 1.22. Average Exchange Rate 22 Chart 1.23. Exchange Rate Volatility 22

Chart 1.24. Average Appreciation (+)/Depreciation (-) in 2008 compared to 2007 22 Chart 1.25. BoP and Exchange Rate 23 Chart 1.26. Credit Default Swap Rate 23 Chart 1.27. Household Fuel Contribution to Inflation 26 Chart 1.28. Rice Procurement by Bulog 27 Chart 1.29. Rice Inflation 27 Chart 1.30. Consensus Forecast Inflation Expectation 28 Chart 1.31. Consumers Price Expectation 28 Chart 1.32. Retailer Price Expectation 28 Chart 1.33. Exchange Rate and Inflation of Trading Partner Countries 28 Chart 1.34. WPI Import and Imported Commodities CPI 29 Chart 1.35. M0 and Currency Growth 30 Chart 1.36. Credit Growth per Currency 30 Chart 1.37. Currency and Credit Growth 30 Chart 1.38. Growth of Private Demand Deposits and ICI 30 Chart 1.39. M1, M2, and Rupiah M2 Growth 31 Chart 1.40. Growth of Real Currency, M1, and M2 31 Chart 1.41. Stock of Banking Excess Liquidity 31 Chart 1.42. Liquidity Premium (JIBOR - OIS) 31 Chart 1.43. Premium Among Tenor 32 Chart 1.44. O/N PUAB and BI Rate 32 Chart 1.45. World Economic Growth 35 Chart 1.46. World Trade Volume 35

Chart 2.1. International Oil Price 57 Chart 2.2. Non Commercial Contract in Oil Market 58 Diagram 2.1. Subprime Crisis Chronology 59 Chart 2.3. LIBOR Rate and T-Bills Spread 60 Chart 2.4. Stock Prices Indices in Europe, Japan, and USA 61 Chart 2.5. Stock Prices Indices in Asia, Emerging Markets, and the World 62 Chart 2.6. World Economic Growth 62 Chart 2.7. USA’s Personal Income and Expenditures 62 Chart 2.8. Retail Sales in Europe 62

Chart 2.9. Unemployment Rate in USA 63 Chart 2.10. USA Economic Growth 63 Chart 2.11. Japan’s Export by Country of Destination 65 Chart 2.12. Asian Economic Growth 65 Chart 2.13. IMF Commodity Price Index 67 Chart 2.14. World Inflation 68 Chart 2.15.CPI Inflation in Developed Countries 68 Chart 2.16.Inflation in Developing Countries 68 Chart 2.17. Policy Rate in Developed Countries 69

�x2008 Economic Report on Indonesia

CHARTS

CHARTS

Chapter III. Economic Integration and the Challenges of the Global Crisis

Chapter IV. Domestic Financial Sector Performance amid the Ongoing Global Crisis

Chart 3.1. Exports Value by Sector 86 Chart 3.2. Contribution of Commodity to Exports Productivity 89 Chart 3.3. Major Commodities Competition in the International Market 89 Chart 3.4. Imports Share : Oil & Gas and Non-Oil & Gas 89 Chart 3.5. Oil Trade Balance 90 Chart 3.6. Oil and Gas Trade Balance 90 Chart 3.7. Structure of Capital Inflow to Indonesia 93 Chart 3.8. Capital Inflow Composition 93 Chart 3.9. Private and Public Portfolio Investment 94 Chart 3.10. Foreign Portfolio Composition 94 Chart 3.11. Yield Comparison of Money Market in 2008 95

Chart 3.12. Yield Comparison of 5 Years Bonds in 2008 95 Chart 3.13. Yield Comparison of Stocks in 2008 95 Chart 3.14. Stocks Capitalization and Bonds/GDP 96 Chart 3.15. Depth of Stocks and Government Bonds Market 96 Chart 3.16. FDI Flows and Growth of Indonesia’s GDP 96 Chart 3.17. Net FDI and Political Risk 97 Chart 3.18. FDI Flows to Southeast Asia 97 Chart 3.19. FDI to GDP Ratio in Several Countries 97 Chart 3.20. Transportation, Communication, and FDI 99 Chart 3.21. Land, Water, and Air Transportation 99 Chart 3.22. Foreign Investment in Indonesia (1997-2007) 99

Chart 4.1. Growth of Credits, Deposits and SBI 111 Chart 4.2. Growth of Deposits 112 Chart 4.3. Non Performing Loan (NPL) 112 Chart 4.4. Growth of Assets, Deposits, PYD, and FDR of Sharia Banking 113 Chart 4.5. NPF of Sharia Banks 115 Chart 4.6. NPF by Sector 115 Chart 4.7. ICI and Net Foreign Buy 119 Chart 4.8. ICI and Regional Stock Exchange 119 Chart 4.9. IPO, Right Issue, and Stock Issuance Accumulation 120 Chart 4.10. The Price of Government Bonds 120 Chart 4.11. Volume and Frequency of Government Bonds Trading Activities 120 Chart 4.12. Government Bonds Holders 121 Chart 4.13. Corporate Bonds Issuance 122 Chart 4.14. NAV of Mutual Funds 122

Chart 4.15. Insurance Industry 123 Chart 4.16. Insurance Company Investment Portfolio 124 Chart 4.17. Pension Funds 124 Chart 4.18. Pension Funds Investment Portfolio 124 Chart 4.19. Currency in Circulation in 2004-2008 126 Chart 4.20. Transactions of BI-RTGS 128 Chart 4.21. Transactions Activities by Group of Banks 129 Chart 4.22. Throughput BI-RTGS 130 Chart 4.23. Clearing Activities 130 Chart 4.24. Nominal Debit Clearing 130 Chart 4.25. Volume Debit Clearing 131 Chart 4.26. Based Account Card Activities 131 Chart 4.27. Credit Card Activities 131 Chart 4.28. Growth of National Credit Card’s NPL 131 Chart 4.29. Electronic Money 132

x 2008 Economic Report on Indonesia

CHARTS Chapter V. Policy Response of Bank Indonesia

Symbols, Reporting Period and Source of Data

Revised figures r

Provisional figures *

Incomplete figures **

Data are not yet available ...

Not available -

Figures in before and after mark could not be compared X

Nil or less than the last digit --

United States Dollar $ (dollar)

All source of data is from Bank Indonesia, unless mentioned otherwise

Chart 5.1. Developing Countries Policy Rate 141 Chart 5.2. Credit Monthly Increase 142 Chart 5.3. Interest Rate and Volume of O/N PUAB 145 Chart 5.4. PUAB Rates 145 Chart 5.5. Deposits Interest Rate 146 Chart 5.6. Credits Interest Rate 146

Chart 5.7. Credits Growth 146 Chart 5.8. BI Rate and ICI 146 Chart 5.9. BI Rate and Government Bonds Yield 147 Chart 5.10. BI Rate and Consumer Confidence 147 Chart 5.11. BI Rate and Retailer Price Expectation 147

x�2008 Economic Report on Indonesia

BOEDIONOGovernor

MIRANDA S. GOELTOMSenior Deputy Governor

HARTADI A. SARWONODeputy Governor

SITI Ch. FADJRIJAHDeputy Governor

S. BUDI ROCHADIDeputy Governor

MULIAMAN D. HADADDeputy Governor

BUDI MULYADeputy Governor

ARDHAYADI MITROATMODJODeputy Governor

BOARD OF GOVERNORS OF BANK INDONESIA

x�� 2008 Economic Report on Indonesia

BoedionoGovernor

FOREWORD

The deepening of global financial crisis is taking its toll in the world economy. The scale and suddenness of the crises has left the world economy to shrink significantly, particularly in the industrial countries. In Indonesia, the effects of global crisis started to take hold in the last quarter of 2008, with economic slowdown looming larger in 2009. Faced with the gloomy economic outlook, it is essential that we assume heightened alertness while maintaining objectivity in assessing issues within their full scope. This is necessary so that we will be able to take actions that properly address the challenges we face.

As an open economy, Indonesia is obviously in no position to isolate itself from the fallout of slowing global economic activity. Nevertheless, in relative terms, Indonesia’s overall position is not as bad as for many other countries. Despite the downward pressure in Q4/2008, the Indonesian economy was still able to manage 6.1% growth for 2008, buoyed by private consumption and exports. Alongside this, fundamentals in the external, fiscal and banking sectors were still adequately strong to withstand the fallout from the global crisis.

With regard to the resilience of the banking system, the nature of our financial system has afforded the domestic economy some protection from the effects of the financial crisis. Our financial system, most of which, still continues to operate along conventional lines with comparatively simple instruments. Unlike in developed countries, intermediation process in our financial sector continued to operate during

2008, despite potential for slowing performance in 2009.

One lesson that we can learned from the current global crisis is the importance of the financial system to go back to the basics. First, banks should concentrate on financing activities with identifiable underlying transactions and based on clear risk calculations. Second, the basic principles of conventional macro management are proven to be relevant in confronting the crisis. With regard to management of macroeconomy, domestic sector in Indonesia is demonstrably capable of generating economic momentum amid the global crisis.

Looking forward, the Indonesian economy in 2009 is forecasted to grow around 4%, with considerable downside risk, should global economic recovery proceed more slowly than expected. Besides this, tight availability of financing in domestic economy also poses a risk that must be taken into account.

To safeguard economic growth and harness our strengths, we need to maximise the capacity of the domestic market to support domestic economic activity, especially household consumption. Despite slowing to some degree, household consumption is predicted to be resilient to shocks, taking into account support from fiscal stimulus package in the 2009 Budget, election-related spending, and subdued inflation. In 2009, inflation is forecasted to ease to the 5.0%-7.0% range in line with potential downward movement of commodity and fuel prices in global market and government programmes to keep foodstuffs in adequate supply.

x��2008 Economic Report on Indonesia

Jakarta, March 2009

Boediono

Bank Indonesia and the Government will strengthen coordination to safeguard macroeconomic stability and to secure public purchasing power through policy measures, so as to prevent a sharp slowdown of domestic economy. We also hope that the economic growth will remain broadly distributed and bring benefits to the public at large.

For Bank Indonesia, the challenges involved in these policies are indeed formidable. However, I am convinced that through hard work, astute actions, and close coordination between Bank Indonesia and the Government, God willing we will all be able to emerge safely from the present global economic crisis.

The global economic crisis has changed the shape of the world economy. The crisis that began in the United States in 2007 spread worldwide, with no exception to developing countries. Several aggresive policies have been adopted at the global level to promote economic recovery. In the United States, the epicentre of the crisis, the resolve of the new administration in taking bold actions to stem the crisis is a positive factor that could mitigate pessimism over the likelihood of prolonged economic recession and risks of depression. At the same time, the willingness of other industrial countriescountries to coordinate their economic recovery policies is also expected to bolster market confidence. However, the ongoing deleveraging process among financial institutions and the impact of the crisis from the real sector back to the financial sector, means that global markets remain beset by heightened risk and uncertainties.

In Indonesia, the fallout from the crisis began to take hold towards the end of 2008. In Q3/2008, the economy was still charting above 6% growth with continued healthy performance in the financial sector reflected in a stable exchange rate, mounting stock index and declining yield on Government Securities. However, in Q4/2008, the global financial turbulence began to bear down on the Indonesian economy. Weakening exports, pressure on the balance of payments and turmoil on the money market took their toll on Indonesia’s economic growth. On the external side, the balance of payments began to accumulate a rising deficit and the exchange rate underwent significant depreciation. On financial markets, global liquidity conditions tightened up in tandem with mounting perceptions of emerging market risks. This in turn triggered a slide in the Indonesian Stock Market, and Government Securities prices alongside a sharp

Maintaining Economic Stability During the Global Financial Crisis

1997 2008

GDP 4.7% 6.1%

Inflation 11.05% 11.06%

External

- Current Account (% of GDP) -2.3% 0.1%

- International Reserve (billions of USD)

21.4 51.6

(Month of Imports and Official Foreign Debt Repayment) 5.5 4.0

-Foreign Debt (% of GDP) 62.2% 29.0%

Fiscal

- Fiscal Balance (% PDB) 2.2% 0.1%

- Public Debt (% PDB) 62.2% 32%

Banking

- LDR (%) 111.1% 77.2%

- CAR (%) 9.19% 16.2%

- NPL (%) 8.15% 3.8%

Table 1. Indonesia Macroeconomic Condition: Asian Crisis (1997) and Global Crisis (2008)

OVERVIEW

x�v Overview

downturn in the exchange the causing the risk spread on Indonesian securities widened considerably, prompting outflows of foreign capital from the stock market and from Government Securities and Bank Indonesia Certificates (SBIs).

In relative terms, Indonesia’s overall position is not as precarious as for many other countries. The Indonesian economy was still able to chart 6.1% growth in 2008. Indonesia’s fundamentals in the external sector, fiscal sector and banking industry are also quite strongly positioned to weather the global crisis (Table 1). However, the crisis will have more pronounced effects on the Indonesian economy. The increasing integration of the global economy and the deepening of the crisis augurs for the slowing of economies across all countries during 2009. Indonesia is no exception. Bank Indonesia projects a drop in economic growth in 2009 to around 4.0% with downside risk if the global economic downturn is greater than predicted. The more modest growth in Indonesia cannot be regarded as bad when compared to the many other countries forecasted to record negative growth. For these reasons, actions by the Government and Bank Indonesia, employing fiscal, monetary and real sector policies to contain the impact of the crisis, will be vital and essential during 2009.

Indonesian’sEconomyin2008

During 2008, Indonesian’s economy maintained adequate performance amid the global turmoil. Overall economic growth reached 6.1% in 2008, slightly below the 6.3% recorded in the previous year. This growth was driven by private consumption and exports. The high consumption growth during 2008 was supported by continued strong purchasing power and improving levels of consumer confidence. Factors bolstering public purchasing power include rising incomes from the surge in export commodity prices, higher income levels for middle and upper income earners and the government safety net policy in the form of Direct Cash Transfers to compensate for the impact of the fuel price hike midway through the year.

Investment expanded by 11.7% during 2008 as a whole, ahead of investment growth one year earlier. Investment began to slow in Q4/2008 in response to weakening domestic demand and plunging external demand. In disaggregation by investment component, the primary contribution to growth in 2008 came from non-construction investment. However, construction investment slowed in comparison to the preceding year.

Government investment was also lower in 2008, due to the low rate of realised government capital expenditures.

Externally, despite the slowing growth in the global economy, Indonesia’s exports still managed 9.5% growth from the preceding year. The high rate of export growth was contributed by soaring world oil prices in the first half of 2008, followed by surging prices for exported agricultural and mining commodities. Further support came with high export demand from China and India, offsetting the slowing growth in major trading partners such as the United States and Europe. Growth in non-oil and gas exports, like before, was bolstered by primary commodities led by agricultural products such as palm oil and mining products, among others coal. Imports grew by 10.03%, ahead of the preceding year, due to the growing need for raw materials and capital goods to meet demand for exports and domestic consumption. This trend was especially noticeable in the initial quarters of 2008.

On the supply side, all economic sectors in Indonesia managed stable growth in 2008. Manufacturing, trade, hotels and restaurants sector and agriculture again accounted for the largest share of economic growth. However, analysed by contribution, the most important sources of growth were trade, hotels and restaurants sector, transport and communications and the manufacturing sector. In Q4/2008, the economy began to slow in all sectors, with the tradable sectors worst affected due to the fall in world demand.

Until mid-2008, economic growth in Indonesia was still contributing to the labour market. However, early in the second half and especially in Q4/2008, the deepening global crisis bore down on the labour market in Indonesia. During the first half of the year, open unemployment was in decline. Key to this was the performance of the agriculture sector, one the most important sources of employment. Workers were also absorbed into all business sectors, such as public services, trade and the transport and communications sector. Early in Q4/2008, pressure from the global crisis compelled several companies to make changes to their operations and upgrade business efficiency, with the result that some factories closed. These changes led to a rise in planned worker layoffs at some companies.

On the external side, the balance of payments came under pressure from the dynamics of the global economy during 2008. In the first half of the year, the balance of payments recorded a fairly strong surplus. Rising oil and

xvOverview

international commodity prices had a positive effect on export growth. Alongside this, robust domestic demand spurred vigorous growth in imports of capital goods, raw materials and even consumption items. Sharply rising imports shifted the current account into deficit in Q2/2008. At the same time, the capital and financial account and particularly portfolio investments continued to chart a surplus. The capital account surplus was buoyed by the issue of global bonds and foreign capital inflows, especially on the Government Bond market, which saw significantly increased activity in Q2/2008.

Early in the second half of 2008, pressure on the balance of payments mounted from the deepening world economic crisis. Within the current account, exports began tapering off in response to falling commodity prices. Similarly, the capital and financial account was impacted by diminishing investor interest in the domestic financial market. Foreign investors pulled out their capital in flight to quality exacerbated by deleveraging as financial institutions struggled to clean up balance sheets amid the growing intensity of the global crisis.

The brisk exodus of foreign capital, especially on the markets for Government Securities and Bank Indonesia Certificates (SBIs), resulted in a portfolio investment deficit in Q3/2008 that widened further in Q4/2008. The combined deficits in the current account and the capital and financial account contributed to a surging balance of payments deficit in the final quarter of the year. Measured for 2008 overall, the estimated balance of payments deficit came to USD2.2 billion. At end-December 2008, international reserves stood at USD51.6 billion. This represented a comfortable level of reserves, equivalent to 4.0 months of imports and servicing of official debt. The various dynamics in the global economy and balance of payments have influenced movement in the rupiah exchange rate. For the most part, the rupiah maintained relative stability until mid-September 2008. Key to this was the performance of the current account, which continued to chart a surplus, as well as prudent macroeconomic policy. However, after mid-September 2008, the deteriorating global crisis put pressure on the rupiah. The crisis triggered a global liquidity crunch and fuelled perceptions of risk on emerging markets, including Indonesia, while generating negative financial market sentiment. These factors prompted foreign investors to offload significant amounts of rupiah assets. Pressure mounted on the rupiah from early Q4/2008, causing the rupiah to fall 15.5%. However, looking at 2008 overall, the

average value of the rupiah was fall only 5.4% at Rp 9,666 to the US dollar.

Concerning prices, inflationary pressure in Indonesia remained strong until Q3/2008, but began to ease in Q4/2008. The high inflation until Q3/2008 was fuelled primarily by soaring international commodity prices, led by oil and food. This upswing impacted administered prices when the government was compelled to raise its prices for subsidised fuels. Early in the second half of 2008, inflationary pressure began to subside in line with the downturn in international commodity, food and energy prices. Following this, the Government acted to reduce prices for automotive diesel and gasoline in December 2008. In other developments, Indonesia benefited from a very good year of food crop production which, combined with slowing aggregate demand, contributed to lower inflationary pressure. In regard to fundamentals, falling inflationary pressure was also attributable to success in mitigating expectations of inflation that had mounted sharply in the wake of the fuel price hike. Taken together, CPI inflation in 2008 came to 11.06%, with core inflation recorded at 8.29%.

BankIndonesiaPolicyResponse

In 2008, the Indonesian economy came under the influence of events in the global economy. From the first half to the third quarter of 2008, rising international commodity prices and mounting pressure from aggregate demand fuelled high inflationary pressure. However, during Q3/2008, growth contracted in advanced countries, setting off a slowdown in the global economy. As the year entered the fourth quarter, international commodity prices began climbing down alongside slowing aggregate demand.

Responding to the the events in 2008, Bank Indonesia has adopted a range of policy actions adjusted to these developments in order to control inflation and bolster sustainable economic growth in the medium-term (Chapter V).

Until Q3/2008, monetary policy was targeted at subduing inflationary pressure driven by robust aggregate demand and the second round effects of a fuel price hike that had pushed inflation to 12.1%. The strong inflationary pressure from aggregate demand was also reflected in the onset of deficit in a current account beginning in Q2/2008 due to rapidly growing imports and expansion in the money supply, most importantly M1. In Q3/2008, bank lending

xv� Overview

was expanding vigorously at 36.3% (yoy). The rate of credit expansion was well ahead of the growth in bank depositor funds recorded at only 14.3% (yoy).

To curb the mounting inflationary pressure, Bank Indonesia progressively raised the BI Rate from 8% in May 2008 to 9.5% in October 2008. This monetary policy stance kept public inflation expectations from climbing further and eased the downward pressure on the balance of payments.

Following this, in early Q4/2008, Bank Indonesia predicted a declining inflationary pressure in the wake of falling world commodity prices and slowing aggregate demand as a result of the global economic crisis. Thus in December 2008, the BI Rate was lowered a further 25 bps.

In the banking sector, Bank Indonesia policy has focused primarily on strengthening the resilience of the banking system, particularly in preparation for implementation of Basel II. This banking policy includes expansion of the service capacity of the sharia-compliant banking industry.

However, in the second half of 2008 as pressure mounted from the global crisis, banking policy shifted to measures to mitigate risk of fallout from the global crisis on the domestic banking system. Due to pressure from the global crisis, liquidity became scarce on global and domestic financial markets. Several policies were introduced in response. Among the most important was increased access for commercial banks and rural banks to funding facilities in order to cope with the liquidity crunch.

Bank Indonesia has taken these actions while keeping close attention to risks in the domestic banking system and broader impact on the grassroots economy of society. Therefore, measures to ensure availability of funding for the Micro, Small and Medium Enterprise (MSME) sector, an important buffer for the grassroots economy, will also be monitored closely. This MSME lending plays a vital role for grassroots communities in enabling them to hold on and grow their businesses during difficult times, such as now in 2009.

In this regard, Bank Indonesia has issued regulatory provisions to allow banks greater room in managing their lending without sacrificing prudential banking and overall economic stability. These regulations encompass the following: extension of the transition period for Basel II implementation in calculation of capital charges for operational risk, simplification in opening of bank offices,

including sharia-compliant offices, adjustment in the risk weighted average assets (ATMR) for SMEs benefiting from loan guarantee schemes, changes in assessment of credit within certain ceilings, USD repurchase agreement (repo) facility for banks with Bank Indonesia and reductions in the required loan loss provision (PPAP).

These regulations will then be followed by regulatory measures at an intense level to improve banking transparency, strengthen liquidity risk management and regulate banking industry derivative products. Under this policy, all banking industry agents, including conventional and sharia-compliant commercial banks, will have adequate space for operating the intermediation function while maintaining a high priority on banking prudence and risk management.

Within the payment system, Bank Indonesia will do its part to ensure that the global financial crisis does not disrupt the national payment system. To prevent systemic risk and risk of counterparty default, which tends to mount under crisis conditions, and to safeguard the smooth operation of payments, Bank Indonesia has introduced changes in the payment system settlement schedule on certain days. Payment system settlement will operate after calculating the required funds for the Short-Term Funding Facility (FPJP), if any banks have applied for FPJP on that day. Even with this added step, settlement will still be completed on the same day. This measure is intended to provide an extra measure of time for members in the systemic bank category and experiencing short-term funding mismatch to settle their obligations at end of day.

In the payment system, the general policy of Bank Indonesia is to improve currency circulation in terms of speed, efficiency, security and reliability, strengthen front-line cash services and improve the quality of currency. In non-cash payments, policy is directed at mitigation of payment system risks, oversight of the payment system, improved discipline in use of cheques and clearing payment orders (bilyet giro), regulation of money remittances, efficiency improvements in the management of government accounts and promotion of non-cash payments.

ExtentoftheCrisisandOutlookforGlobalEconomicRecovery

Looking forward, the prospects for the Indonesian economy in 2009 will depend largely on recovery in the global economy and adeptness of the Government,

xv��Overview

Bank Indonesia and economic actors in responding to the dynamics of the global economy (Chapter (II). The global economic recovery process is likely to have major bearing on the Indonesian economy in 2009. Within this context, an assessment of the outlook for global economic recovery is essential.

The world economy is now in the depths of the most severe global economic crisis since the depression of 1929. The various measures taken to cope with the present crisis of 2009 comprise the leading agenda for policy makers and economic actors around the world.

The current global financial crisis is not the first that has struck the world. Economic crises and financial instability have come and gone throughout history. The changing characteristics of crisis over time have resulted in different impacts on the global economy. In recent years, global financial markets have been marked by a phenomenon of global excess liquidity, soaring oil prices and the proliferation of financial innovations reflected in the carry trade, securitisation and leveraging activity by financial institutions. These events have stretched the global financial system to the limit. The emergence of these financial innovations also led to increased moral hazard, in particular from the perception of “too big to fall” in the case of US financial products. Also supporting this were stellar ratings issued even for subprime mortgage-based products. The collapse in property prices followed by falling prices for subprime mortgage-based securities in the United States ultimately rocked the US financial market to its foundations. This crisis, taking place within an integrated global economy, then multiplied and spread throughout the world.

Having learned from the failures in dealing with the Great Depression during the 1930’s that led to a very slow recovery, some countries have taken aggressive measures. Governments around the world have launched fiscal stimulus packages to provide a boost to weakening economies. Central banks in various countries have joined together in pumping liquidity into economies at unprecedented levels. These actions were taken to prevent a downward spiral that would devastate the financial sector and real sector.

In the financial sector, government of various countries have taken action to rescue their economies through a range of interventions, including blanket guarantees for bank deposits, underwriting or takeover of toxic assets,

capital injection in financial institutions or even takeover of those institutions.

Although these actions have not been sufficient to resolve all the emerging problems, the aggressive policies also offer some light at the end of the tunnel. If these policies can be properly implemented and operate in a consistent manner, there is greater hope for a turnaround in the world economy in Q4/2009. If this happens, the current global crisis will not slide into a depression such as suffered during the 1930’s.

Integration of the Indonesian Economy amid the ChallengesoftheGlobalCrisis

For the Indonesian economy, the current global crisis is a lesson on the consequences of the growing integration of Indonesia into the global economy (Chapter III). Analysed by trade, Indonesia has become progressively more integrated into the global economy in recent years. This is reflected in the ratio of exports and imports to GDP, which has climbed sharply since 1980. This integration has also been accompanied by diversification of export desticountries and commodities.

On the financial side, the Indonesian economy is one of the most open in ASEAN, ranking after Singapore. Reflecting this is the expanding share of Net Foreign Assets or even Foreign Direct Investment to GDP, in addition to foreign holdings in various investment instruments. Even so, inflows continue to be dominated by portfolio capital, rendering Indonesia susceptible to capital reversal due to the very sensitive nature of these funds to sentiment. Furthermore, the majority of FDI flowing into Indonesia is not export oriented, for the reason that Indonesia has not become part of the supply chain in the global economy,

On one hand, the economic integration has generated added dynamism and provided many benefits for the Indonesian economy. The other side to this, however, is that economic integration also carries the risk of instability, as can be seen during a time of global crisis.

Concerning benefits, economic integration will bring greater prosperity through increased movement of goods and capital among the countries involved. The movement of goods through international trade has raised the general levels of prosperity in needy countries. At the same time, movement of capital will bring benefits because resources will always be allocated

xv�� Overview

to the most productive venues of economic activity. Financial globalisation is also seen as assisting a country in minimising domestic economic fluctuations. Access to offshore funds can be used to accelerate growth in aggregate demand during times of limited availability of domestic financing.

The integration of foreign capital inflows has also stimulated expansion in the domestic financial sector through increased market liquidity. For this reason, increased integration of the financial sector is seen as key to applying market discipline on decision makers, introducing financial product innovations, promoting technological advancement, and promoting the competition that will strengthen efficiency within the national banking industry.

The downside is that economic integration also carries risk of instability. The benefits of financial liberalisation have been eroded by asymmetric information and distortions in the global and domestic economy. The reality is that flows of information on financial markets are imperfect in both transparency and integrity. This has led to problems in regard to incentives, such as moral hazard and adverse selection. As a result, investors tend to herding, taking their cues from other investors perceived to possess better quality information.

The global financial crisis triggered by the subprime mortgage failures is an example of the vulnerability of financial liberalisation. The crisis, having spread to many countries, has now led to highly volatile movements of capital. The global crisis has forced corporations, financial institutions and households in developed countries to clean up their balance sheets, among others by pulling portfolio capital back to their home countries. The portfolio capital that once poured into Indonesia has suddenly been pulled out in significant volume, putting pressure on the balance of payments and driving down the value of the rupiah. Nevertheless, the capital reversal from emerging market countries, including Indonesia, has now eased.

The various recovery actions pursued by advanced countries are expected to halt the downward spiral in economic activity. When normality in lending can be restored in advanced countries, inflows into emerging markets, including Indonesia, are also forecasted to recover progressively to normal. Accordingly, the Indonesian economy needs to position itself to retain the image of a secure, comfortable environment for business

and investment. It is important to maintain joint efforts to reassure investors of the quality and prudence of Indonesia’s macroeconomic management. In addition, to promote longer-term capital flows, improvement of the investment climate remains a priority.

IndonesianEconomicOutlookfor2009

As an open economy, Indonesia is inevitably impacted by the fallout from the ongoing global crisis. This is the natural consequence of the growing integration of Indonesia into the world economy. In 2009, the world economy is predicted to head towards a deeper recession, and this will naturally influence the dynamics of the Indonesian economy. However, the various actions taken by some countries to move forward with aggressive fiscal and monetary stimulus are expected to keep the world economy from sliding into depression.

To this end, common efforts by the government and other national stakeholders to minimise shocks to the Indonesian economy during 2009 will be vitally important. Also necessary are sustained actions to build macroeconomic resilience, improve competitiveness and bolster the sources of domestic economic resilience.

In the global banking sector, the recapitalisation process in some countries will also take considerable time and require enormous injections of capital. At the end of 2008, recapitalisation in the global banking system had reached a total of 890 billion US dollars. This figure for the cost of the crisis only takes account of losses from the financial crisis after 2007. The second round effects on the banking system from deterioration in world business from recession have not been fully assessed. Accordingly, the world economy still faces serious issues and difficulties in mounting a quick recovery in 2009.

In assessing these global developments and the capacity of the domestic economy, Indonesia is predicted to chart significantly reduced growth in 2009. Economic growth will reach around 4.0%, due to falling exports that will in turn impact consumption and investment. Nevertheless, this forecast still carries significant downside risk, especially if the global economic recovery advances more slowly than expected. On the domestic front, constraints on bank financing also pose a risk that must be monitored carefully.

One of the advantages of the Indonesian economy is the large population that represents a potential market

x�xOverview

supporting economic growth. During 2009, economic growth in Indonesia will be driven primarily by domestic demand and especially household consumption. Despite predictions of slowing, household consumption is still expected to show resilience, particularly in view of the government plans for an added fiscal stimulus in 2009. Furthermore, Government plans for earlier realisation of the stimulus, civil servant pay rises, the election year and increases in provincial minimum wage levels are also predicted to foster increased household consumption.

Unabated external turbulence means that further pressure is predicted to bear down on Indonesia’s balance of payments, despite a levelling trend. Falling exports on one hand will be offset by less vigorous imports, result of weakening aggregate demand. This in turn may bring improvement to the current account during 2009.

Concerning the capital and financial account, the persistent global liquidity crunch and still strong perceptions of emerging market risk, combined with the added sale of US treasury bills to finance the enlarged fiscal stimulus, mean that capital inflows will fall short of optimum levels. Nevertheless, the pressure of capital outflows from Indonesia is predicted to ease in 2009. Government capital flows are also expected to improve in view of plans to issue foreign currency bonds, foreign currency Islamic bonds (sukuk), draw down external borrowings and draw on standby loans.

While external pressure is mounting, the downward trend in international commodity prices has eased domestic inflation. The decline in commodity prices has created room for the Government to reduce prices for automotive diesel and gasoline. In addition, government efforts to ensure adequate supplies of foodstuffs through the dry season helped stabilise food prices and bring down volatile foods inflation. This in turn has assisted in lowering public expectations of inflation.

Through these developments, CPI inflation in 2009 is forecasted to maintain a declining trend to 5.0%-7.0%. Looking forward, Bank Indonesia will monitor potential inflationary pressure from the exchange rate in order to keep future inflation on track with the medium and long-term inflation target.

In 2009, Indonesia’s banking industry faces the twin challenges of slowing domestic economic growth and prolonged tight liquidity on the global market. Nevertheless, the overall banking industry will still retain

considerable resilience, as reflected in the CAR and NPL key banking indicators (Chapter IV). In 2009, the capital adequacy ratio (CAR) is expected to remain high, above the 8% regulatory minimum. With capital adequacy in good shape, the domestic banking industry also has ample funding sources from depositor funds and other resources to support exports and promote economic growth.

Based on the current strength of capital, credit growth in Indonesia is predicted to hold in the 15%-18% range during 2009, in contrast the faltering credit expansion in advanced countries such as the European Union and the United States in 2008 and possible negative credit growth in 2009. This credit expansion will be targeted a high performing sectors with low risk, such as MSMEs, while maintaining prudence to ensure that NPLs remain within safe limits.

Risks, Challenges and Bank Indonesia Policy Direction

RisksfortheIndonesianEconomy

a. Further slowing in the global economy

A major risk for the Indonesian economy is the possibility of the global economic slowdown moving beyond projections . Various indicators show that the global recession will last throughout 2009. The impact of this prolonged recession will be felt in the weakening of the Indonesian economy as a whole. This will pose challenges for actions aimed at halting the economy from steeper decline.

Some advanced countries are expected to maintain negative growth, while more and more emerging economies are likely to suffer from the impact of the crisis. This will erode Indonesian exports even further, putting added pressure on the current account.

The current adverse condition of the global economy also increases the risk of protectionist policies in various countries aimed at protecting their domestic economies and preventing increased unemployment, while also keeping out foreign goods. The risk of this protectionism will lead to deteriorating volume of world trade, which in turn may prolong the global crisis.

b. Stability of the banking industry

Another source of domestic risk is the persistent issue of banking industry stability related to the segmented

xx Overview

interbank market. If this situation is allowed to persist, liquidity will not be evenly distributed within the banking system even though aggregate banking liquidity remains sufficient. Added to this, the potential for rising non-performing loans during the economic downturn in Indonesia means that domestic banks must take action to raise capital. This portends to constrain available liquidity on the market.

c. Fiscal Financing

The counter-cyclical policies pursued by the government through a range of actions, such as the fiscal stimulus, will in turn require financing. Under the present condition of the global economy, there is steadily diminishing room to raise fiscal financing on either the international or domestic financial markets. At this time, the space for raising funds on the global financial market is tight. If these financing issues cannot be properly resolved, pressure could bear down on the balance of payments and this in turn would pose even more severe difficulties for economic recovery.

FutureChallengesfortheEconomy

a. Resolving external imbalances

The global economic crisis has influenced the domestic economy primarily through the external channel. The source of vulnerability and direct impact from the crisis lies in the pressure on Indonesia’s balance of payments. The flagging global economy has depressed demand, which in turn has hit exports. In 2009, the current account is forecasted to run a deficit at about 0.53% of GDP due to deteriorating export performance, while imports will decline but not at the same rate. The impact on the balance of payments from the global crisis will bear down mainly on the capital and financial account. With the processes of deleveraging and global bank recapitalisation expected to last a considerable time and demand vast quantities of capital, global liquidity is forecasted to remain tight. Only very limited capital inflows on the domestic financial market are therefore expected.

External imbalances emerging from the pressure on Indonesia’s balance of payments pose a challenge for the Indonesian economy in 2009. In regard to the capital and financial account, the ongoing global liquidity crunch may add to the difficulties of raising external financing. Furthermore, limited supply of foreign currency on the domestic market under the present conditions of tight

global liquidity will exacerbate risk in the rupiah exchange rate.

In responding to these various pressures, Bank Indonesia will keep a close watch on developments in the rupiah over time. To prevent excessive pressure on the rupiah exchange rate, during 2008 Bank Indonesia pursued a serious of measure involving the restructuring of forex trading activity. This move was crucially important in minimising foreign currency speculation.

For the most part, the regulation of customer purchases of foreign currency from banks has help curb speculative transactions. Nevertheless, Bank Indonesia envisages improvements to optimise and strengthen efficiency in ongoing policies.

To cope with these issues, Bank Indonesia will optimise policy further to minimise uncertainty over movement in the exchange rate. In addition, Bank Indonesia has taken further action to regulate financial derivative instruments not based on underlying transactions in the real sector, which left to themselves could fuel pressure on the rupiah.

The steady slowing in the global economy will in turn also worsen the liquidity crunch on the international financial market. This will become a challenge in maintaining stability in the rupiah. So far, export revenues and foreign capital inflows have been vital in keeping Indonesia supplied with foreign exchange, especially to cover the heavy demand for foreign currency to pay for imports and service external debt. The persistent uncertainty over global market liquidity has kept capital inflows at a limited level.

The high risk spread for Indonesia is an added factor spurring exchange rate volatility when changes occur in market sentiment. The growing diversity of financial market instruments such as structured products, which may be used for speculation, also represents a potential source of downward pressure on the rupiah.

b. Improving the effectiveness of monetary policy transmission

The looming challenge in monetary policy implementation concerns how to improve monetary policy effectiveness and transmission on the money market. Monetary policy will operate more effectively if there is optimum transmission of policy signals from Bank Indonesia to the money market, reflected in interest rate movement

xx�Overview

in tandem with the BI Rate. Bank Indonesia will work continually to improve monetary policy effectiveness and expedite the transmission of monetary policy.

Challenges preventing optimum monetary policy response on the financial market include uncertainty over business prospects, which raises the risk premium for debtors. To address this issue, Bank Indonesia works constantly to inform the public of the economic outlook and future direction of monetary policy. In addition, Bank Indonesia will keep encouraging some banks to act more as market leaders in setting the pace in deposit and loan interest rates. These actions will enable reductions in the monetary policy rate (the BI Rate) to be followed by similar movement in bank deposit and lending rates.

c. Segmentation and liquidity problems on the financial market

The liquidity crunch has taken on urgent importance for banks and financial markets during this time of global crisis. Pressure from portfolio adjustments has squeezed the liquidity of several banks, although aggregate banking liquidity remains sufficient. In the view of Bank Indonesia, however, the problem faced by the banking industry involves the segmentation of the financial market. Segmentation among banks has led to disparities in availability of liquidity and is a cause of the tightened liquidity in recent months. This segmentation is also the factor that poses recurrent challenges for Bank Indonesia in policy implementation.

The segmentation on financial markets has lead to a widening in the spread between the lowest and highest overnight (O/N) rates in interbank transactions. Also reflecting this is the wide differential between interbank rates and rates with longer tenors, due to persistently heavy demand for liquidity at certain banks. As a result, some banks have been plunged into liquidity difficulties and one bank was suspended from clearing by Bank Indonesia during 2008. However, the loose bias monetary policy and the various BI policy actions in monetary policy operations have reduced interbank risk. Reflecting this is the yield on interbank rates, which has returned to normal and has steadily eased since the end of 2008.

Difficulties are predicted to arise in bank compliance with the 2.5% secondary reserve requirement in October 2009 if the issues of segmentation and tight liquidity at some banks are not resolved. Within this context, Bank Indonesia will continue appealing to banks to take

immediate steps to prepare themselves and develop comprehensive plans for compliance with the secondary reserve requirement.

The various policy thrusts to be pursued by Bank Indonesia in 2009 to resolve the segmentation and liquidity issues include: extension of the tenor for the Bank Indonesia short-term facility, expanded scope of assets eligible for pledging as collateral for the Bank Indonesia short-term facility and further consolidation of the banking system.

Bank Indonesia Policy Direction

On the monetary side, Bank Indonesia has pursued a series of actions to keep the economy from steeper decline. This involves a monetary policy stance conducive to promoting domestic demand, while upholding the commitment to safeguard economic stability in the medium and long term. Opportunity remains for further relaxation of monetary policy, particularly if the inflation outlook stays on track with the medium-term inflation target. This expansionary monetary policy direction is vital to reducing the uncertainties and vulnerability of the Indonesian economy in both the financial sector and real sector.

In regard to efforts to stabilise the exchange rate, Bank Indonesia will consistently seek the most optimum use of various policies to minimise exchange rate volatility. In addition, Bank Indonesia has taken further action to regulate financial derivative instruments not based on underlying transactions in the real sector, which left to themselves could fuel pressure on the rupiah.

On the other hand, relaxation of monetary policy through interest rate cuts will not provide a complete solution. Amid the uncertain outlook for the economy and growing risks, banks will continue to exercise greater caution in lending by applying an increased risk premium. In addition, the risk of mounting non-performing loans (NPLs) will compel banks to raise additional capital.

In banking, Bank Indonesia policy will pursue various efforts to safeguard the resilience of the national banking system in the face of the global crisis. Bank Indonesia will issue regulations aimed at allowing banks greater flexibility in lending while remaining within the prudential framework and safeguarding medium-term economic stability. More relaxed policies will be introduced for low-risk business sectors, such as MSMEs, that have broad impact on the lives of the population. This sector

xx�� Overview

has demonstrated its capacity for growth and is strongly resilient to crisis.

In the national payment system, Bank Indonesia policy continues to focus on meeting public demand for payment instruments and services, supporting monetary and banking policy effectiveness and maintaining financial system stability.

In the real sector, weakening global demand has also prompted downsizing in export-oriented companies, which has reduced credit demand from the real sector. Nevertheless, with bank capital now in a relatively strong position, reinforced by adequate liquidity, good reasons exist to expect a positive response from the banking system. In this regard, Indonesian banks are expected not to hold interest rates at current levels, as this in turn would set off a negative feedback effect from the real sector.

On the fiscal side, a range of public policies is aimed at counter-cyclical actions to keep the economy from weakening further. Amid the constraints on other sources of growth, the fiscal stimulus is a key instrument for spurring the domestic economy to grow and delivery positive benefits to the public. The fiscal consolidation and reforms implemented by the government in recent years have not only strengthened fiscal sustainability, but also created greater fiscal space for stimulus. On the other hand, the slowing economy and gloomy condition of the financial market has also adversely impacted the stimulus capability of the government.

ConcludingRemarks

With the current global financial crisis taking its toll on all sides, the Indonesian economy faces enormous challenges in 2009. The dynamics in the global economy will have a major bearing on the future of the Indonesian economy. Despite this, the domestic fundamentals underpinning the Indonesian economy are demonstrably in good shape and offer a platform for securing the economic future.

The execution of the fiscal stimulus will be key to preventing a sharp drop in domestic demand. The fiscal stimulus is expected to deliver benefits to the public more rapidly than would a monetary stimulus due to the lag in transmission of monetary policy before effective impact is felt in the financial market and banking system. Moreover, when business is shrouded with uncertainty, banks tend to exercise greater caution in their lending. Under the conditions of the present global crisis, with uncertainties on all sides, monetary policy must be supported by other policies in the banking, fiscal and real sectors. To keep economic growth at about the 4.0% mark, it will be important to give consideration to policies capable of bringing quick results in the real sector.

In 2009, there is confidence that Indonesia will be in better condition compared to other countries facing the prospect of sharply reduced growth and even deep contraction. Developed countries such as the United States, Japan and the UK will chart negative growth. In China and India, growth will be significantly reduced. With growth rates sliding on a global scale, many countries have launched fiscal stimulus packages in various forms aimed at shielding the poor from even worse impact from the crisis. These stimulus packages consist of investment, education, reductions in fuel prices, free transport for the poor, credit for MSMEs and even construction of infrastructure.

Given Indonesia’s potential, bolstered by numerous achievements and the resilience now in solidly in place, the Indonesian economy is predicted to maintain growth and deliver benefits to the population. In view of the resolute actions taken, close coordination and the constructive cooperation now in place among the various stakeholders, the Indonesian economy is expected to hold ground and ride out the global financial crisis. The management of the economy amid the onslaught of the financial crisis calls for the concerted support of the many different actors in our nation.

xx��Overview

xx�v Overview

Condition of the Economy | Economic Outlook and Policy Direction

PERFORMANCE OF THE INDONESIAN ECONOMY, OUTLOOk AND POLICY DIRECTIONI.

Chapter 1

In 2008, the Indonesian economy came under enormous pressure from mounting uncertainty on global financial markets, the significant world economic slowdown and drastic changes in global commodity prices. Even though almost on par with the previous year, economic growth in 2008 tapered off with increasing pressure on macroeconomic stability during the second half of the year. The sheer weight of external pressure was reflected in the deteriorating performance in the balance of payments, downward trend in the exchange rate and high inflation. Even so, the Indonesian economy did not fare too badly in comparison

to other countries. This was largely attributable to strong domestic demand supported by prudent, consistent fiscal and monetary policies. Those policies were also reinforced by various measures in the real sector and financial sector aimed at safeguarding macroeconomic stability while sustaining momentum for long-term economic growth.

The fallout from the gloomy world economic turbulence on the Indonesian economy is reflected mainly in the balance of payments for 2008, the exchange rate and inflation. Positive gains in the balance of payments during the first half of 2008 were reversed by drastic setbacks in the second half of the year. The current

OUTLOOk AND POLICY DIRECTIONPERFORMANCE OF THE INDONESIAN ECONOMY,

I.

2 Performance of the Indonesian Economy, Outlook and Policy Direction

Chapter 1

account began charting a deficit in QII-2008, and ultimately the capital and financial account followed suit in QIV-2008 due to offloading of financial assets by foreign investors spooked by worsening sentiment on global financial markets. In similar movement, the balance of payments performed less strongly, eventually posting a deficit in QIII-2008. The downturn in the balance of payments in turn triggered strong exchange rate depreciation accompanied by high volatility. The exchange rate, which had held relatively stable until August 2008, came under heavy pressure and registered steep depreciation. During this time, soaring world oil prices forced the Government to take action to safeguard fiscal sustainability by raising prices for subsidised fuels. This led to rising inflationary pressure, which had persisted at a high level since the beginning of the year due to strong global commodity prices. Nevertheless, inflationary pressure gradually eased near the end of the year, in keeping with

cuts in subsidised fuel prices and falling global commodity prices.

In 2009, the Indonesian economy will face some formidable challenges, most importantly from the external sector, due to the impact of the ongoing global crisis and uncertain prospects for recovery. A range of policy actions is therefore essential to prevent steeper decline. On the monetary side, space is still available for future relaxation of monetary policy as inflationary pressure maintains a downward trend. This policy will be implemented with prudence on a consistent course for achievement of the low, stable long-term inflation target. In the banking system, regulations to strengthen banking intermediation and introduce more comprehensive supervision will be given priority to build a more robust banking system to support financing for the economy, while enabling banks to operate in an environment of increasingly modern and innovative business practices.

OUTLOOk AND POLICY DIRECTION

3Performance of the Indonesian Economy, Outlook and Policy Direction

Chapter 1

CONDITION OF THE ECONOMY

1.1

During 2008, the condition of the Indonesian economy was marked by highly dynamic, challenging developments brought on by the turbulence in the drastically changed world economy. Despite the high growth until QIII-2008, the Indonesian economy slowed considerably in the final quarter as the world economy slid further into decline. Growth slowed across all components of aggregate demand, with exports plunging sharply in line with tumbling commodity prices and slackening growth in trading partner countries.

Despite significant slowing in the final quarter of 2008, economic growth of Indonesia reached 6.1% for 2008 overall, almost on par with the previous year’s growth rate of 6.3%. As late as QIII-2008, the Indonesian economy was still forging ahead. This is explained to a large extent by high growth in exports, which soared in line with escalating global prices for mining and agricultural commodities. Bolstered by the robust economic growth in China and India, Indonesia’s exports charted buoyant growth in the first two quarters of 2008. Strong export growth then provided added momentum to purchasing power, especially in export-producing regions, which contributed to high levels of consumption and investment. As could be expected, import growth also soared in response to the need for raw materials and capital goods. Despite this, Indonesia’s economic growth began tapering

off from the beginning of the second half of 2008, due to the steeper turn in the global economic slowdown and falling global commodity prices. These developments led to falling levels of export growth. In a similar vein, growth in household consumption, investment and imports also registered decline.

The steep downturn in the world economy was accompanied by mounting uncertainty and risk on global financial markets. The spreading fallout from the problems in the US housing sector and bailout of several financial institutions by the government and the Federal Reserve continued to meet with negative response from markets, which intensified the turmoil on global financial markets. The unstable condition of financial markets subsequently triggered negative sentiment that blunted the risk appetite of investors and set off a trend of global portfolio reshuffling. In addition to the high levels of uncertainty, tight liquidity increasingly hampered efforts to boost exports and attract foreign investment.

Pressure from the world economic slowdown and turbulent global financial markets was also reflected in deteriorating performance in the balance of payments in the second half of 2008. Over the year, the balance of payments recorded a 2.2 billion US dollar deficit. International reserves at end-2008 stood at 51.6 billion


Chapter 1

US dollars, equivalent to 4.0 months of imports and servicing of official external debt. In the first half of 2008, the balance of payments showed quite solid performance, reflected in international reserves and a surplus in the overall balance at 59.4 billion and 2.35 billion US dollars. The current account charted a 1.3 billion US dollar surplus on buoyant volume of exports and strong commodity prices. At end-June 2008, Indonesia’s commodity export price index was up 36% over the end-December 2007 position. Reinforcing this was the capital and financial account that booked a surplus at 915 million US dollars, mainly from portfolio capital inflows totalling 3.8 billion US dollars.

However, these relatively conducive external conditions changed with drastic deterioration in the second half of 2008 triggered by massive losses from the subprime mortgage crisis in the US and the impact on the US real sector that far exceeded expectations. These changes led to significant and rapid downturn in Indonesian exports. The current account surplus quickly evaporated due to falling exports and rising imports driven by the continued vigorous pace of economic activity. In the capital and financial account, loss of foreign investor confidence in emerging markets led to capital outflows, pushing up the account deficit.

The impact of the global crisis is also reflected in the movement of the rupiah, which since October 2008 has seen considerable volatility combined with strong downward pressure. During the first half of 2008, the current account surplus and prudent macroeconomic responses were sufficient to contain pressures generated by external turbulence. However, since QIII-2008, the fallout from the global financial crisis has mounted with the collapse of major financial institutions in the US and the deleveraging process on global financial markets. Heightened risks on a global scale triggered a rush to pull foreign portfolio investments out of Indonesia’s financial market. On the other hand, the current account sustained pressure from falling commodity prices and declining economic activity in trading partner countries. These events led to increased pressure on the rupiah, which sank to a low of Rp 12,150 per US dollar in November alongside sharply increased volatility at 4.67%. On average for the year, the rupiah depreciated 5.4% from Rp 9,140 (2007) to Rp 9,666 per US dollar (2008).

At the same time, soaring global prices for crude oil and food commodities also affected CPI inflation in Indonesia, which mounted to 11.06% in 2008. Disaggregation of inflation factors shows that the rise in CPI inflation was spurred mainly by increases in administered prices.

The inflation contribution from the administered prices category widened 2.24% from the 0.75% contribution in 2007 to 2.99% in 2008. This inflation was triggered by escalating world oil prices that forced the Government to raise subsidised fuel prices in May 2008 by 28.7%. The impact of this fuel price hike was exacerbated by supply shortages of relevant commodities, such as kerosene and bottled LPG in some regions. Besides the 1.22% first round effect, the fuel price also produced a second round effect of 0.82% from increases in transport fares. Rising world food prices, despite stable condition of supply, also increased the volatile foods contribution to inflation from 2.09% to 2.59%. Taken together, these factors also led to a 1.73% rise in core inflation from 6.29% in 2007 to 8.29% in 2008. Another factor in the heightened core inflation was increased public expectations of inflation related to escalating world food commodity prices and distribution bottlenecks affecting supply.

On the fiscal side, the fuel subsidy allocation in the 2008 Budget was no longer sufficient to cope with high world oil prices and heavy volume of crude oil imports, a situation that was feared could derail fiscal sustainability. In response, the Government decided to raise domestic fuel prices by an average 28.7% in May 2008. The increased prices remained unchanged until December 2008, when world oil prices were in decline. To ensure optimum implementation of the 2008 Budget, the Government took various safeguard measures on the expenditures side. These actions include the use of fiscal risk reserves; approximately 10% savings from expenditure cuts, refocused activity priorities and postponement of non-priority activities in line ministry/agency budgets; and cuts in budget expenditures for the fuel subsidy and electricity subsidy. In a parallel action to ease the burden of the population from escalating prices for key domestic foodstuff commodities, the Government launched the Price Stabilisation Policy Package (PKSH). While reducing the fuel subsidy, the Government also compensated for this cut by providing Direct Cash Transfers (BLT). Later, however, with oil prices moving lower, the Government announced a cut in fuel prices in December. In the overall outcome, the deficit from Government financial operations came to 0.1% of GDP, well below the 1.7% recorded in the previous year.

Responding to the potential for heightened macroeconomic instability related to high oil prices and the global financial crisis, the Government and Bank Indonesia pursued a series of macroeconomic stabilisation policies. At end-Q1/2008, Bank Indonesia kept the BI Rate on hold at 8%, mainly in view of the condition of excess liquidity and wide interest rate differential. A further


Chapter 1

consideration in this decision was that interest rate stability would support economic growth, which was still in an expansion phase, and would not disrupt financial system stability. However, uncertainties on the global financial market and the steep rise in oil prices in April 2008 fuelled strong inflationary pressure from escalating food and non-food prices. In view of the potential for continued pressure on macroeconomic stability, Bank Indonesia embarked on gradual, measured increases in the BI Rate beginning in April 2008, with the rate climbing 150 bps to 9.5% by October 2008.

These macroeconomic stabilisation measures were also reinforced by various policy actions aimed at mitigating the negative impact of the intensifying global financial crisis. In October 2008, Bank Indonesia (BI) issued the exchange rate stabilisation package to manage foreign exchange supply and demand. The foreign exchange supply stabilisation policy includes regulations on FX Swaps, the foreign currency reserve requirement, services for corporate entities and export drafts (WEB). Similarly, to manage foreign exchange demand, other policies were introduced to prohibit banks from engaging in customer FX transactions without underlying transactions and to make foreign currency available for servicing external borrowings in the short-term. The Government also reinforced these actions with regulations pertaining to the Indonesia Financial Safety Net (IFSN), increase in the limit of bank customer deposit insurance to Rp 2 billion, controls on selected import commodities, reductions in export taxes on CPO, requirement for SOEs to deposit foreign currency funds in domestic banks, buyback of SOE shares and Government Bond (SUN), ban on short-selling on the stock exchange and extension of existing bilateral swap agreements. Details of the Bank Indonesia policy responses are presented in Chapter V.

In the business community, the impact of the deteriorating global economy has met with a range of responses. To copy with falling demand, most business agents have resorted to efficiency improvements by slashing inventories and operational costs. A considerable degree of flexibility is evident in the mining and agriculture sectors, which were able to draw down inventories and cut costs when sales plunged. On the other hand, manufacturing has less flexibility to make similar adjustments, as is reflected in the persistently high costs and inventory levels despite falling sales.

The various risks pertaining to global economic developments and policy implementation to mitigate the potential for adverse impact from the global crisis will continue to daunt the outlook for the Indonesian

economy. Not only is the world economic slowdown predicted to take a steeper than expected turn, but the heightened uncertainty on the global financial market and fluctuation in world oil prices must be monitored continually for impact on the balance of payments and the exchange rate. At home, a close watch must also be kept on the potential impact of the deteriorating economic situation on banking stability and performance. In this regard, the policy actions aimed at mitigating the adverse impact of these factors must be implemented immediately with proper coordination. After factoring in various risks, Bank Indonesia predicts economic growth in 2009 to reach 4%-5%. This growth will be supported by increased Government spending to promote investment and boost public purchasing power. Investment growth is therefore predicted to recover, buoyed by Government investment in infrastructure and the oil and natural gas sector and the implementation of various regulatory amendments and new regulations to provide incentives to business.

CPI inflation in 2009 is predicted to ease to the 5%-7% range in keeping with low oil prices and subdued pressure from imported inflation. The 2009 inflation forecast is also based on improving public expectations of inflation, supported by relative stability in the exchange rate, minimum increases in administered prices, fostered supply of goods and services with little disruption in staple goods distibution.

In view of the macroeconomic and inflation outlook, Bank Indonesia will work consistently to keep inflation and inflation expectations on track with the medium-term inflation target. On the other hand, the emergence of indications of slowing economic growth and negative output gap prompted Bank Indonesia to maintain caution in safeguarding macroeconomic stability in order to sustain momentum for accelerated economic growth. This monetary policy stance was also supported by closer coordination with the Government to foster policy consistency and harmony.

Macroeconomic Performance

During 2008 as a whole, Indonesia’s economic growth reached 6.1% (yoy), ahead of neighbouring countries even in spite of the significant impact of the world economic slowdown on the domestic economy, most importantly in QIV-2008. Analysed by distribution, private consumption and exports again dominated GDP in 2008. However, the share of private consumption to GDP eased in comparison to 2007, in contrast to the mounting share of exports (Table 1.1). The increased share of exports to


Chapter 1

GDP is explained to some extent by export growth driven by soaring commodity prices in the first half of 2008. Accordingly, export demand and private consumption retained their place as the most important contributors to total economic growth in 2008.

On the demand side, the effect of weakening global demand in the first half of 2008 was still offset by high world commodity prices. As a result, exports and investments maintained growth. The vigorous growth in exports and investment bolstered public purchasing power, with household consumption forging ahead in the first half of the year. In the second half of 2008, however, Indonesian exports were hit by the downturn in global economic growth and heightened uncertainty on financial markets, and slowed significantly during the final quarter of the year. The worsening outlook for the world economy also prompted business to postpone investment spending and to pursue efficiency improvements, resulting in slowed investment growth with knock-on effects on public purchasing power. Some businesses began laying off workers, driving down purchasing power even further. On the other hand, softening domestic demand was matched by reduced need for imports, with import growth slowing considerably in the last quarter of 2008.

During 2008, household consumption charted more vigorous growth compared to the previous year. The high rate of household consumption was buoyed by stable public purchasing power and improving levels of consumer confidence. Also bolstering public purchasing power were rising incomes from the surge in export commodity prices, higher incomes in the middle to upper

class earning brackets and the Government programme for Direct Cash Transfers. Further indication of improved purchasing power came from the upward trend in growth of real disposable income. Other indicators, such as farmer terms of trade and worker wages, also showed improvement over the preceding year. At the same time, consumer confidence, which suffered a drop triggered by the mid-year fuel price hike, managed to recover alongside improvement in purchasing power and income expectations.

Despite slowing growth in the last two quarters of 2008, investment growth for 2008 overall reached 12.6% (yoy), up from the previous year. This improvement was related to business response to high export commodity prices in the first half of 2008. Also supporting strong investment growth was business confidence in the economic outlook, reflected in improved business sentiment. Analysed by component, investment growth in 2008 was driven mainly by non-construction investment, estimated to have climbed 28.1% (yoy). This represents a sharp increase over growth in 2007. In contrast, construction investment grew by an estimated 7.6% (yoy), down from one year earlier. Growth in Government investment is also estimated lower due to the low rate of realised Government capital expenditures. The strong investment growth during the January-November 2008 period was dominated by Foreign Direct Investment (FDI), in contrast to sluggish performance in domestic investment. The largest share of FDI flowed into the transportation and telecommunications sector, while domestic investment was led by manufacturing.

Items 2005 2006 2007*2008**

2008**I II III IV

Growth(%)Total Consumption 4.3 3.9 4.9 5.5 5.5 6.3 6.4 5.9

Private Consumption 4.0 3.2 5.0 5.7 5.5 5.3 4.8 5.3Government Consumption 6.6 9.6 3.9 3.6 5.3 14.1 16.4 10.4

Investment 12.4 1.3 2.0 18.4 10.7 9.5 12.5 12.6Domestic Demand 6.3 3.2 4.1 8.7 6.8 7.2 7.9 7.7Net Exports 12.0 12.8 6.8 -1.7 -1.9 9.0 25.5 7.3

Exports of Goods and Services 16.6 9.4 8.5 13.6 12.4 10.6 1.8 9.5Imports of Goods and Services 17.8 8.6 9.0 18.0 16.1 11.0 -3.5 10.0

GDP 5.7 5.5 6.3 6.2 6.4 6.4 5.2 6.1

Distribution of GDP (%) Total Consumption 67.3 66.3 65.4 63.9 64.5 63.7 69.2 65.3

Private Consumption 59.6 58.3 57.6 57.6 56.7 55.7 58.9 57.2Government Consumption 7.7 8.0 7.8 6.4 7.8 7.9 10.4 8.1

Investment 24.4 23.4 22.5 23.9 23.4 23.9 24.3 23.9Domestic Demand 91.7 89.7 87.9 87.8 88.0 87.6 93.5 89.2Net Exports 8.8 9.4 9.5 9.7 9.2 8.5 10.9 9.6

Exports of Goods and Services 45.3 47.0 48.0 50.5 50.8 48.9 48.0 49.6Imports of Goods and Services 36.5 37.6 38.6 40.8 41.6 40.5 37.1 40.0

Table 1.1. GDP Growth and Distribution by Expenditures

Source : BPS-Statistics Indonesia

(percent)


Chapter 1

Chart 1.1. Exports Growth by Region Chart 1.2. Exports Share by Region

The high rate of investment growth in 2008 was also reflected by improving business trends. According to surveys by the Central Statistics Agency (BPS), business tendency showed an improving trend throughout 2008 compared to the preceding year, despite a renewed slump in the Business Tendency Index at end of year due to declining orders for input goods and foreign orders, accompanied by a drop in real selling prices. This downturn was consistent with the findings of the Bank Indonesia survey, which pointed to reduced planned investment in the second half of 2008 compared to the preceding half.

Although investment growth has improved in recent years, some obstacles remain that continue to hamper the future investment climate. Among the various hindrances cited by investors are inefficient bureaucratic procedures and inadequate infrastructure support. This is reflected in the Doing Business 2009 survey, which reported a setback in ease of investment in Indonesia compared to the preceding year. This is mainly because of business startup processes, which are regarded as inefficient. These findings were also confirmed by Global Competitiveness Index 2008 survey. Inadequate support from infrastructure in promoting business growth was also indicated by the low rate of loan disbursements for government-initiated projects. Loan disbursements came to only 17.9% of total infrastructure loans applied for during 2008, with most of these loans used for infrastructure development in the telecommunications sector.

In 2008, the Incremental Capital Output Ratio (ICOR) widened to 4.11 from the previous year’s ratio of 3.77. The high ICOR is closely linked to the drastic loss of external demand during the second half of 2008. This sudden drop in demand caught business by surprise, with longer horizon investments worst affected. As a result,

it was not possible to make optimum use of expanded capacity, due to lack of demand. At the same time, the brisk investment growth in 2008 contributed to a reduction in the savings-investment gap. The more modest surplus in the savings-investment gap is explained by the reduced surplus of private savings, while the government deficit also recorded decline.

Export growth in 2008 is estimated at 9.5%, up from the preceding year. The high rate of export growth was strengthened by soaring world oil prices in the first half of 2008, followed by surging prices for exported agricultural and mining commodities. Further support came with high export demand from emerging market countries such as China and India, offsetting the slowing growth in advanced trading partners such as the United States and Europe. In keeping with this trend, non-oil and gas export growth, like before, was driven by primary commodity exports led by agricultural and mining products such as palm oil and coal.

In disaggregation by region, export growth in 2008 was dominated by primary commodity exports from the Sumatra and Kalimantan-Sulawesi-Ambon-Papua (Kali-Sulampua) regions. During the first half of the year, rising demand and prices for primary commodities fuelled strong export momentum in Sumatra and Kali-Sulampua (Charts 1.1 and 1.2). In QIV-2008, however, exports slowed to some degree in all regions for most commodities. A few export commodities still managed to grow, including shrimps, canned pineapple, tea, spices and tobacco.

Import growth for 2008 overall came to 13.2% (yoy), higher than in the previous year. This growth rate is explained primarily by strong demand for imports of raw materials and capital goods used in production for exports and the domestic market. Analysed by the 2-digit


Chapter 1

classification, import growth was dominated by capital goods, such as mechanically operated machinery and tools and electrical machinery and equipment.

With demand rising strongly, capacity utilisation improved in various sectors of the economy, particularly in January-June 2008. Reflecting this were the results of several surveys, including the BI Business Survey (SKDU), the BI Production Survey (SP) and the ITB-BPS Capacity Utilisation survey, which all showed improvement in the first half of 2008. On a more detailed level, capacity utilisation dropped significantly in early QIV-2008. In a similar vein, the BPS Business Tendency Index and all component factors began to show signs of faltering during QIII-2008 (Charts 1.3 and 1.4).

In disaggregation by sector, slowing growth marked several sectors during 2008, most importantly manufacturing, mining, trade, construction and services. Slowing growth in manufacturing, mining and trade resulted mainly from sagging external demand and falling commodity prices. In the construction and services sectors, however, the slowdown was explained more by weakened purchasing power and rising interest rates on financing. Contrasting this was improved growth in some sectors, notably agriculture, electricity, gas and water utilities and the transportation and communications sector. Growth in agriculture benefited not only from the influence of rising global food prices, but also improving productivity and climatic conditions. In the electricity, gas and water utilities and transportation and communications

Chart 1.3. Capacity Utilization,(BTI-BPS) Chart 1.4. Capacity Utilization (SKDU)

Items 2005 2006 20072008

2008I II III IV

Growth(%)Agriculture 2.7 3.4 3.4 6.3 4.8 3.4 4.7 4.8Mining and Quarrying 3.2 1.7 2.0 -1.7 -0.5 2.1 2.1 0.5Manufacturing 4.6 4.6 4.7 4.3 4.2 4.3 1.8 3.7Electricity, Gas and Water Supply 6.3 5.8 10.3 12.3 11.8 10.4 9.3 10.9Construction 7.5 8.3 8.6 8.0 8.1 7.6 5.7 7.3Trade, Hotels and Restaurants 8.3 6.4 8.4 6.9 8.1 8.4 5.6 7.2Transportation and Communications 12.8 14.2 14 18.3 17.3 15.5 15.8 16.7Finance, Rental and Business Service 6.7 5.5 8.0 8.3 8.7 8.6 7.4 8.2Services 5.2 6.2 6.6 5.9 6.7 7.2 6.0 6.4GDP 5.7 5.5 6.3 6.2 6.4 6.4 5.2 6.1

Distribution of GDP (%) Agriculture 14.5 14.2 13.8 13.8 14.3 14.7 11.8 13.7Mining and Quarrying 9.4 9.1 8.7 8.4 8.2 8.1 8.4 8.3Manufacturing 28.1 27.8 27.4 27.1 26.7 26.5 26.9 26.8Electricity, Gas and Water Supply 0.7 0.7 0.7 0.7 0.7 0.7 0.7 0.7Construction 5.9 6.1 6.2 6.2 6.2 6.2 6.5 6.3Trade, Hotels and Restaurants 16.8 16.9 17.3 17.2 17.3 17.5 17.7 17.4Transportation and Communications 6.2 6.8 7.3 7.7 7.8 7.9 8.6 8.0Finance, Rental and Business Service 9.2 9.2 9.4 9.6 9.5 9.3 9.8 9.5Services 9.2 9.2 9.3 9.3 9.3 9.1 9.6 9.3

Table 1.2. GDP Growth and Distribution by Sector(percent)


Chapter 1

Chart 1.5. Company Sales and Inventory in Agriculture Sector Chart 1.6. Company Sales and Inventory in Manufacturing Sector

sectors, growth was fuelled primarily by vigorous domestic demand. Analysed by contribution to growth in 2008, the most important sectors were manufacturing, the trade, hotels and restaurants sector and transportation and communications (Table 1.2).

Manufacturing growth followed a slackening trend, mainly due to weakening demand. Estimated manufacturing growth for 2008 overall was down from 4.7% (yoy) in the previous year to 3.7% (yoy). While manufacturing growth remained generally stable until QIII-2008, this trend did not last. Instead, growth plunged in QIV-2008 from the fallout of the slowing global economy. Reflecting this was a tapering off in the Production Index, Capacity Utilisation Index and Production Capacity Index. The predominant subsectors, namely transportation, machinery and tool manufacturing and the foods, beverages and tobacco industry recorded lower estimated growth during QIV-2008 and 2008 overall. The slowdown in transportation, machinery and tool manufacturing was visible in a number of prompt indicators and survey results pointing to the beginning of a slowing trend in the second half of 2008. Factors contributing to flagging growth in the transportation, machinery and tools manufacturing category include depressed public purchasing power, particularly for durable goods, and the liquidity crunch. However, preliminary figures for the food, beverages and tobacco industry subsector suggest that the slowdown commenced only in QIV-2008.

For 2008 overall, preliminary figures point to 4.8% growth in the agriculture sector, up from the 3.4% growth recorded one year earlier. Performance in the agriculture sector was again buoyed by output in the estates and foodcrop subsectors. Key to the improved agricultural output was higher foodcrop productivity as a result of

increased farm production in Java and Sumatra during 2008, in combination with robust demand in the first half of the year for estate crop exports, led by palm oil, in Sumatra and Kalimantan. In the second half, growth in the estates subsector tapered off largely in response to falling export demand and prices for estate commodities.

If the world economic slowdown persists, some industry subsectors have potential for significant downturn due to weakening external demand.� These are subsectors in which a significant proportion of output is exported, i.e. non-ferrous basic metals production (65.7%), bamboo, wood and rattan-based manufacturing (48%) and the oils and fats industry (45.2%). Confirmation of these indications is provided by the BI production survey index for export-oriented subsectors, which underwent significant decline in QIV-2008.

Business has made various adjustments to cope with the impact of the deteriorating global economy. Faced with falling demand, most business actors have resorted to efficiency improvements by reducing inventories and cutting operational costs. A considerable degree of flexibility is evident in the mining and agriculture sectors, which were able to draw down inventories and cut costs when sales dropped (Chart 1.5). On the other hand, manufacturing has less flexibility to make similar adjustments, as is reflected in the persistently high costs and inventory levels despite falling sales (Chart 1.6).

With economic growth relatively stable, the labour market showed comparative improvement until August 2008, buoyed by growth in major employment sectors. Despite this, in QIV-2008, the labour market showed signs of deterioration reflected in the findings of a Bank Indonesia

1 Based on input-output analysis


Chapter 1

survey, which pointed to lower actual employment of workers during that quarter (Chart 1.7). Sectors marked by indications of declining employment included manufacturing, agriculture and the trade, hotels and restaurants sector.

In August 2008, Indonesia’s workforce was recorded at 111.95 million persons, an increase of 470 thousand over February 2008 or 2.01 million persons compared to August 2007. Workforce expansion was also matched by growth in numbers of employed person to 102.55 million, up 503 thousand from February 2008 or 2.62 million compared to the previous August. Open unemployment in August 2008 was down from before at 8.39% compared to 10.01% in August 2007 (Chart 1.8). The improving condition of the labour market was largely attributable to the first half performance of the agriculture sector in 2008 and the position of agriculture as one of Indonesia’s largest sources of employment.

Employment was up in all sectors. The strongest employment growth was recorded in the social services sector (1.08 million persons), followed by trade (667 thousand persons) and transportation (220 thousand persons). The rising employment in the transportation and communications sector was consistent with the high growth rate of that sector in 2008 (Chart 1.9). Labour productivity improved in the manufacturing, construction and the transportation and communications sectors, but in other sectors maintained a stable trend (Chart 1.10). In analysis by educational level for the period ending August 2008, university and senior high school graduates represented the fastest growing section of the workforce. In contrast, the least growth was reported among workers with less than primary school education. Even so, Indonesia’s workforce continues to be dominated by workers with no more than primary school education (Chart 1.11).

Chart 1.7. Labor Use

%, y-o-y %

4

6

8

10

12

-

1

2

3

4

5

6

7

8

Feb Aug Feb Aug Feb Aug Feb Aug

2005 2006 2007 2008

Source : BPS - Statistics Indonesia

Open Unemployment Rate (rhs)

Grafik 1.7

GDP of Previous Quarter

Chart 1.8. Economic Growth and Open Unemployment Rate

Chart 1.9. Labor Force by Sector Chart 1.10. Labor Productivity


Chapter 1

The improvement in the labour market has had a positive impact on poverty reduction.� Data for March 2008 points to decline in the total population living in poverty in Indonesia. During 2008, the total number of the poor fell to 34.96 million (15.42%) from 37.17 million (16.58%) one year before. However, a close watch is needed on the impact of the economic slowdown in the final quarter of 2008 and indications of worsening labour conditions at year-end, due to the potential deterioration of poverty figures.

During 2008, the total population living in poverty fell by 2.21 million, divided into 1.42 million rural poor and 0.79 million urban poor. The significant drop in rural poverty is explained to a large extent by the more vigorous growth in agriculture compared to the preceding year, which generated added employment in rural areas. Despite this, the proportion of rural poor to total impoverished citizens in Indonesia remained high at 63.47%. This proportion was relatively unchanged from the 2007 level recorded at 63.52%.

Improvement in poverty was also followed by reductions in the poverty depth index and poverty level index in 2008.�,� During the year, the poverty depth index came down to 2.77, indicating that average spending by the poor was moving closer to the poverty line. A similar development was observed in the poverty level index, which eased to 0.76, indicating a narrowing in spending disparities among the poor (Tables 1.3 and 1.4).

2 Data as of March 20083 The poverty gap index is the average gap in spending by the poor,

measured against the poverty line. 4 The higher the poverty severity index, the greater the spending

disparities among the poor.

Regional Economic Performance

The dynamics of the global economy also influenced economic growth in various parts of Indonesia. Soaring commodity prices in the first half of 2008 pushed growth to higher levels in the Sumatra and Kali-Sulampua regions, which rely heavily on export commodities. The strong growth in those regions was followed by improvements in jobs and welfare, reflected in more steeply falling unemployment and poverty compared to elsewhere. However, weakening world demand marked by plunging commodity prices halfway through the second half of 2008 bore down heavily on growth in those regions. Bleak prospects for the world economy alongside rising operational costs prompted business to postpone investment expenditures and raise efficiency. The declining growth in exports and investment even led to mass dismissals of workers and decline in public purchasing power.

On the other hand, the surge in commodity and foodstuff prices and heavy demand fuelled CPI inflation in export-dependent regions such as Sumatra and Kali-Sulampua more than in other regions. This inflationary surge eased in the second half of 2008 in keeping with falling demand and progressive decline in commodity prices.

Chart 1.11. Labor Force by Education Level

Year Urban RuralUrban+

Rural

1999 3.52 4.84 4.332000 1.89 4.68 3.512001 1.74 4.68 3.422002 2.59 3.34 3.012003 2.55 3.53 3.132004 2.18 3.43 2.892005 2.05 3.34 2.782006 2.61 4.22 3.432007 2.15 3.78 2.992008 2.07 3.42 2.77

Source : BPS-Statistics Indonesia, calculated from susenas data

Table 1.3. Poverty Depth Index

Year Urban RuralUrban+

Rural

1999 0.98 1.39 1.232000 0.51 1.39 1.022001 0.45 1.36 0.972002 0.71 0.85 0.792003 0.74 0.93 0.852004 0.58 0.90 0.782005 0.60 0.89 0.762006 0.77 1.22 1.002007 0.57 1.09 0.842008 0.56 0.95 0.76

Source : BPS-Statistics Indonesia, calculated from susenas data

Table 1.4. Poverty Level Index


Chapter 1

RegionalEconomic

Economic performance in some regions was marked by brisk growth in the first half of 2008. Growth forged ahead at a faster rate in the Sumatra region and parts of Kali-Sulampua. High international commodity prices boosted economic growth in regions dominated by tradable sectors, such as Sumatra and Kali-Sulampua. The opportunity to profit from high commodity prices provided incentive for export growth and strengthened public purchasing power. This was accompanied by an escalating trend in household consumption, even though overshadowed by rising inflationary pressure. Added to this, rapid growth in private investment, especially in the estates sector, provided stimulation for regional economic growth despite the comparatively limited support from government capital expenditures. In analysis by sector, brisk growth in this region was supported by positive trends in agriculture, trade and manufacturing.

Early in QIV-2008, the economic slowdown began to take hold in several regions, as could be expected with the deeper world economic slowdown that has hit world commodity prices. The Sumatra and Kali-Sulampua regions, which rely heavily on primary export commodities, suffered directly from the collapse in world commodity prices during a year of abundant estate crops. The steeper drop in commodity prices compared to input prices was reflected in the tendency for downward trending in the farmer terms of trade (Charts 1.12 and 1.13).

In the Java-Bali-Nusa Tenggara (Jabalnustra) region, falling export demand in various manufacturing industries compelled business to pursue efficiency savings, including

reductions in working hours and in some cases employee dismissals. This, combined with the slowing expansion of consumption credit, had a downward impact on private incomes. The slowing exports and consumption has prompted moderate growth in agriculture and trade, given that turnover in the two sectors is insufficient to cover production costs.

Demand for various manufactured exports in Jabalnustra has fallen as a result of declining orders and unilateral cancellations by foreign buyers. The direct impact of this was a drop in capacity utilisation, forcing companies to take various actions to improve efficiency including reductions in working hours and numbers of workers. The deterioration in farmer terms of trade, falling corporate profits, cutbacks in working hours and mass layoffs impacted worker incomes, combined with deterioration in the stock market that sapped profits for market players all contributed to weakening public purchasing power. Overall, the region most affected by the impact was Sumatra, where growth deviated more than 1.5% below the national economic growth rate.

Significant increases in inflationary pressure were reported in the first half of 2008 in almost all regions of Indonesia. Soaring international commodity prices, led by foodstuffs, were one factor spurring inflationary pressure in the regions, especially where consumption is dominated by food items and also in regions heavily dependent on supply from other areas. Prices climbed more steeply in Sumatra and the Kali-Sulampua region, two areas dominated by tradable commodities and which reaped windfall profits from soaring world commodity prices, while remaining heavily dependent on supply from other areas, including from Java.

Chart 1.12. Farmers Term of Trade in Sumatera Chart 1.13. Farmers Term of Trade in Kali-Sulampua


Chapter 1

RegionalDemographics

The relatively buoyant economic growth until QIII-2008 helped bring improvement in various indicators of welfare. Poverty and unemployment were down in all regions. Government programmes designed to combat unemployment, such as the National Community Empowerment Programme (PNPM) for block grants, disbursement of Grassroots Business Credit (KUR), the Unemployment Reduction Movement and distribution of Direct Cash Transfers, all had some positive influence in the improvement of welfare indicators.

In August 2008, unemployment showed improvement in almost all regions of Indonesia. The steepest reductions in unemployment took place in the Kali-Sulampua and Sumatra regions. Unemployment persisted at high levels in Java, including Jakarta and Banten province. On the other hand, quite low levels of unemployment were again recorded in Bali, Nusa Tenggara, the Maluku and Papua (Table 1.5).

Declining unemployment was accompanied by falling poverty levels in some regions (data as at March 2008). The lowest reductions in unemployment took place in the DKI Jakarta at 0.3% (Table 1.6). However, the fallout from the global financial crisis on activities in key export-dependent sectors seems to have put considerable pressure on prosperity levels. Added to this was the onset of worker redundancies and dismissals in some industries. Furthermore, incomes of farmers in the estates sector began to suffer in October 2008, following the collapse in commodity prices. The high inflationary pressure this year has also produced a reduction in real wage levels for workers (Table 1.6).

Regional Inflation Issues and Mitigation

Inflation in some regions during 2008 was influenced by price movements in foodstuff commodities and crude oil on world markets. Strong upward pressure on world food and oil prices during January-June 2008 spurred inflation in some regions. Inflationary pressure was especially strong in regions with consumption dominated by foodstuffs in combination with heavy dependence on supply from other regions.

With world commodity prices down at end-2008, inflationary pressure gradually eased in the regions, albeit remaining comparatively high. Key to falling regional inflation levels was the declining contribution from foodstuffs across all regions. Regions with consumption dominated by food items even recorded steeper reductions in inflation. In addition, minimum demand pressure due to weakening public purchasing power was one factor easing the upward pressure on prices at end-2008.

Aside from the external factors that influenced price movements during 2008, the strong dependence of the regions on each other for supply of basic needs continues to merit close monitoring. Adequate infrastructure and transportation must be retained as a priority, given that weather and nature frequently pose risks of disruption in the distribution of supplies. Furthermore, the decision by the Central Statistics Agency (BPS) to expand the coverage of inflation statistics from 45 cities to 66 cities signals the importance of the various actions and policies put into place to subdue inflation at the regional level (Chart 1.14).

Table 1.5. Employed Population and Unemployment Rate by Region

LaborForce(millionsofpeople) Employed(millionsofpeople) UnemploymentRate(%)

August2007 August2008 August2007 August2008 August2007 August2008

Sumatera 21.7 22.6 19.7 20.8 8.9 8.0

Jabalnustra 64.2 63.9 58.6 58.7 8.6 8.1

Java (outside Jakarta-Banten) 57.9 57.6 52.7 52.7 9.0 8.5

Bali - Nusa Tenggara 6.2 6.3 5.9 6.0 4.8 4.4

Jakarta-Banten 8.4 9.1 7.2 7.9 14.3 13.6

Kali-Sulampua 15.7 16.4 14.4 15.2 8.7 7.2

Kalimantan 6.1 6.4 5.7 6.0 7.5 6.8

Sulawesi 7.4 7.6 6.6 7.0 9.9 7.8

Maluku - Papua 2.2 2.4 2.1 2.2 7.6 6.7

Nasional 109.9 111.9 99.9 102.6 9.1 8.4



Chapter 1

Chart 1.14. Inflation by Region

Region

PeopleLivinginPoverty(thousandsofpeople)

NumberofPeople(thousandsofpeople)

Percentage(%)

2007 2008 2007 2008 2007 2008

Sumatera 7,845.4 7,294.0 47,995.3 48,807.2 16.3 14.9

Northern Part of Sumatera 2,852.2 2,573.5 17,058.2 17,336.2 16.7 14.8

Central Part of Sumatera 1,534.0 1,440.6 13,903.2 14,193.7 11.0 10.1

Southern Part of Sumatera 3,459.2 3,279.9 17,033.2 17,277.3 20.3 19.0

DKI Jakarta 405.7 379.6 9,064.6 9,146.2 4.5 4.2

Java, Bali, & Nusa Tenggara 23,201.4 21,990.9 13,684.1 135,404.5 17.0 16.2

Northern Part of Java 6,344.1 6,139.1 49,752.5 49,800.7 12.8 12.3

Central Part of Java 7,190.7 6,805.9 35,814.8 36,094.9 20.1 18.9

Eastern Part of Java 7,155.3 6,651.3 36,895.6 37,094.8 19.4 17.9

Bali & Nusa Tenggara 2,511.3 2,394.6 12,221.2 12,414.1 20.5 19.3

Kalimantan, Sulawesi, Maluku & Papua 4,922.4 4,565.5 33,898.0 34,445.4 14.5 13.3

Kalimantan 1,352.9 1,214.1 12,628.3 12,847.7 10.7 9.4

Sulawesi, Maluku & Papua 3,569.5 3,351.4 21,269.7 21,597.7 16.8 15.5


Table 1.6. Rural Poverty Rate


Chapter 1

Balance of Payments

Overall, the balance of payments in 2008 sustained heavy pressure from the deterioration on world financial markets, slowing world economic growth and falling global commodity prices. The worsening condition of global financial markets left capital inflows in emerging market countries increasingly susceptible to capital reversal. A key element in the slowing tendency in global economic growth is the worsening fallout from the slowdown in advanced economies on emerging market growth. As a result, the relatively buoyant growth rates in the developing world are no longer able to keep global economic growth strong as in past years. With economic growth in decline, demand for commodities has also weakened, driving down global commodity prices from the highs reached after steady ascent in the preceding year.

In response to these developments, the balance of payments in 2008 recorded a 1.9 billion US dollar deficit, representing considerable drop from the preceding year’s surplus of 12.7 billion US dollars. This deficit brought

international reserves down 9.3% to 51.6 billion US dollars at end-2008, equivalent to 4 months of imports and servicing of official external debt (Table 1.7).

The balance of payments charted strong positive gains in the first half of 2008, reflected in a healthy surplus. In the current account, soaring world prices for oil, mining and agricultural commodities provided a boost to export growth. Buoyed by vigorous growth in several emerging market countries, Indonesia’s exports forged ahead at 28.5% (yoy) in the first half of 2008, with non-oil and gas exports climbing 20.3% (yoy). The steady rise in commodity prices also fuelled business optimism for the export market and stimulated keen interest in investment. Alongside this, imports also mounted sharply in all three categories of capital goods, raw materials and consumption goods. During the first half of 2008, import growth reached 46.9% with non-oil and gas imports up 42.7% (yoy).

This vigorous import growth tipped the current account into deficit in QII-2008. In the mean time, the capital and

Table 1.7. Indonesia’s Balance of Payment

1) (-) surplus; (+) deficit

Descriptions 2006 2007 2008

I. Current Account 10,859 10,492 606A. Goods, net (Balance of Trade) 29,660 32,754 23,309

– Exports, fob. 103,528 118,014 139,291– Imports, fob. -73,868 -85,260 -115,9811. Non-Oil and Gas 22,875 27,084 15,549

– Exports 80,578 93,142 107,607– Imports -57,703 -66,058 -92,059

2. Oil and Gas 6,785 5,671 7,760– Exports 22,950 24,872 31,683– Imports -16,165 -19,201 -23,923

B. Services, net -9,874 -11,841 -13,011C. Income, net -13,790 -15,525 -15,334D. Current Transfer, net 4,863 5,104 5,643

II. Capital and Financial Account 3,025 3,591 -1,706A. Capital Account 350 546 353B. Financial Account 2,675 3,045 -2,059

1. Direct Investment 2,188 2,253 2,4792. Portfolio Investment 4,277 5,566 1,7533. Other Investment -3,790 -4,775 -6,291

III. Total (I+II) 13,885 14,083 -1,100IV. Net Errors and Omissions 644 -1,368 -845 V. Overall Balance (III+IV) 14,510 12,715 -1,945VI. Reserve and Related Items 1) -14,510 -12,715 1,945

A. Reserve Assets Changes -6,902 -12,715 1,945B. IMF Purchases -7,608 0 0

Memorandum: International Reserve 42,586 56,920 51,639

(In months of imports and official foreign debt repayment) 4.6 5.8 4.0

(millionsofUSD)


Chapter 1

financial account fell into deficit due to capital outflows in QI-2008 as foreign investors shifted their interest to more liquid, short-term assets amid rising uncertainty on financial markets. Foreign capital inflows nevertheless recovered in QII-2008 in keeping with improvement in investor risk appetite and increased yields on fixed income instruments.

In the second half of 2008, the balance of payments came under heavy pressure from the worsening slowdown in the world economy and collapse in export commodity prices. Exacerbating this was deteriorating global sentiment that triggered a massive seling of financial market assets by foreign investors in Indonesia and a soaring deficit in the capital and financial account. In the current account, export growth tapered off due to slowing global economic growth and falling prices for exported commodities. While exports subsided, the levelling of import growth was slowed to some extent by the still robust domestic demand, which trimmed the current account surplus from 2.8 billion US dollars in QI-2008 to only 0.6 billion US dollars at end of year. In the capital and financial account, strengthened investor perceptions and attractive yields fuelled inflows of portfolio capital in QII and QIII-2008. However, the capital and financial account in QIV-2008 again plunged into a sizeable deficit in line with deteriorating investor perceptions.

CurrentAccount

In 2008, the current account recorded a 0.6 billion US dollar surplus. Despite posting a strong surplus in Q1/2008, the current account steadily weakened during the subsequent three quarters due to steadily rising imports (Chart 1.15). On one hand, import growth was driven by rapidly escalating domestic demand, indicative of the strength of the domestic economy. However, export growth tapered off due to faltering global economic growth and sliding export commodity prices. Alongside this, the services, income and remittances account also charted a 22.7 billion US dollar deficit, largely unchanged from the 22.3 billion US dollar deficit one year before. The stable level of the deficit is explained by rising freight costs for imports and higher outward transfers of profits for foreign-owned companies approximately balanced by improved foreign exchange earnings from increased foreign tourist arrivals in Indonesia and higher worker remittances.

The strong merchandise exports in 2008 were bolstered mainly by non-oil and gas exports at 107.6 billion US dollars (FOB), representing 15.5% growth (yoy) over

the same period one year before (Table 1.8). Driving force for this high growth came from the agriculture and mining sectors, in which growth reached 32.9% and 22.7% mainly in response to rising commodity prices. Manufactured exports, however, recorded more modest 13.6% growth over one year before. Key to this growth was the performance of palm oil and metal products, buoyed by stronger international prices for CPO and metal commodities. On the other side, non-oil and gas imports reached 100.2 billion US dollars (FOB), with growth at 39.4% (yoy). Merchandise imports were up sharply in all categories, with imports of consumer goods, raw materials and capital goods forging ahead at 24.7%, 37.9% and 52.8%. Consumption goods imports climbed as a result of major increases in international foodstuff prices. Imports of raw materials and capital goods, however, were influenced not only by increased prices but also higher import volume.

In the oil and gas sector, buoyant natural gas exports contributed to a trade surplus. Oil and natural gas exports were recorded at 15.4 billion US dollars and 16.3 billion

Chart 1.15. Current Account

Table 1.8. Non-Oil and Gas Main Exports Commodities

Commodities

2008

Value(millionsofUSD)

Share(%)

Growth(%)

TotalExportsofNon-Oil/Gas 107,607 100.0 15.5

Agriculture 4,950 4.6 32.9

Mining 14,742 13.7 22.7

Manufacturing 87,915 81.7 13.6

TotalImportsofNon-Oil/Gas 100,170 100.0 39.4

Consumption Goods 9,033 9.0 24.7

Raw Material 70,513 70.4 37.9

Capital Goods 20,623 20.6 52.8


Chapter 1

Chart 1.16. Commodity Price Index

Chart 1.17. Capital and Financial Account

US dollars, representing 22.8% and 32% growth over the same period one year earlier (Table 1.9). Crude oil imports again climbed at a vigorous pace (23.8%, yoy). Accordingly, Indonesia’s oil balance of trade posted an 8.4 billion US dollar deficit. Despite this, brisk growth in natural gas exports enabled the oil and natural gas sector to chart another annual surplus at 7.8 billion US dollars.

Total services, income and current transfers recorded approximately the same deficit in 2008 compared to one year earlier. The stable deficit is explained by an increased services deficit offset by a deficit reduction in income transactions and an increased surplus in current transactions.

The net services account recorded a 13.0 billion US dollar rise in outflows, most importantly due to increased freight costs for imports. The stronger inflows from tourism services were insufficient to cover the deficit caused by higher freight costs. The net income account saw a reduction in the account deficit to 15.3 billion US dollars. The lower deficit is explained primarily by reduced outward transfers of earnings from FDI companies in Indonesia. At the same time, the current transfers account registered an increased surplus, buoyed by worker remittances. During 2008, incoming transfers from worker remittances generated a surplus of 5.6 billion US dollars.

In regard to prices, the Indonesian export commodity price index (IHKEI) mounted sharply in keeping with international commodity prices. During 2008, prices for Indonesian export commodities rose by 16.8% (yoy) (Chart 1.16). On a more detailed level, prices for non-oil and gas commodities and for oil and natural gas mounted 11.8% and 30.8% (yoy) during 2008. These price movements were consistent with the soaring prices for internationally traded commodities, especially during the first half of

2008. Falling world demand resulting in the collapse of commodity prices during the second half of the year similarly pushed down prices for Indonesian commodities.

CapitalandFinancialAccount

The global financial market downturn has weighed significantly on the capital and financial account. In 2008, this account posted a 1.7 billion US dollar deficit, down considerably from the 3.6 billion US dollar surplus one year earlier (Chart 1.17). The deterioration in the capital and financial account is explained primarily by the high degree of uncertainty on the global financial market, the risk aversion behaviour of investors and relatively tight conditions of global liquidity. In analysis by composition, non-portfolio investment capital flows were dominant in contrast to the downward trend in portfolio investment.

Foreign direct investment (FDI), however, was little changed from one year before. Direct investment transactions resulted in a 2.5 billion US dollar surplus,

Components

2008

Value(millionsofUSD) Growth(%,yoy)

Exports 31,683.0 27.4

Oil 15,350.0 22.8

Gas 16,333.0 32.0

Imports -23,922.0 24.6

Oil -23,737.0 23.8

Gas -186.0 0.0

Net 7,761.0 36.9

Oil -8,387.0 25.7

Gas 16,147.0 30.8

Table 1.9. Oil and Gas Exports Imports


Chapter 1

slightly higher than the previous year, which recorded a surplus of 2.3 billion US dollars. Despite this, quarterly figures for long-term capital inflows (FDI) were relatively stable during 2008 before mounting in QIV-2008 on a merger of domestic banks by foreign investors.

Alongside this, portfolio investment transactions maintained a surplus, buoyed by the 4.2 billion US dollar issue of Government foreign currency bonds. Although the success of the bond issue reflects investor confidence in Indonesia’s macroeconomic stability and outlook, foreign ownership of domestic portfolios showed decline. This was also closely linked to escalating perceptions of investment risk in emerging markets. Foreign ownership in domestic portfolios, which reached a peak in QII-2008, gradually diminished in keeping with the downward adjustment in risk appetite and reduced volume of capital inflows. During 2008, foreign investors booked a net sale of Bank Indonesia Certificates (SBIs) at 2.0 billion US dollars. However, in Government Bond (including foreign currency bonds), foreign investors charted a 5.3 billion US dollar net purchase. Taken together, portfolio investment produced total net inflows of 1.8 billion US dollars in 2008.

Other investment transactions posted a 6.3 billion US dollar deficit, up from one year earlier. The increased deficit is explained by higher drawing on corporate lines of credit spurred by heavy corporate foreign exchange demand to pay for imports in 2008. In contrast, drawing on government program loans came slightly below the original target. The undisbursed portion of program loans, amounting to about 111 million US dollars, will be carried over to program loans in 2009.

External influence on the 2008 balance of payments was also visible in key balance of payments ratios (Table 1.10). In analysis by structure, the capital and financial account was again dominated by portfolio capital inflows and external debt, both susceptible to external shocks. Although exports showed quite positive performance, expanding in ratio to GDP from the preceding year, the much more vigorous growth in imports meant that the current account charted only a thin surplus.

Indicators of external vulnerability in relation to foreign debt showed further improvement, in keeping with the still positive performance of exports. Indonesia’s external

Chart 1.18. Indonesia Debt Indicators

Table 1.10. Indicators of BOP

2005 2006 2007 2008

CA/PDB 0.1 2.9 2.4 0.1

X/PDB 30.1 28.0 26.9 27.1

M/PDB 24.1 20.0 19.5 22.6

TMF/PDB 0.1 0.8 0.8 -0.3

FDI/PDB 1.8 0.6 0.5 0.5

FPI/PDB 1.4 1.2 1.3 0.3

OI/PDB -3.3 -1.0 -1.1 -1.2

Overall Bal/PDB 0.2 3.9 2.9 -0.4

(percent)

Table 1.11. Indonesia’s Outstanding Foreign Debts1)

Dalam Jutaan USD2003 2004 2005 2006 2007

2008

March June Sept Dec*)

Total Foreign Debts 135,402 137,024 130,652 128,736 136,640 145,519 146,226 147,339 149,141

A. Government 80,910 80,734 75,406 67,722 69,340 75,429 74,288 73,169 77,821

B. Private 51,942 52,929 48,601 50,983 53,909 55,801 56,020 58,796 60,651

1. Financial Institution 7,537 8,211 6,371 6,560 7,465 8,136 7,947 9,097 8,807

1.1. Bank 4,316 3,906 4,042 4,544 5,351 5,969 5,516 6,029 5,640

1.2. Non-Bank 3,221 4,306 2,329 2,017 2,114 2,167 2,431 3,068 3,167

2. Non-Financial Institution 44,405 44,718 42,229 44,423 46,444 47,665 48,073 49,699 51,843

C. Others

Domestic Securities Owned by Non-Resident 2,550 3,361 6,646 10,031 13,391 14,290 15,918 15,374 10,668 1) Excluding currency and deposits and other debt plus liabilities included in SDDS IMF report *) Provisional figures

(millions of USD)


Chapter 1

Chart 1.19. Comparison of Debt Service Ratio Chart 1.20. Comparison of Debt to GDP Ratio

debt position at 149.0 billion US dollars in December 2008 was still offset by expansion in the domestic economy, including a positive trade balance (Table 1.11).

Easing of the debt service burden was visible in various debt burden indicators, with progressive decline in the debt to GDP ratio, debt to export ratio and the debt service ratio (DSR) at levels within the safety limits established by the World Bank (Chart 1.18). However, indicators such as the debt service ratio and debt to GDP ratio were still above those of Indonesia’s peer group and other nations in Asia (Charts 1.19 and 1.20).

In 2008, the net increase in drawing on external debt was still higher than the increase in external debt servicing for the same period (Tables 1.12 and 1.13). Total drawing on official external borrowings reached 8.69 billion US dollar in 2008, an increase of about 60% over 2007. In the first half of 2008, external debt was raised mainly on the commercial market through foreign currency bonds sold

on the international market in issuances totalling USD4.2 billion. In the second half of the year, drawing on external debt involved mainly program loans from multilateral institutions.

Measured overall, private sector loan disbursements do not appear to be excessively impacted by the effects of the global financial crisis. Total drawing on private external debt reached USD37.08 billion in 2008, up 33.1% from the total USD27.8 billion disbursements in 2007. This rising activity was linked to rising levels of new commitments for the Indonesian private sector in the past two years (2007 and 2008), which enabled private borrowers to keep drawing on external borrowings during 2008. However, 2008 also saw delays in private sector bond issues, mainly because of the increased cost of borrowing in the wake of the global financial crisis. These dynamics resulted in international reserves as of end 2008 standing at 51.6 billion dollar or equal to 4 months of imports and official foreign debt repayment (Chart 1.21).

Table 1.12. Indonesia’s Foreign Debts Withdrawal

2003 2004r 2005 2006 20072008

Q1 Q2 Q3 Q4*) TotalTotal 12,133 15,537 21,516 28,774 33,260 10,500 12,302 11,085 12,217 46,104 Government 3,796 3,221 5,295 5,518 5,427 2,551 2,763 913 2,796 9,023

- Bilateral 498 512 908 915 1,071 359 134 472 667 1,632 - Multilateral 2,881 1,194 1,676 2,006 2,361 153 396 277 2,029 2,856 - Export Credit Facility (ECF) 417 591 615 667 571 88 105 164 100 456 - Leasing - - - - - - - - - - - Commercial - 923 2,095 1,930 1,425 1,952 2,129 - - 4,080

Private 8,337 12,316 16,222 23,256 27,833 7,949 9,539 10,172 9,421 37,081 B.1 Financial Institution 5,063 7,635 7,747 10,735 12,234 4,160 5,454 4,998 3,695 18,306

1.1 Bank 4,415 6,105 6,685 9,300 10,611 3,799 4,889 4,313 3,021 16,022 1.2 Non-Bank 649 1,529 1,062 1,434 1,623 361 564 684 674 2,284

B.2 Non-Financial Institution 3,274 4,682 8,474 12,521 15,599 3,789 4,085 5,175 5,726 18,776 Notes : Excluding domestic securities owned by non-resident*) Provisional figures

(millions of USD)


Chapter 1

Indonesia’s Sovereign Rating

The trends in external debt described above are closely linked to the upgrading of Indonesia’s sovereign rating amid the wave of downgrading on the global level. During the first half of 2008, Indonesia’s sovereign credit rating was upgraded in line with the solidly maintained fundamentals of the economy. Fitch Rating, the international rating agency, upgraded Indonesia one notch to BB (from BB- previously) in February 2008. This is one indication that investment risk in Indonesia is being regarded in a more favourable light by international rating agencies, although Indonesia has yet to reach investment grade. The improvement in rating also received positive responses from creditor countries and multilateral financial institutions, enabling the Government and also private sector borrowers to raise external debt on more favourable terms and conditions.

Indonesia’s improvement in rating during the first half of 2008 was also supported by affirmation of Indonesia’s sovereign credit rating by two other international rating agencies, Standard & Poor’s and Moody’s, near the

end of year. S&P reiterated their assessment in which the sovereign rating for the Republic of Indonesia was unchanged at “BB-” for the long-term foreign currency sovereign credit rating and “BB+” for the long-term local currency rating, with outlook remaining stable.

Similarly, Moody’s reported in their annual report that the Ba3 rating for Indonesian Government bonds was still regarded commensurate to current conditions in Indonesia, despite the considerably mounting pressure on the economy. The stable outlook for Moody’s Ba3 rating on Indonesian Government bonds is based on the ability of the Government to manage state finance and domestic macroeconomic conditions amid the global financial crisis and economic recession.

The two affirmations sent out a positive signal concerning Indonesia, being issued by the international rating agencies at a time of downward revision in sovereign rating and outlook for various countries in the final months of 2008 due to the impact of the global financial crisis. This naturally also reflects the confidence of these international rating agencies in the capacity of the economic authorities to ensure macroeconomic stability in the face of the current challenges from the global economic crisis.

Rupiah Performance

In general, the rupiah exchange rate movement was stable up to September 2008, supported by the performance of the current account and prudent macreconomic policy. Nonetheless, the rupiah came under pressure accompanied by increased volatility in the fourth quarter of 2008. The collapse in commodity prices hit exports and reduced the supply of foreign currency from export earnings. On the other hand, rising imports, driven by strong domestic demand, also created rising need for

Chart 1.21. International Reserve

Table 1.13. Foreign Debts Repayment

2003 2004 2005 2006 20072008

Q1 Q2 Q3 Q4*) Total

T o t a l 18,900 22,403 24,364 39,737 36,652 10,014 12,067 10,332 12,652 45,065

A. Government 6,450 9,033 7,234 17,056 9,189 1,513 3,087 1,672 3,082 9,355B. Private 12,449 13,370 17,130 22,681 27,463 8,500 8,980 8,660 9,570 35,710

B.1. Financial Institutions 5,656 6,866 8,562 10,402 11,315 3,528 4,773 4,166 4,471 16,9391. Bank1 5,078 6,265 7,812 9,004 9,673 3,175 4,439 3,820 3,762 15,1962. Non-Bank 579 602 749 1,399 1,642 354 334 346 709 1,743

B.2. Non-Financial Institutions2 6,793 6,504 8,568 12,279 16,148 4,972 4,206 4,494 5,099 18,771Notes : Excluding domestic securities owned by non-resident1) Including overseas branches 2) Excluding Pertamina, up to March 2003*) Provisional figures

(millions of $)


Chapter 1

Chart 1.22. Average Exchange Rate Chart 1.23. Exchange Rate Volatility

Chart 1.24. Average Appreciation (+)/Depreciation (-) in 2008 compared to 2007

foreign currency. Demand pressure for foreign currency intensified due to outflows of foreign portfolio capital triggered by negative sentiment in the fallout from the global financial crisis. The drop in foreign currency supply that coincided with high demand led to heavy depreciating pressure on the exchange rate (Chart 1.22).

RupiahExchangeRate

The dynamics of the rupiah exchange rate during 2008 were influenced to a large degree by developments in the global financial crisis, turbulent commodity prices and slowing global economy which led to deteriorating investor perceptions and market expectations. This external turmoil produced very wide fluctuation in the rupiah, especially since the beginning of the fourth quarter of 2008. Nevertheless, consistent and prudent macroeconomic policy accompanied by actions to stabilise the rupiah was generally sufficient to curb excessive pressures. Despite the onslaught of various turbulences, overall movement in the rupiah was relatively stable until mid-September 2008. The spreading impact of the global financial crisis, however, has prompted investors to dump assets on a significant scale, thereby putting heavy pressure on the rupiah exchange rate in QIV-2008.

During 2008, the exchange rate saw considerably higher volatility compared to the previous year, while maintaining a depreciating trend (Chart 1.23). Averaged over the year, the rupiah weakened 5.4% from Rp 9,140 per US dollar in 2007 to Rp 9,666 per US dollar in 2008. At year end, the rupiah was trading at Rp 10,900 per US dollar, having lost 13.8% (point-to-point) from the previous year-end close at Rp 9,393 per US dollar. Accompanying this was a sharp rise in volatility from 1.44% in 2007 to 4.67% in 2008. Rupiah weaks followed regional currencies condition (Chart 1.24).

The relatively stable rupiah exchange rate up to the end of QIII-2008 was supported by the current account surplus, attractive yields and continued positive market sentiment. Despite this, the rupiah suffered temporary depreciation in QI-2008, averaging Rp 9,258 per US dollar during that period. This downturn is explained by negative global market sentiment from the downward spiral in the subprime mortgage crisis since end-2007. This trend was exacerbated by increasing oil prices that prompted investors to move their assets into safe havens. Nevertheless, the policy actions pursued by Bank Indonesia and Government actions to secure the implementation of the 2008 Budget kept pressures from mounting higher, and even stimulated renewed inflows of foreign portfolio capital. In response to these developments, the rupiah maintained a stable trend during QII-2008.

At the end of QIII-2008, fallout from the global financial crisis mounted to a new level with the defaults of major


Chapter 1

US financial institutions. Investor fears over financial conditions and the outlook for the world economy triggered widespread offloading of assets on the global financial market. Risk perceptions soared, prompting investors to move their funds away from emerging markets. On the other hand, the current account also sustained pressure from plunging commodity prices and faltering economic growth in trading partner nations. These developments combined to put pressure on the rupiah, which fell to a low of Rp 12,150 per US dollar in November 2008.

Factors Affecting the Rupiah

On the fundamentals side, macroeconomic conditions in 2008 remained generally conducive to exchange rate stability. Until QIII-2008, high economic growth supported by all aggregate demand components generated optimism among economic agents in the future of the economy. Despite the upward trend in inflationary pressure and a dip in investor sentiment in QI-2008, consistent and prudent macroeconomic management was able to shore up market confidence in the rupiah.

In the second half of 2008, the rupiah came under increasing pressure from the growing balance of payments deficit, fuelled by adverse developments in the current account and the capital and financial account (Chart 1.25). Entering QIII-2008, the global economic slowdown and falling commodity prices produced a significant drop in export growth. The defaults by several financial institutions in the US also contributed to growing negative sentiment in financial markets. While imports forging ahead unabated, the balance of payments was also susceptible to sudden changes in the capital and financial

account, and especially to reversal of foreign portfolio capital. The continued slowdown in exports during QIV-2008 and heavy outflows of foreign capital produced strong downward pressure on the currency. Bank Indonesia and the Government responded by issuing a series of policies to ease the pressure and prevent excess volatility in the rupiah, while simultaneously curbing potential for macroeconomic instability.

Exchange rate movement in 2008 was also influenced by investment risk in Indonesia. Perceptions of investment risk in emerging economies became caught up in the downward spiral of the global financial crisis and the economic slowdown in developed economies. Deteriorating balance of payments even forced some countries in Eastern Europe and Asia to appeal for IMF financing. This worsened perceptions of risk in investment in emerging economies and prompted investors to offload assets in actions to either cut losses or assume profit taking and to move to more secure assets in a flight to quality. This adversely influenced investor perceptions of risk in Indonesia. The rising deficit in the balance of payments also contributed to less favourable perceptions of investment risk in Indonesia.

One indicator of these risk perceptions was the sharp rise in Indonesia credit default swaps (CDS) from 153 bps to 691 bps, with the spread even soaring past the 1,248 mark in October 2008. Another risk indicator, the spread between Indonesia global bonds and US Treasury Notes (T-Notes) mounted dramatically from 238 bps to close the year at 716 bps after touching a high of 1,195 bps in November 2008 (Chart 1.26). The increased spread was the result of escalating yield on Indonesian bonds alongside the decline in US Treasury yields caused by flight to quality. Under conditions of high uncertainty, the

Chart 1.25. BoP and Exchange Rate Chart 1.26. Credit Default Swap Rate


Chapter 1

deteriorating risk perceptions also set off high exchange rate volatility, given the substantial portion of short-term portfolio investments entering and leaving Indonesia.

Exchange rate movement was also influenced by yields offered on rupiah instruments. For the most part, rupiah investment yields remained high during 2008, measured both by uncovered parity (UIP) and covered parity (CIP), the latter allowing for risk. The interest rate differential was greater than for other countries in the region due to the effect of rising domestic interest rates and the downward trend in global rates. However, covered interest parity dipped temporarily, even reaching negative levels in November 2008. Even so, CIP regained ground by year-end, due to falling pressure from external risks. Alongside this, Indonesian bond investments retained their attraction, as reflected in the yield spread between Government Bonds and US Treasury Notes.

ForeignExchangeSupplyandDemand

Measured overall, the foreign exchange market was marked by excess demand spurred by domestic demand and outflows of foreign capital. Despite this excess demand, supply remained in relative equilibrium with demand until August 2008. Supply came down mostly from September onwards, in keeping with slowing export growth as export commodity prices fell. Alongside this was rising demand pressure due to the exodus of foreign portfolio investments near the end of the year. Added factors were persistently strong demand to cover payments for imports and servicing of external debt.

Foreign exchange demand from domestic players was again dominated by corporate buyers, with demand up from the previous year. Except for foreign exchange purchases by one SOE, domestic players continued to contribute net supply of foreign exchange to the market despite a declining trend in supply at the end of the year due to reduced export earnings. Foreign exchange market conditions were therefore quite thin at the end of the year, triggering volatile movements in the rupiah exchange rate.

Inflation

The strength of external factors had significant bearing on inflation in 2008. The sharp rise in global commodity prices particularly food and energy prices put upward presure on CPI inflation. The escalation in international oil prices even forced the Government to increase domestic fuel prices in May 2008. The intensity of the global

factors were also reflected in the climbing inflation per category of goods in which transportation, foodstuffs and processed food recorded considerable hike. From the influencing factors, the climb in CPI inflation was mainly the impact of rising inflation in administrered prices as well as fair increase in core inflation. In the mean time, volatile food inflation escalated to a minimal amount due to adequacy of supply and the Government stabilisation policy for basic need prices.

Inflation Developments

Overall, inflationary pressure in 2008 stood reasonably high. CPI inflation climbed sharply during 2008 to 11.06% (yoy) from the previous year’s level recorded at 6.59%. The inflationary pressure was fuelled by surging global commodity prices, led by oil and food. High oil prices not only drove up imported inflation, but also brought on higher administered prices inflation following the Government decision to raise subsidised fuel prices. These events combined with problems in distribution and supply of key commodities boosted inflation expectations to high levels, which also put upward pressure on core inflation in 2008.

Nevertheless, inflationary pressures eased quite significantly in QIV-2008 as the global commodity prices fell and the slowdown of the world economy deepened. Aside from that, the Government policy to lower domestic fuel prices in December 2008 in line with the declining world oil prices alleviated further the inflationary pressure.

Analysed by category of goods, the rise in 2008 CPI inflation is explained by increases in the transportation, foodstuffs and processed food categories. Higher inflation in the transportation category was related primarily to the 28.7% hike in subsidised fuel prices in May 2008. The steep inflation in the foodstuffs and processed food categories at 16.35% and 12.53% respectively, was linked most importantly to heavy pressure from imported inflation, especially in early 2008. Other high inflation categories included the housing, water, electricity and fuels category driven by rising household fuel prices in line with the kerosene to LPG conversion programme (Table 1.14).

Inflationary pressure maintained an upward trend in the first half of 2008. In disaggregation of the heightened inflationary pressure, the main contributing categories were administered prices and volatile foods. Strong administered prices inflation was linked to the decision to


Chapter 1

raise subsidised fuel prices by an average of 28.7%, while higher volatile foods inflation came in response to hefty increases in world food prices. With the high administered prices inflation and expectations of rupiah depreciation, inflation expectations mounted higher, bringing core inflation to 8.29% (yoy).

Inflationary pressure moved into decline during the second half of 2008. The downward trend in inflationary pressure came mainly in response to falling international commodity prices followed by comparatively limited easing of domestic commodity prices and the price cuts for premium gasoline and automotive diesel in December 2008. Seasonal factors, such as religious festivities and the beginning of the new academic year, had less impact than normal, while no significant impact was observed from exchange rate depreciation as it was compensated by falling commodity prices in the global market. Assured domestic supply of rice was an added factor, helping to keep increases in rice prices down in comparison to one year earlier.

Factors Affecting Inflation

Analysed by influencing factors, mounting CPI inflation in 2008 is explained mainly by heightened inflation in

administered prices (Table 1.15). Government decisions concerning administered prices, most importantly to raise subsidised fuel prices on 24 May 2008, combined with escalating global foodstuff prices were responsible for escalating inflationary pressure. Core inflation similarly mounted, but more from increased pressure from external factors and inflation expectations. Pressure from the demand side temporarily heightened, but subsequently weakened during QIV-2008.

Non-FundamentalFactors

AdministeredPrices

Administered prices inflation soared to 15.99% (yoy) from 3.3% (yoy) in 2008. This rise was closely linked to the impact of high international oil prices, which forced the Government to exercise cuts in the fuel subsidy. As a result, fuel prices were raised by an average of 28.7% on 24 May 2008. Besides the 1.22% first round effect on inflation, the fuel price hike also had a second round effect pushing up inflation by 0.82% through increased transport fares. Taken together, the impact of the May 2008 fuel price hike came to 2.05% (Table 1.16). The decision to raise fuel prices was a key factor in the significantly higher

Table 1.14. Inflation and Its Contribution by Categories

No CategoriesWeight(%) Basedon2007=100(%,yoy)

2007=100 2006 2007 2008

1 Food Stuff 19.57 12.94 10.74 16.35

2 Processed Food, Beverages, Cigarette and Tobacco 16.55 6.36 5.70 12.53

3 Housing, Water Supply, Electricity, Gas and Fuel 25.41 4.83 4.85 10.92

4 Clothing 7.09 6.84 7.53 7.33

5 Medical Care 4.44 5.87 3.52 7.96

6 Education, Recreation and Sport 7.81 8.13 6.94 6.66

7 Transportation, Communication and Financial Services 19.12 1.02 0.46 7.49

CPI 100.00 6.20 5.61 11.06


Table 1.15. Core and Non-Core Inflation and Its Contribution

NoCore Volatile Food AdministeredPrice

CPIInflation Contribution Inflation Contribution Inflation Contribution

2006 6.03 3.48 15.27 2.75 1.84 0.37 6.6

2007 6.29 3.75 11.41 2.09 3.30 0.75 6.59

2008 8.29 5.48 16.48 2.59 15.99 2.99 11.06

(percent, yoy)



Chapter 1

inflation in 2008 compared to the previous year. Prices for subsidised fuels (premium gasoline and diesel fuel) were not lowered until December 2008, when world oil prices resumed decline. This price cut had a first round effect on CPI inflation of -0.54%. However, the second round effect was negligible.

The high inflation in administered prices was also fuelled by price increases for kerosene, LPG and cigarette retail prices (Table 1.17). High kerosene prices resulted from supply bottlenecks in the kerosene to LPG conversion programme. LPG prices similarly climbed due to supply shortages. An added factor driving up LPG prices lay in difficulties in distribution. In July 2008, 12 kg bottled LPG went up from Rp 51,000 to Rp 63,000� (24%) in line with higher LPG prices on the international market and escalating operational costs.� Overall, household fuels 5 New price effective 1 July 2008 pursuant to Decree of the Director

of Marketing and Commercial Affairs No. Kpts- 101/F00000/2008-S3 dated 27 June 2008 concerning Selling Price for 12 Kg Bottled LPG (Pertamina).

6 When the LPG selling price was fixed at Rp. 4,250/kg (2005), the international LPG price (CP Aramco) was USD 310/MT. In June 2008, however, the international LPG price (CP Aramco) reached USD830/MT, an increase of 173%. Added to this were increased operational and distribution costs following the fuel price hike. Contributing to the higher operating costs were: transportation, agent margins and filling fee ranging from 15% to 20% (Pertamina).

contributed 1.16% out of the total 11.06% inflation figure for 2008 (Chart 1.27). Meanwhile, the rise in cigarette prices followed the announcement of increased retail cigarette prices in January 2008.� During 2008, filter clove cigarette contributed 0.19% to inflation (Table 1.17).

Volatile Food

Despite measures to keep foodstuffs in adequate supply, strong pressure from external factors produced increased volatile foods inflation. Rising international commodity prices pushed up volatile foods inflation from 11.41% (yoy) in 2007 to 16.48% (yoy)in 2008. Heightened volatile foods inflation resulted primarily from the effect of escalating international foodstuff prices on domestic foodstuff prices.

High global food prices in the first half of 2008 spurred price increase for similar commodities on the domestic market. Prices for some volatile food commodities, in particular cooking oil, increased dramatically. Soaring cooking oil prices were linked to the upward trend in

7 The Government set excise rates for 2008 in Minister of Finance Regulation (PMK) Number 134/PMK.04/2007 concerning Base Prices and Excise Rates on Tobacco Products effective from 1 January 2008.

Chart 1.27. Household Fuel Contribution to Inflation

Table 1.16. The Impact of First and Second Round Fuel Price Hike

EffectsWeight (May 2008,Base

2007)

FuelPriceIncrease

PriceRp/l(April2008)

PriceRp/l(May 2008)

Contribution to inflation (%)

First RoundGasoline 3.71 4,500 6,000 1.12Diesel 0.08 4,300 5,500 0.02Kerosene 2.64* 2,000 2,500 0.08Total First Round 3.79 1.22Second RoundInter City 0.67 0.10Intra City 2.85 0.68Taxi 0.07 0.01Air Transportation 0.46 0.04Total Second Round 4.05 0.82TOTAL 7.83 2.05

* kerosene weight is based on 2007=100 per April 2008

Table 1.17. Administered Commodities Contribution to Inflation in 2008

CommoditiesContribution

2007 2008

Fuel 0.08 1.16Gasoline 0.10 0.57Intra City Transportation 0.00 0.69Filtered Clove Cigarette 0.24 0.19Clove Cigarette 0.12 0.08Cigarette 0.03 0.03PAM Drinking Water Tariff 0.00 0.04Diesel 0.01 0.01

Source : BPS-Statistics Indonesia, consumption value processed

(percent)

Table 1.18. Volatile Food Commodities Contribution to Inflation in 2008

CommoditiesContribution

2007 2008

Broiler Chicken Meat 0.17 0.28Rice 0.52 0.31Broiler Chicken Egg 0.13 0.19Tofu 0.08 0.17Meat 0.01 0.15Cooking Oil 0.49 0.10Red Chili 0.00 0.19

Source : BPS-Statistics Indonesia, consumption value processed

(percent)


Chapter 1

world CPO prices. In December 2007, CPO had reached 887.8 US dollars per metric ton before climbing 29% to a peak of 1,149 US dollars per metric ton in March 2008. Steep price increases were also recorded in commercially-raised chicken meat and eggs, a result of hikes in animal feed prices caused by rising international prices for corn (Table 1.18).

To mitigate the impact of rising global food prices, the Government launched a series of price stabilisation polices for staple needs in 2008. These policies include: 1) VAT subsidy for domestic sales of bulk and packaged cooking oil, imported cereal grains and domestic flour sales, 2) market operations for cheap Rp 2,500 per litre low-priced/subsidised cooking oil over 6 months, 3) import

duty relief for soybeans, 4) reduction in import income tax on soybeans (from 2.5% to 0.5%), cereal grains and flour, and 5) subsidised sales of soybeans for soybean curd/cake makers over 6 months (Table 1.19).

Rice prices in 2008 were relatively stable compared to the year before. This was supported by higher rice production and rice procurement by the National Logistics Agency (Bulog) (Chart 1.28). It is noteworthy that when the Government raised the Procurement Floor Price for milled rice and dry unhusked rice in 2008, rice prices remained comparatively stable even though such price increases are usually followed by trader speculation (Chart 1.29). Rice prices surged in early 2008 due to limited supply caused by the prolonged dry season. Rice production was up

Chart 1.28. Rice Procurement by Bulog Chart 1.29. Rice Inflation

Table 1.19. Increase in International Commodity Prices and Related Domestic Commodity Prices

No International Commodities Domestic Commodities Weight***

1% International Commodities Price

to Domestik Price, in year2007(%)

1% International Commodities Price to Domestik Price, in year 2008 (%) Remark

IncreasingCycle DecreasingCycle

1CPO Cooking Oil 1.40 0.62 0.78 0.13

Margarine 0 0.21 1.13 -0.08 Downward Rigidity

2Wheat Flour 0.10 0.39 0.86 -0.01

Flour Product(noodle, bread, cake) 4.70 0.10 0.38 -0.13

3Soybean Soybean 0 0.36 1.20 0 Downward Rigidity

Soybean Product (tofu, soybean cake, soy sauce,etc)

0.80 0.14 0.99 -0.15

4

Corn Corn 0 0.86 0.50 0.47

Broiler Chicken 1.50 0.85 0.23 -0.49

Chicken Egg 0.80 1.31 0.25 -0.52

5 Sugar Sugar 0.60 -0.45 0.20 0.08

6 Gold Jewelry 1.40 0.97 0.44 0 Influence of rupiah depreciation in decreasing cycle

7 Total 11.4

* Average price of December 2007 compared to 2006** International price increase cyclus (dihitung ytd sampai harga mencapai puncaknya) & International price decrease cyclus (dihitung sejak harga menurun sampai 22 Desember 2008)*** Based on 2007=100


Chapter 1

Chart 1.30. Consensus Forecast Inflation Expectation

5.46% in 2008 (3.12 million tons) over the preceding year, reaching 60.2 million tons of dry unhusked rice (based on third quarter forecast released by BPS).

Fundamentals

Core Inflation

Core inflation remained persistently high in 2008 due to pressure from external factors and high inflation expectations. At 8.29% (yoy), core inflation was up from the previous year’s level of 6.03% (yoy). The rise in core inflation came in response to increased pressure from imported inflation, fuelled by sharply increased international prices for commodities such as crude oil, CPO, gold and cereal grains in the first half of 2008. In addition, the effect of rising international commodity prices and Government energy policy on inflation expectations also generated added inflationary pressure. On the other hand, after temporarily increasing, pressure from the demand side was back down in QIV-2008.

Inflation Expectations

Inflation expectations remained at a high level up to QIII-2008. A surge in inflation expectations took place in May 2008 in response to the Government decision to raise subsidised fuel prices. Based on the Consensus Forecast survey, inflation forecasts for 2008 from several institutions showed a rise in inflation expectations from 6.7% at the beginning of the year to 10.4%, far exceeding the 2008 inflation target of 5% ±1% (Chart 1.30). Heightened inflation expectations were also reflected in

the results of the Consumer Survey and the Retails Survey for 3 months and 6 months forward, despite considerable easing after September 2008 in line with the fall in international commodity prices (Charts 1.31 and 1.32).

Chart 1.32. Retailer Price Expectation

Chart 1.31. Consumers Price Expectation

Chart 1.33. Exchange Rate and Inflation of Trading Partner Countries


Chapter 1

ExternalFactors

External factors exerted predominant influence on inflation in 2008. The magnitude of external impact was reflected in escalating inflation in early 2008, in keeping with the rise in international commodity prices.

During the first half of 2008, escalating international commodity prices (gold, cereal grains, soybeans, corn, CPO and sugar) fuelled inflationary pressure across many countries, a development reflected in rising trading partner inflation (US, Singapore, Germany, China, Japan and Korea) from 2.66% in December 2007 to a peak in July 2008 of 4.07%. Higher inflation in trading partner nations was in turn reflected in the Import Wholesale Price Index. The Import Wholesale Price Index soared from 25.60% (yoy) in 2007 to a peak in July 2008 of 41.9% (yoy). However, the rise in this index was not fully transmitted to domestic consumer prices due to partial local content. Inflation in imported commodities mounted from 12.59% (yoy) in 2007 to 19.5% (yoy) in July 2008.

In the second half of 2008, pressure from external factors eased with the collapse in global commodity prices alongside the weakening of the global economy. Falling inflation in trading partner nations led to reduced inflation in the wholesale price index for imports, an indicator of price movements in imported merchandise (Chart 1.33). Nevertheless, year-end CPI inflation was still comparatively high due to the still minimal producer response to softening pressure from imported inflation. Rupiah depreciation at the end of the year also prevented CPI inflation from easing further. The sharp drop in the value of the rupiah in October and November 2008 is suggested to be the dominant factor holding back CPI inflation from declining in the second half of 2008 (Chart 1.34).

Supply and Demand Interaction

Inflationary pressure from the output gap remained minimal and in fact showed a downward trend in line with slowing growth in domestic demand. Reflecting this was the more modest growth in retail sales compared to 2007. The growth of consumption credit in QIV-2008 also slowed, despite previous rapid growth. In line with this, economic liquidity in M1 and growth in cash outside banks in QIV-2008 began showing a downward trend.

On the supply side, similar decline was observed in the manufacturing sector production index and capacity utilisation index. Quarterly business survey results also point to comparatively stable levels of capacity utilisation. This indicates that most industries are able to draw on capacity to raise output in the event of increased demand.

Monetary Developments and Government Finances

Monetary Developments

The movement in monetary indicators in 2008 was also strongly affected by global factors and the dynamic of the domestic economy. Tight liquidity on global financial markets triggered by the subprime mortgage problem unfolded into a crisis of confidence. As a result, capital outflows from emerging markets gathered intensity. These conditions paved the way for the weakening of the rupiah and tumbling performance of the domestic financial market in the second half of 2008. Even so, the Indonesian economy still showed considerable resilience with growth exceeding 6% during the first three quarters and pressure bearing down only in QIV-2008. In keeping with these conditions, monetary indicators such as currency outside banks and credits grew at an accelerated rate before slowing in the final quarter of 2008.

Mounting global pressures in the second half of 2008 also led to temporary liquidity shortage on the money market. Reflecting this was an increase in the liquidity premium and reduction in bank excess liquidity positions. The liquidity shortage was accompanied by escalation in counterparty risk and spreading impact that diminished confidence in interbank money market transactions. Some key players on the interbank market restructured their credit lines and credit limits, creating even more uneven liquidity distribution on the market, especially after the outbreak of a case that brought down one local bank. Taken together, these conditions led to diminished volume

Chart 1.34. WPI Import and Imported Commodities CPI


Chapter 1

of interbank money market transactions that prompted banks to compete with each other in mobilising depositor funds. This condition persisted even after the decision to relax the minimum reserve requirement in October 2008 (Charts 1.35-1.38).

During 2008, currency expanded by an average 27.3%, considerably faster than during the preceding year (18.1%). Accelerated growth began early in the year, reaching a peak in September. This condition was closely linked to the continued strong economic growth, especially in private consumption, with added support from the Government-provided direct cash transfers during the year. Supporting this was the brisk bank credit expansion at over 30% during 2008, representing very high growth compared to the preceding year. Despite this, currency and credit underwent slowing growth in QIV-2008, corresponding to the condition of the domestic economy.

The escalating knock-on effects from the global crisis on the domestic financial market since the second half of

2008 have had significant impact on monetary indicators. Privately held demand deposits saw markedly reduced growth alongside the stock market downturn reflected in the plunging Indonesia Composite Index (ICI). This condition has led to slowing growth in the narrow measure of money circulating in the economy (M1). With the context of persistent inflationary pressure, this suggests a weakening in purchasing power reflected in the progressively steeper correction in real M1 growth until the end of 2008 (Charts 1.39-1.40).

The stock of excess bank liquidity, held mostly at Bank Indonesia in various Open Market Operation (OMO) instruments, plunged drastically, even dipping below the reference level. At end-2007, the OMO position was recorded at Rp 281.2 trillion, but at end-2008, this position had dropped to Rp 233.9 trillion. Factors contributing to this included not only rapid credit expansion, but also Bank Indonesia’s efforts to maintain exchange rate stability through forerign exchange market interventions. Compounding this effect was the seasonal trend in which additional rupiah liquidity from net Government financial

Chart 1.37. Currency and Credit Growth

Chart 1.36. Credit Growth per Currency

Chart 1.38. Growth of Private Demand Deposits and ICI

Chart 1.35. M0 and Currency Growth


Chapter 1

operations came on the money market only during the final quarter of 2008. These conditions converged to produce a temporary liquidity crunch on the money market and a shift in preferences for liquidity placements to shorter tenor monetary instruments (Chart 1.41).

Tight liquidity on the money market was reflected in the rising liquidity premium, which widened progressively for longer tenors. With conditions tightening on the money market, some banks customarily supplying liquidity reviewed their credit lines and credit limits with individual counterparties. This resulted in more uneven distribution of liquidity on the market tending towards greater segmentation, due to loss of confidence in transactions. Reflecting this was movement in the overnight interbank rate, which remained above the BI Rate during July-October 2008, alongside drastically reduced transaction volume and a growing spread between the highest and lowest overnight rates. Following this, banks with long positions on the money market chose to shift their liquidity to Bank Indonesia short-term

monetary instruments, rather than hold cash in interbank placements, to provide greater assurance of their liquidity amid susceptibility to financial market turmoil. Under these conditions, outstanding SBIs fell dramatically from the end-2007 position of Rp 247.9 trillion to only Rp 179.8 trillion at end-2008.

The relatively tight condition of the money market prompted banks to work more aggressively to mobilise depositor funds. From the end of July, banks competed more vigorously for prime customers by offering high deposit rates. This condition persisted until end of year, due to the high liquidity premium on the money market that reached a peak in November 2008 following problems at one local bank. In response to these conditions, Bank Indonesia announced policies including refinements to monetary policy implementation on the rupiah money market and simplification combined with relaxation of the minimum reserve requirement. Banking liquidity quickly improved from the actions taken under these policies and more expansionary Government financial operations at

Chart 1.39. M1, M2, and Rupiah M2 GrowthChart 1.40. Growth of Real Currency, M1, and M2

Chart 1.41. Stock of Banking Excess Liquidity Chart 1.42. Liquidity Premium (JIBOR - OIS)


Chapter 1

Chart 1.43. Premium Among Tenor Chart 1.44. O/N PUAB and BI Rate

end-2008 (Charts 1.42-1.44).

GovernmentFinances

Budget implementation in 2008 did not escape the various challenges from external turmoil. In the first half of 2008, the world economic slowdown and escalating world market prices for crude oil and food commodities threatened to curb state revenues while raising the fiscal deficit. To address this, the Government undertook nine policy actions to secure the operation of the 2008 Budget. In the second half of 2008, yield on Government Securities mounted significantly due to the impact of the global financial crisis, compelling the Government to halt bond issues in October. In the end, however, fiscal operations were secured through successful efforts to boost Government revenues.

Above-target state revenues enabled the 2008 Budget deficit to be reduced to 0.1% of GDP, well below the Revised 2008 Budget target of 2.1% of GDP. This level of deficit still permitted an increased fiscal contribution to the real sector and a financing surplus. According to plans, this financing surplus will be used to finance the 2009 Budget and additional fiscal stimulus in 2009. The overall fundamentals of fiscal management will be stronger in 2009, with oil prices moving in line with the market and the availability of fiscal reserve funds.

RevenuesandGrants

Revenues and grants mounted significantly in the fiscal outcome of 2008, a result of various Government policies and the impact of macroeconomic conditions. Annual growth in revenues and grants reached 38.6%, up considerably from the 2007 growth of 11%. Major

contributions to this achievement came from the taxation and oil and natural gas sectors. These conditions enabled the revenues and grants outcome to mount to 109.6% of the Revised 2008 Budget. In the taxation sector, revenues were up 34.2% to 108.1% of the Revised 2008 Budget, well ahead of the preceding year’s growth of 20%. Also reflecting improved taxation performance was the tax ratio at 14.7% of GDP, having climbed from the 2007 tax ratio of 12.4% of GDP.

This rise in taxation revenues was closely linked to the effects of intensified tax compliance, broadening of the tax base, modernisation of tax administration, tax enforcement and other, similar policies. Intensification of tax compliance in 2008 focused on maximising tax potential in booming sectors, such as the palm oil, coal and construction industries and a programme for mapping, profiling and benchmarking of taxpayers. Law enforcement focused on the excise sector in order to eradicate traffic in illegal tobacco. Besides policy enhancements, conditions in the external sector also contributed to more robust tax revenues. Soaring prices for oil and other international market commodities resulted in significant increases in oil and natural gas income tax, import duties and export taxes until about midway through QIII-2008.

These conditions led to a significant rise in taxation revenues despite some slowing in economic growth due to the impact of the global economic crisis. Non-tax revenues also outperformed the targets set in the Revised 2008 Budget. During 2008, non-tax revenues reached 113.2% of the budgeted level. Key to this were soaring crude oil prices and the weakening of the exchange rate. Crude oil prices averaged 94.2 US dollars per barrel during 2008, well above the 2007 average price of 78 US dollars per barrel. Non-tax revenues were not only strengthened by


Chapter 1

prices, but also by higher oil production with domestic lifting reaching 931,000 barrels per day, also up from the 2007 level of only 909,000 barrels per day. An added boost came from the decision to order SOEs to pay interim dividends, which increased the profits received from SOEs.

StateExpenditures

State expenditures also rose in response to implementation of various price stabilisation programmes to mitigate the impact of the global economic crisis on the domestic economy. Expenditure growth reached 30%, well above the 2007 level of 13.6% with spending on subsidies rising by 83.3%. The relentless climb in oil prices from early 2008 forced the Government to take economy measures and review expenditure priorities, particularly in line ministries and statutory agencies, in order to maintain fiscal sustainability amid the burden of escalating subsidies. The drastic increase in oil prices forced the Government to raise domestic subsidised fuel prices while compensating with direct cash transfers. In December 2008, however, the Government was able to lower these prices following a dramatic fall in crude oil prices.

In a similar vein, the effect on the domestic economy soaring prices for key global food commodities necessitated the launching of Price Stabilisation Policy Packages, involving tax cuts for food commodities such as rice, cooking oil, wheat and soybeans and added food subsidies. Through these developments, state expenditures came quite close to the 2008 target (99.6% of the Revised Budget), albeit with ministry and statutory agency expenditures at only 91.5% of the Revised 2008 Budget levels. Under the increased subsidy spending, the largest share of these expenditures was used for subsidies and debt interest (36.9%), followed by expenditures on the regions (29.7%) and the remainder for the central Government fiscal stimulus and compensation for the fuel subsidy cut.

Deficit Financing

The operation of the Revised 2008 Budget was marked by significant excess deficit financing. With the performance

in revenues as described above and expenditures on target, the deficit under the Revised 2008 Budget came to only Rp 4.2 trillion (0.1% of GDP), far below the Revised 2008 Budget target of Rp 51.3 trillion (21.3% of GDP). The deficit financing outcome in the Revised 2008 Budget was also below target, but with the reduced deficit outcome, the Government booked Rp 51.3 trillion in Unused Budget Funds. These funds are planned for use in financing the 2009 Budget deficit and in delivering an extra fiscal stimulus in 2009.

Until mid-QIII-2008, deficit financing operated smoothly through issuances of Government Bonds. However, in September 2008, the Government Bonds market began to face significant upward pressure in yields. Faced with this situation, the Government decided to halt issuances of Government Bonds from October 2008. Deteriorating bond prices on the international market also led the Government to postpone the issue of foreign currency Sharia Government Securities (SBSN) at end-2008. As a result, the deficit financing outcome in the 2008 budget fell far short of target. At end-December 2008, new issuances of rupiah and foreign currency Government Securities (SBN) totalled only Rp 86.9 trillion and 4.2 billion US dollars. After deducting the value of maturing Government Bond (SUN) and buyback transactions, net issuance of Government Securities came to Rp 85.9 trillion, considerably below the Rp 117.8 trillion target in the Revised 2008 Budget. Alongside this, the Government engaged in buyback of Government Bond during April, October and November in an effort to stabilise prices for this instrument.

Asset sales under the privatisation programme were on target as of December, while the sale of banking assets by Asset Management Company (PT PPA) fell short. The Government was able to raise about Rp 0.6 trillion from privatisation sales, slightly above the Revised 2008 Budget target of Rp 0.5 trillion. However, PT PPA sales under the bank restructuring programme netted only about Rp 0.6 trillion, well below the Rp 3.9 trillion target in the Revised 2008 Budget. Externally, disbursements from foreign loans fell short of the Revised 2008 Budget target, while principal repayments were made according to schedule. As a result, net disbursement from external borrowings was under target.


Chapter 1

The turmoil from the global economic crisis is predicted to remain a dominant factor in the condition of the Indonesian economy in 2009. The slowdown in the world economy is forecasted to continue during this year. Accordingly, world trade volume and international commodity prices are set to weaken further. Due to the effect of the global economic slowdown, the Indonesian economy in 2009 is predicted to chart reduced growth at about 4.0%. On the demand side, export growth will taper off in response to weakening economic growth in Indonesia’s trading partners. Added to this, falling commodity prices will put further pressure on incentives to export. Declining exports are expected to impact public purchasing power and weaken household consumption. This in turn will reduce investment growth as well as imports. In analysis by sector, the slowdown in the external sector will influence the tradable sectors of manufacturing, agriculture and mining, where growth is forecasted to decline.

In the balance of payments, deficit pressure is set to rise in the current account during 2009 from weakening export demand and continued fall in commodity prices. However, no excessive deficit pressure is expected, with import growth set to decline. At the same time, the unstable condition of global liquidity augurs for a deficit in the capital and financial account. Accordingly, during 2009

Indonesia’s balance of payments is forecasted to post a deficit of 0.59% of GDP.

Inflationary pressure in 2009 is also predicted to ease towards the 5%-7% range. On the fundamentals side, inflationary pressure will soften in response to reduced imported inflation due to the effect of falling world commodity, food and energy prices and subdued expectations of inflation. The buoyant forecast for domestic food crops and slowing aggregate demand are other factors that will help subdue inflation. On the non-fundamentals side, lower inflation in 2009 will be supported by adequate supply and smooth distribution of staple goods, as well as minimum increases in administered prices.

On the fiscal side, the weakening in the domestic economy necessitates a widening in the 2009 Budget deficit compared to 2008. Although the deficit will be higher, the fiscal stimulus is still expected to be lower because the increased deficit will result mainly from lower revenues. An added fiscal stimulus will be delivered through various social safety net programmes with direct impact on private consumption. Financing for the enlarged 2009 Budget deficit will be provided from external borrowings and unused budget expenditures carried forward from 2008.

ECONOMIC OUTLOOK AND POLICY DIRECTION

1.2


Chapter 1

GlobalEconomicOutlookin2009

The world economy is forecasted to chart reduced growth in 2009. World economic growth is projected to plunge to 0.4% (yoy) in 2009 compared to the 2008 level of 3.4% (Chart 1.45). The slowdown is predicted to carry forward into 2009 and persist until an expected turnaround at the end of the year. Consistent with the forecast for world GDP, volume of world trade and non-oil and gas commodity prices are projected to fall by -3.0% (yoy) and -22% (yoy) (Chart 1.46).

Aside from the economic contraction in the US, Eurozone and Japan, the potential for downside risk for economic slowdown in developing countries in 2009 is reinforced by the deterioration in global macroeconomic indicators. Key economic indicators for the US, Eurozone and Japan, including indicators for housing, household consumption and industry, are in steady decline. As a result, during 2009 the economies in the US, Eurozone and Japan are predicted to undergo contraction. The IMF predicts US growth in 2009 to reach -1.6%, while the Eurozone will slow -2.0% and Japan -2.6%. The economic contraction in advanced nations will impact developing economies through reduced export demand, falling global commodity prices and loss of worker remittances. For these reasons, economic growth in developing nations is forecasted at 3.3%.

World trade volume in 2009 is predicted to chart stagnating growth, in line with the economic contraction in advanced countries (US, Eurozone and Japan). The economic contraction in advanced nations will drive down demand for imports and slow the exports of those nations. The WEO (January 2009) forecasts imports of advanced economies to shrink by -3.1% (yoy) in 2009, while exports from these countries will diminish -3.7%

(yoy). The reduced imports in advanced economies will impact demand for exports from the developing world. In 2009, developing country exports are forecasted to drop by -0.8% (yoy). With exports in decline, imports by developing countries are similarly forecasted to slow by -2.2% (yoy). Taken together, the forecasted growth in world trade volume is anticipated to be below the long-term trend, dipping to -3.0%

In related developments, crude oil prices are forecasted to decline in 2009. The continued global economic slowdown in 2009 will sap energy demand, which will in turn bring down prices for oil and other energy commodities. Crude oil prices are forecasted to settle at 43 US dollars per barrel, compared to the 2008 level of 94.0 dollars per barrel.

Prices for non-oil and gas commodities are similarly set to weaken in comparison to the preceding year, with global commodity prices tumbling -22% (yoy). The World Bank also supports this outlook. In its 2009 forecasts, food and metal prices, is projected to come down 23% (yoy) and 26% (yoy) respectively.

In regard to inflation, falling commodity prices and global economic slowdown will ease inflationary pressure in 2009. Inflationary pressure in 2009 is forecasted to subside in keeping with low commodity prices as an indirect result of the slowing global economy. In the WEO forecast (January 2009), inflation in advanced countries and emerging economies is projected to fall to 0.3% and 5.8%, respectively, from 3.5% and 9.2% one year earlier.

Capital inflows to emerging economies, including the Asia Pacific region, are predicted to be lower in 2009 compared to the preceding year. The decline in net capital inflows is mainly the result of the deteriorating global economic

Chart 1.45. World Economic Growth Chart 1.46. World Trade Volume


Chapter 1

outlook for 2009. In a similar vein, the worsening outlook will also heighten perceptions of emerging market risk. The downturn is predicted in flows of private creditor capital, mainly from commercial banks, due to waning interest and funding capacity of banks constrained by the tight liquidity on the global interbank market. Outflows of foreign funds from stock markets are predicted to continue in 2009. Nevertheless, foreign direct investment inflows are forecasted to hold at about the same level compared to 2008.

Economic Growth Outlook

The continuing impact from global financial turmoil is expected to bear down on the Indonesian economy in 2009. Economic growth is predicted to slow from 6.1% in 2008 to 4.0% in 2009. Slackening global demand and falling commodity prices will be transmitted to the domestic economy through the international trade channel. Under these conditions, export performance will see significant decline. With the adverse trend in external conditions, domestic demand will be a key source of economic growth. Steeper decline in private consumption in 2009, a result of deterioration in the income effect and exports, will be offset by the spending by election contestants, increases in provincial minimum wages and civil servant salaries and government income support policies. Alongside this, investment growth is predicted to ease in keeping with weakening demand and comparatively high levels of uncertainty (Table 1.20).

AggregateDemandOutlook

Household consumption is forecasted to slow considerably during 2009. After a year of high growth in 2008, household consumption in 2009 is set to climb only 3.7%. The slowing in household consumption that

became visible during Q3/2008 will take deeper hold in the present year. Analysed by category, the slowdown will affect mainly non-food consumption, as indicated by stagnating sales of cars, motorcycles and electronic goods since October 2008. This downturn will result from declining public purchasing power, hit by the fallout from deteriorating export performance (income effect) and weakening prices for stocks/other financial assets (wealth effect).

Flagging exports are expected to reduce available employment, as experienced by oil palm farmers and workers in the textile and textile products industry. These job losses may lead consumers to delay purchases as a means of precautionary saving. Weakening household consumption will also be caused by reduced availability of household consumer financing, particularly from banks. In 2009, the outlook is for reduced lending growth, including consumption credit. This is related to perceptions of mounting credit risk and the persistently high level of uncertainties.

Other factors influencing private consumption in 2009 include increases in provincial minimum wage levels and civil servant salary scales, support from government fiscal policy and the holding of the national elections in 2009. Provincial minimum wages are generally set to outpace inflation in 2009. Government policies stimulating economic activity include the increased tax-free income bracket, simplification of corporate and personal taxation rates, tax incentives for publicly-listed companies and MSMEs, reduced tax on corporate dividends and increased budget allocations for social assistance. These budget allocations will be used for the Rural Community Block Grant Empowerment Programme (PNPM), subsidised health care and conditional direct cash transfers. Other factors bolstering private consumption include higher incomes in the middle and upper class, which generally climbed 19%-22% in 2008 over 2007.

Table 1.20. Economic Growth Outlook by Expenditures

Components 2003 2004 2005 2006 2007 2008 2009*

Gross Domestic Product 4.8 5.0 5.7 5.5 6.3 6.1 4.0

Private Consumption 3.9 5.0 4.0 3.2 5.0 5.3 3.7

Government Consumption 10.0 4.0 6.6 9.6 3.9 10.4 9.9

Gross Fixed Capital Formation 0.6 14.7 10.9 2.6 9.4 11.7 6.0

Exports of Goods and Services 5.9 13.5 16.6 9.4 8.5 9.5 -4.6

Imports of Goods and Services 1.6 26.7 17.8 8.6 9.0 10.0 -4.8

*) Bank Indonesia Projection

(percent, yoy, base year 2000)


Chapter 1

Government consumption is predicted to taper off in 2009, with growth in the range of 9.9% range. The downward movement in oil prices set for 2009 will reduce government revenues from natural resources extraction. In government budget allocations, the lower revenues will necessitate cuts in the equalisation funds distributed to the regions, most importantly profit sharing funds. This will depress growth in regional government consumption during 2009. At the same time, central government consumption is predicted to expand at a faster rate compared to 2008. This growth will be reflected in significant increases in material expenditure items. Expenditures will also rise from allocations for the national elections for members of the legislature and executive, which in past years were not recorded in central government consumption. With civil servants set to receive a pay rise, personnel expenditures will represent a further source of increased central government spending.

At the same time, investment activity in 2009 is predicted to expand 6.0%, a slower rate compared to 2008. This reduced growth will take place in both non-construction and construction investment. With the weakening domestic economy, business will tend to postpone expansion because of the flagging demand that has taken the edge off the incentive to invest. Investment delays are expected in cement production, textiles and textile products and expansion of oil palm estates.

Construction investment growth is forecasted to fall in 2009. Most affected will be infrastructure projects, due to various obstacles and constraints. The hindrances to infrastructure development include regulation, technical requirements and limited financing. In a situation of adverse developments in the global economy, investment financing from the banking system and the Government will become increasingly scarce. Despite this, budget allocations for construction are still expected to provide vital support for construction investment in 2009. The construction investment fiscal stimulus includes budget funding for construction of roads and bridges, clean water supply, markets, irrigation and electricity.

On the external side, exports of goods and services will see significant slowdown due to the effects of the weakening world economy. In 2009, exports of goods and services are predicted to fall by -4.6%. The recession in advanced economies such as the US, Japan and the Eurozone will bear down on Indonesian exports. Slowing growth in emerging markets such as China and India, now export markets for Indonesia, will also affect export performance. According to Bank Indonesia research,

Indonesia’s major export commodities are elastic to incomes in key trading partners, i.e. Singapore, the US and Japan. Falling incomes in these nations will impact exports of mainstay commodities such as textiles and textile products, metals, paper, coal and chemicals.

Exports will be impacted not only by the global economic slowdown, but also falling international commodity prices. With commodity prices down, there will be less incentive to export non-oil and gas products – dominated by primary commodities such as palm oil, rubber and copper – due to low selling value on the international market. On the financing side, tight availability of trade financing will hamper future exports. Added to this, the tightening of export financing schemes in Indonesia is forecasted to put brakes on exporter financing.

Imports in 2009 are predicted to fall. Imports of goods and services in 2009 are set to contract about -4.8% in comparison to 2008. Weak domestic demand from private consumption augurs for reduced imports of consumption goods in 2009. The slowing growth in investment and exports will also lead to cuts in imports of raw materials and capital goods. Falling international commodity prices in 2009 will drive down prices for imported goods. Despite this, total imports of goods and services will continue to decline given that the influence of lower prices will be insufficient to compensate for weak demand for imported goods.

AggregateSupplyOutlook

The global economic crisis set to continue in 2009 will lead to slowing growth in all economic sectors. Global economic contraction will give significant blow to performance in manufacturing industry, trade, hotels and restaurants and the transportation and communications sector (Table 1.21). Falling international commodity prices in 2009 will diminish the selling value of primary exported commodities, impacting revenues in the agriculture sector and the mining and quarrying sector. However, the transportation and communications sector, despite being hit by the global crisis, still retains capacity for fairly high growth, especially in the communications subsector.

Manufacturing industry growth in 2009 is forecasted to reach 2.0%, down significantly from the preceding year. The reason for this flagging performance is weakening exports in tandem with slowing domestic demand. The global economic crisis will give significant blow to export-oriented manufacturing, including textiles and textile


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products, footwear, electronics, automotives, wood and wood handicrafts. Weak domestic and external demand will force companies in the manufacturing sector to suspend production in a move to avoid excessive build-up of stocks.

Besides suffering from weak external demand, domestic economic expansion could also be constrained by tight liquidity and entry of lower-priced imports in dumping actions by developed nations hit by falling purchasing power. These imported products not only consist of semi-finished products, but also final products ready for use, competing head on with domestically manufactured products.

The trade, hotels and restaurants sector is forecasted to slow in 2009 to 4.5% compared to 2008. The most important factor in the weakening performance in this sector is flagging private consumption resulting from deteriorating public purchasing power. In consequence, activity in the wholesale and retail subsector will slow significantly. Sales in the retail subsector have fallen since the end of 2008. This condition is expected to persist during 2009. The most affected retail markets are automotives, electronics and footwear. Automotive trading, which showed buoyant performance during 2008, is expected to slow in 2009. Key factors driving down automotive sales are weak public purchasing power, rising auto prices and tight availability of financing.

The global economic crisis is also predicted to impact the hotels and restaurants subsector. The global loss of purchasing power will lead to falling volume of international tourism to various countries around the world, including Indonesia. In addition, weakening economic activity will prompt many companies to prioritise efficiency in bolstering corporate performance.

One impact of this will be cutbacks in business travel. Accordingly, average hotel occupancy rates in 2009 will be less than in 2008.

In 2009, the agriculture sector is forecasted to grow 3.9%, down from 2008. Key to the sluggish growth in the agriculture sector will be weakening performance in the plantation subsector. Products in the plantation subsector are dominated by exports. Falling external demand and plunging commodity prices will impact agriculture sector performance in 2009. The collapse in CPO and rubber prices alongside mounting stocks due to inadequate uptake for these products will be a blow to the performance of the sector as a whole. To prevent further collapse in prices, business actors are expected to tighten the supply of agricultural commodities. Rubber plantations, for example, are rejuvenating their plantings by culling unproductive trees. In the case of CPO, companies are delaying expansion while also rejuvenating their oil palm plantings in order to cut back the rate of increase of fresh fruit bunches (ffb) in response to build-up of stock.

On the other hand, the food crops subsector is expected to support the agriculture sector from further loss of growth. In 2009, rice and corn production will exceed domestic requirements. Indonesia may thus manage a turnaround in 2009 to become an exporter of rice and corn. The increased production of these food crops follows from expansion of land under cultivation and improved productivity. Growth in the food crops subsector will also be bolstered by the government commitment to national food resilience and sustainable food self-sufficiency.

The transportation and communications sector is predicted to maintain relatively strong growth at 10.0% in 2009, despite a downward trend. This robust

Table 1.21. Economic Growth Outlook by Sector

Sector 2003 2004 2005 2006 2007 2008 2009*

Gross Domestic Product 4.8 5.0 5.7 5.5 6.3 6.1 4.0

Agriculture 3.8 2.8 2.7 3.4 3.4 4.8 3.9

Mining and Quarrying -1.4 -4.5 3.2 1.7 2.0 0.5 0.3

Manufacturing 5.3 6.4 4.6 4.6 4.7 3.7 2.0

Electricity, Gas and Water Supply 4.9 5.3 6.3 5.8 10.3 10.9 7.6

Construction 6.1 7.5 7.5 8.3 8.6 7.3 5.2

Trade, Hotels and Restaurants 5.4 5.7 8.3 6.4 8.4 7.2 4.5

Transportation and Communication 12.2 13.4 12.8 14.2 14.0 16.7 10.0

Financial, Rental and Business Services 6.7 7.7 6.7 5.5 8.0 8.2 5.6

Services 4.4 5.4 5.2 6.2 6.6 6.4 4.1

*) Bank Indonesia Projection

(percent, yoy, base year 2000)


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growth will be supported mainly by performance in the communications subsector. Further investment is anticipated by some business players in the telecommunications subsector during 2009. This investment is targeted mainly at improvement in service quality and network coverage in order to maintain a leading edge amid increasing competition. The investment includes construction of base transceiver stations (BTS) and development of other communications technology. Over 30% increase in cellular telephone subscribers is forecasted for 2009. However, the transportation subsector is expected to see reduced growth. The global economic crisis is putting downward pressure on exports and imports, which in turn will deal a blow to freight activity, such as carried out by freight forwarding companies.

The global financial crisis will also impact growth in the construction sector. Construction growth in 2009 is forecasted at 5.2%, down from 7.3% in 2008. Several public-private partnership infrastructure projects will be delayed due to withdrawal of private partners. In most cases, the private partners in government infrastructure projects are pulling out for financial reasons. Amid the ongoing financial crisis, financing support for development projects from financial institutions is drying up. Funds can only be obtained at high cost, undermining the feasibility of these projects for private sector partners. On the government side, the commitment to accelerate infrastructure development to neutralise the impact of the financial crisis is reflected in the efforts to speed up absorption of infrastructure budget funds. For this purpose, the government has expedited the tendering process for infrastructure projects scheduled for 2009. This accelerated process is expected to provide an immediate stimulus for the real sector.

Like other sectors, the financial sector is predicted to slow during 2009. Financial sector growth is forecasted at 5.6%. The downturn in economic activity will weaken demand for financial intermediary services. Deteriorating economic performance in 2009 is expected to result in increased non-performing loans (NPLs). NPLs are predicted to worsen in the corporate sector, particularly among export-oriented manufacturing companies. The gloomy outlook for the financial sector is also borne out in the high interest rates that non-bank financial institutions charge to consumers. Auto financing, the customary business segment of non-bank financial institutions, has begun to decline as a result of tightened access to financing and loss of public purchasing power.

BankingSectorOutlook

In 2009, conditions in the banking system will remain overshadowed by continued uncertainties on the financial market caused by the ongoing global crisis. Heightened bank caution and the risk of mounting NPLs are forecasted to slow credit growth. Nonetheless, aggregate liquidity is predicted to increase albeit with some banks still facing liquidity risks due to the segmentation on the money market. However, this risk will improve as interest rates move lower.

As stated in the bank business plans, aggregate credit growth is projected at 15.4% (or about Rp 202 trillion), with funding to be provided by a projected Rp 220.2 trillion or 12.6% increase in deposits. The increase in deposits will again be dominated by time deposits, a more costly source of funding compared to savings and demand deposits. This suggests that interest rate movements will become one of the most important considerations for the banking system.

In analysis by sector, the most aggressive credit expansion is planned for consumption sectors, followed by business services, trade and agriculture. Disaggregated by use, the strongest increase will take place in consumption credit and subsequently in working capital credit. Micro, small and medium business loans are forecasted to keep rising, but at a less vigorous pace compared to growth in 2008.

Key banking indicators, such as the CAR and NPLs, are projected to remain sound despite potential for mounting NPLs in keeping with weakening economic activity. The banking industry CAR is forecasted to hold firm at a relatively strong 15% at the end of 2009.

In order to maintain the stability of banking and financial system, Bank Indonesia periodically monitors credit qualities of banks. This monitoring is done especially for small and medium banks with a potential of liquidity problem.

Bank Indonesia will also introduce banking policies designed to improve credit disbursement for productive purposes, improve risk management of banks especially in the case of liquidity and credit risk, accelerate banking consolidation particularly with respect to its capital, strengthen bank monitoring, urge the availability of accurate information in order to resolve segmentation in interbank money market (PUAB) and anticipate rising credit risk.


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Stock Market Outlook

With improving trend in the global financial market especially in the second half of 2009, domestic stock market is also forecasted to pick up. For the first half of 2009, investors is expected to remain cautious, while in the second half of 2009 transaction is anticipated to increase. Initial public offering (IPO) in Indonesian Stock Exchange (IDX) is expected to remain buoyant with approximately 15 IPOs, down marginally from 17 in the previous year. Meanwhile 25 companies will perform right issues.

In the bond market there will be 27 corporate bonds issuance in 2009. This figure is higher than that of 2008 due to several corporate bonds maturing in 2009. The prospect of dollar denominated domestic corporate bond issuance is expected to be less attractive compared to its rupiah counterpart due to escalating competition from US corporate bond products. A more brisk US economy recovery is expected to attract global investors to pursue US corporate bonds with high rating, cheap price and relatively high yield.

Corresponding to lower interest rate, the prospect for rupiah denominated corporate bonds in 2009 will be appealing. Tendencies of national banks to be prudent in allocating credit in the midst of increasing NPLs will push a number of domestic companies to issue rupiah corporate bonds to cover financing needs.

The market for government bond is also predicted to remain prospective in 2009, partly due to a more attractive yield Government bond issuance is also supported by the introduction of various new instruments such as SUKUK(Sharia Bond), while SUN net issuance is set lower than the figure in 2008.

Non-Bank Financial Institution Outlook

In 2009, mutual funds prospect remains sound. Although mutual fund’s net asset fell in 2008, but increase in unit of investment indicates investor’s appetite for this type of products is still quite high. This remains true for both type of mutual fund such as Income or protected mutual fund. Meanwhile the release of new government law reducing the amount of tax to zero8 on items such as income tax, tax on capital and bond interest, is predicted to cause mutual funds to be more attractive in 2009, particularly

8 The Government reduced a final income tax on interests or discount bonds earned by mutual fund companies listed in Capital Market and Financial Institution Supervision Agency. Final income tax of 0% applies to interests or discount bonds earned in 2009-2010, 5% applies to interests or discount bonds earned in 2011-2013, and 15% for earned in 2014 and years thereafter.

those based on bonds. Those bond-based mutual funds are considered to provide a solideturn and deemed more resilient in facing the impact of the global financial crisis. Conversely, demand for stock-based mutual funds, which was more appealing in the past, is expected to fall due to higher uncertainty.

Pension fund which grew quite well in 2008 will experience a slowdown in 2009. The threat of greater wave of lay off due to domestic economy slowdown encouraged many companies to withdraw their pension funds to pay employees’ severance. Nevertheless, pension fund is still predicted to grow and profit from long term investment such as government bond (SUN) and real estate investment trust (REITS). Meanwhile the prospect of insurance and financing business in 2009 is quite sound although with somewhat slower growth compared to 2008.

Balance of Payments and Exchange Rate Outlook

BalanceofPayments

In 2009, the Indonesian balance of payments is predicted to face heavy challenges as a result of the continued world economic turmoil. Weakened external demand and low commodity prices will hit export performance. Similarly, imports of goods and services are also predicted to lose momentum due to weakening domestic demand and falling commodity prices.

As a result, the current account will accumulate a deficit in 2009, although this deficit will not be significant. In the capital and financial account, the ongoing consolidation on global financial markets will impact capital inflows in Indonesia. For this reason, disbursements on external debt and issuance of government foreign currency bonds will be key to performance in the capital and financial account. Overall, Indonesia’s balance of payments is forecasted to sustain a deficit. This will bring international reserves at end-2009 to 48.8 billion US dollars, equivalent to 5.2 months of imports and servicing of official external debt.

CurrentAccount

The balance of trade is predicted to register a lower surplus compared to 2008, mainly from the downturn in exports. Slowing exports is one of the impacts of the global economic slowdown that has depressed demand for Indonesian export products. Due to the weak


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demand, commodity prices in 2009 are forecasted to decline. Significant reductions are expected in prices of industrial commodity based on natural resources. World oil prices are also set to move to lower levels. Although OPEC production cuts could potentially keep prices from tumbling further, weak demand will remain a key fundamental factor in oil price movements during 2009. Under these conditions, export performance will weaken in 2009 compared to conditions in 2008. Concerning imports, the weakening domestic economy and falling demand for raw material imports for export production mean that imports are also forecasted to decline (Table 1.22).

Alongside this, the deficit in the services and income account is predicted to ease in 2009. The fall of oil prices and trading activity will help bring down the deficit in the services account, particularly for freight services. A lower deficit is forecasted in the income account due to reduced interest payments on securities to non-residents, following changes in non-resident holdings of domestic portfolio

instruments. The current transfer surplus is not expected to change much from the preceding period. However, foreign exchange earnings from international tourists and worker remittances face serious challenges during the present global slowdown. With the combination of developments in the balance of trade and the services and income account, the current account is predicted to chart a relatively small deficit amounting to 0.5% of the GDP.

CapitalandFinancialAccount

In the capital and financial account, capital flows are expected to be constrained by the ongoing instability in global liquidity conditions and the outlook for flagging domestic economic performance. In the private sector, capital inflows are forecasted to decline in response to the gloomy economic outlook and tight global liquidity. Loan disbursements for direct investment and other purposes have fallen in line with the forecasts for slowing corporate

Table 1.22. Balance of Payments Outlook

Descriptions 2008 2009*

I. Current Account 606 -2,538

A. Goods, net (Balance of Trade) 23,309 14,770

– Exports, fob. 139,291 92,196

– Imports, fob. -115,981 -77,426

1. Non-Oil and Gas 15,549 11,104

– Exports 107,607 77,477

– Imports -92,059 -66,373

2. Oil and Gas 7,761 3,666

– Exports 31,683 14,720

– Imports -23,923 -11,054

B. Services, net -13,011 -9,673

C. Income, net -15,334 -12,514

D. Current Transfer, net 5,643 4,879

II. Capital and Financial Account -1,706 -304

A. Capital Account 353 96

B. Financial Account -2,060 -400

1. Direct Investment 2,479 -100

2. Portfolio Investment 1,753 1,092

3. Other Investment -6,291 -1,392

III. Total (I+II) -1,098 -2,841

IV. Net Errors and Omissions -847 0

V. Overall Balance (III+IV) -1,945 -2,841

VI. Reserve and Related Items 1) 1,945 2,841

A. Reserve Assets Changes 1,945 1,639

B. IMF Purchases 0 0

Memorandum:

International Reserve 51,639 48,798

(In months of imports and official foreign debt repayment) 4.0 5.2

1) (-) surplus; (+) deficit* Bank Indonesia Projection

(millions of USD)


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expansion and further decline in commodity prices. In contrast, government capital inflows are predicted to keep rising in view of the planned issue of foreign currency bonds under the Global Medium Term Notes (GMTN) programme, issuance of foreign currency sharia bonds (sukuk), disbursements of program and project loans, issuance of foreign currency bonds and drawing on standby loans (Deffered Drawdown Options). Even so, this will not be enough to support the performance of the capital and financial account. With the combination of these conditions, the overall capital and financial account is predicted to chart a deficit.

ExternalDebt

Looking ahead, external debt financing is predicted to become more scarce. This is will cause the private sector and the Government of Indonesia to encounter difficulties in accessing and sustaining inflows of external debt. In the case of Indonesia’s private sector, this condition is the result of several factors. Analysed by lender, about 50% of private external debt is loaned by banking institutions, which as a result of the crisis are tightening prudential regulation in their lending. This applies especially in the case of international creditors. In addition, the majority of external lenders to the private sector are institutions without ownership ties to private domestic companies. External debt from parent companies and affiliates accounts for only about 30% of the total private external debt position. With the global credit crunch set to continue, the absence of ownership ties with creditors is expected to bear down on inflows of private external debt. In analysis of the creditor nations involved, private external debt is also expected to become more scarce given that some of the major external lenders to the Indonesian private sector, such as Singapore, Europe, Japan and Hong Kong, are also caught up in the global financial crisis. Similar trends are also predicted for external borrowings from the USA, the fourth largest creditor nation to the private sector in Indonesia.

To manage government external debt, the Government will again rely on issuances of government securities (on the international market) to cover budget financing in 2009. The Government plans to issue bonds on the international market in the form of GMTN, Global Bonds and Sharia-compliant Securities (Sukuk).

Aside from this, the Government will keep pursuing actions to optimise financing sources within the overall scope of debt management amid the ongoing condition of tight global liquidity. In addition to the commercial market,

the Government is relying on support from Indonesian government partners at multilateral institutions and bilateral partners in the form of Program Loans and Project Loans. The Government is also negotiating up to USD6.5 billion in stand-by loans from multilateral and bilateral creditors as a reserve in case of difficulty in issuing debt on the commercial market.

ExchangeRate

In 2009, the rupiah exchange rate is predicted to sustain further pressure. Analysed by fundamentals, this trend is linked closely to the outlook for the balance of payments, which will still face external pressure. Weakening exports are expected to diminish the available supply of foreign currency on the domestic market. As can be expected, the forex market will be more susceptible to negative sentiment. In regard to capital flows, the ongoing turbulence on global financial markets will constrain the volume of foreign capital inflows into the domestic economy. On the other hand, assurance over the outcome of the national elections will encourage investors to return to the Indonesian financial market.

With global economic developments still shrouded in heightened uncertainty, efforts to maintain positive market perceptions will be crucial. To this end, Bank Indonesia will launch a range of policies to mitigate significant impact on the rupiah exchange rate. At the policy level, monetary management will need to be reinforced by actions to maintain exchange rate stability.

Inflation Outlook

CPI inflation is predicted to fall in 2009 to the 5%-7% range. Analysed by fundamentals, the softening of inflationary pressure is supported by decline in imported inflation, lower demand pressure (output gap), and modest inflation expectations. On the non-fundamentals side, downward movement in inflation will be supported by minimum increases in administered prices and measures to secure the supply and distribution of staple goods. Reduced imported inflation in 2009 will be driven by falling commodity, food and energy prices on world markets. International commodity prices have been in decline since the end of 2008, and are predicted to fall further in 2009. These falling prices also mean that inflation in major trading partners, such as China and the US, is on a downward trend. The combination of lower commodity prices and reduced trading partner inflation will drive down prices for goods imported for domestic


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use and export production. This in turn will ease imported inflation, which represents one of the components of core inflation.

Concerning inflation expectations, the downward trend in inflation since the last quarter of 2008 and decline in subsidised fuel prices are expected to guide expectations of inflation to a lower level. Inflationary pressure from supply-demand interaction is forecasted to be minimal due to the slowdown in economic growth. The minimum demand-side pressure is confirmed by the downward trend in capital utilisation, which remains below 70%. Falling demand pressure is also indicated by a widening output gap..

Inflationary pressure from administered prices is predicted to ease in 2009. The direct impact of the cuts in subsidised fuel prices in December 2008 is expected to carry forward early into the year. Following this, the second round effect with cuts in transport fares is similarly forecasted for this period. Fares for urban and intercity transportation are predicted to ease by an average 5%. Pressure from administered prices is expected from the continued conversion of kerosene to LPG programme and cigarette excise rates.

Inflationary pressure from volatile foods is forecasted to be minimum and declining during 2009. This is consistent with forecasts for sustained supply and distribution of foodstuffs. Within Indonesia, more abundant supply will be driven mainly by increased productivity with the use of hybrid seedlings, provision of subsidised fertilisers and improvements in agricultural infrastructure such as irrigation. Production of some food crops, such as rice and corn, is forecasted to rise. Furthermore, procurement of rice stocks by the National Logistics Agency (Bulog) is predicted at 3.8 million tons, the highest ever in the history of Bulog rice procurement. At the international level, food commodity prices, such as for cereal grains, corn and rice, are also forecasted to ease. Accordingly, imported foodstuffs are set to generate only minimum inflationary pressure.

Fiscal Outlook

The influence of the present global economic crisis on fiscal conditions is predicted to continue in 2009. The outlook for economic slowdown in 2009 has necessitated a downward revision in the economic growth assumption in the 2009 Budget. In this budget, the Government assumes an economic growth rate of 5%. Another key assumption is the world oil price, set at 45 US dollars

per barrel. The more modest assumed economic growth for 2009 compared to 2008 will limit taxation revenues. Likewise, lower oil prices will result in diminished revenues from oil and natural gas income taxes. On the expenditures side, reductions are also budgeted in subsidies and transfers to the regions from oil and natural gas profit sharing funds. Taken together, the slowing economic growth means that the Government projects the 2009 Budget deficit to mount to 2.5% of GDP.

The 2009 Budget is expected to maintain sound fiscal sustainability with the support of various financing sources. The deficit will be financed by issuances of securities in 2009, despite facing heavy challenges amid the expected adverse condition of financial markets. Added financing for the deficit is also envisaged from Unused 2008 Budget Expenditure funds, while other financing will be raised from standby loans (DDO) (Table 1.23). Concerning the structure of the 2009 Budget itself, the Government is allocating fiscal risk reserves as a measure to ensure availability of deficit financing.

With an increased deficit projected in the 2009 Budget, the Government is pursuing various policies to deliver a stimulus to the economy. A direct stimulus is budgeted in the form of government consumption and investment at the central level and the regions. The stimulus in central government consumption and investment will be in the form of increased salary for civil servants, 100% funding of civil servant pensions from the state budget and higher capital expenditures. The stimulus will also be used to fund education at 20% of the total budget and to pay for the national elections. In an added measure, the Government envisages a range of taxation and transfer policies to deliver an indirect stimulus. In the taxation sector, the Government will lower some taxation rates and offer tax relief for selected business sectors and categories of goods. Taken together, these taxation policies are

Table 1.23. Government Foreign Debt Withdrawal Plan for 2009

Budget StandbyLoan

A. Program 3,111- ADB 500 - World Bank 2,000- World Bank 1,511 - Japan 1,500- JBIC 700 - Australia 1,000- France 200 - ADB 1,000- Others 200 - IDB 500

B. Project 2,734 - France 500C. Bonds 5,534 6,000

- Global Bond* 2,250- Sharia Bond 1,000

TOTAL 9,095 6,500 *) Up to March 2009, realization number has reached 3.000 million US$ Source : Ministry of Finance

(millions of $)


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expected to provide significant relief for companies and individual taxpayers.

Besides delivering the direct and indirect stimulus, the government plans an extra fiscal stimulus in the 2009 Budget. This extra stimulus consists of a price cut for diesel fuel, reduced peak electricity billing rates for industrial users, added spending on infrastructure and expansion of the national community self-help empowerment programme (PNPM). These actions are expected to bring improvement to public purchasing power, strengthen business and export competitiveness and boost spending on labour-intensive infrastructure.

Risks

The slowdown in world economic growth represents a risk with major impact on the domestic economy. Growth in some advanced nations is forecasted to remain negative, while the list of emerging economies hit by the impact of the crisis portends to expand. Depressed world growth will lead to declining volume of world trade. The consequence of this will be loss of demand for Indonesian exports. Weakening export performance will impact the domestic economy and may deal a major blow to the current account.

The ambitious fiscal stimulus proposed by some advanced nations as a solution to the crisis may potentially be followed by international trade protectionism. The magnitude of losses from the crisis, including job losses and the vast amounts of taxpayers’ money being marshalled by these countries has dominated the thinking of governments in issuing various policies aimed at rescuing domestic economies. These policies have the objective of bring benefit to domestic companies, including to the extent possible to keep out imports. Such protectionist measures could send volume of world trade tumbling further, which then augurs for the possibility of a prolonged global crisis.

The downward spiral in world trade could well be followed by steeper decline in commodity prices. Should this happen, falling commodity prices will pose an added obstacle to exports, which are already buckling under weakening world demand. This would diminish further the incentive for Indonesia to export, given the predominant reliance on primary commodities. In consequence, Indonesia’s exports would suffer even further decline. Domestic economic growth would be dragged even lower and the balance of payments would potentially accumulate an even larger deficit.

In 2009, the Indonesian economy will also be heavily influenced by uncertainty on financial markets. The recapitalisation process launched by the global banking system has absorbed vast amounts of funds. The various rescue actions taken in the present crisis situation carry a high level of uncertainty. With the uncertainty of the situation and the huge volume of funding for bailouts, global liquidity will be tight. This may lead to greater difficulty in accessing external financing sources, which in turn will put pressure on the capital and financial account. Furthermore, limited supply of foreign currency on the domestic market under the present global liquidity crunch will exacerbate risk in the rupiah exchange rate.

Amid the constraints on external sources of growth, the implementation of various counter-cyclical policies is the primary thrust of efforts to keep the economy from further decline. However, the commitment to the fiscal stimulus delivered in a range of programmes - such as early budget implementation and social safety net programmes - runs the risk of falling short in implementation and not delivering the desired level of momentum for domestic economic growth. If conditions reversed, the increased fiscal deficit originally envisaged for stimulating the economy could bring heightened vulnerability in fiscal conditions and macroeconomic stability.

Concerning domestic financing, the economic uncertainty may hamper lending, with credit expansion falling short of forecasts. In a situation of adverse macroeconomic conditions and flagging purchasing power, perceptions of risk in the real sector will steadily mount. Under these conditions, banks and financial institutions will place prudential concerns foremost in their lending to the public to avoid accumulation of bad debts. This prudent stance will limit the availability of credit financing sources for debtors and thus constrain business expansion. As a result, the driving power for economic growth could lose steam, resulting in an overall stagnation in growth.

Another source of domestic risk is the persistent issue of banking industry stability related to the segmentation on the interbank market. This has resulted in uneven distribution of banking liquidity, even though aggregate bank liquidity remains sufficient. Under the present condition of segmentation, which has yet to be resolved, potential remains for liquidity problems to surface at some banks. Beside this, the possibility of a rise in non-performing loans under the present conditions of a weakening economy will require banks to seek additional capital. Reinforcing bank capital could result in even tighter availability of liquidity.


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Bank Indonesia Policy Direction in 2009

Monetary Policy Direction

In the current global crisis, Bank Indonesia is fully cognizant of the importance of monetary policy support for the real sector. Nevertheless, the many different policies must also be consistently implemented within the framework for achieving sustainable economic growth built on long-term economic stability. The monetary policy stance will be directed to strike an optimum balance in maintaining price stability, ensuring calm on the financial market, protecting the integrity of the financial system and stimulating the real sector. Monetary relaxation and liquidity support will be constantly adjusted in line with close monitoring of indicators related to these objectives.

To address the potential for weakened monetary policy transmission, as indicated by the slow bank response in interest rates cuts and lending, Bank Indonesia will strengthen its public communications about the future policy direction. In addition, Bank Indonesia will encourage the major banks to play a more prominent role as market leaders in setting the pace in deposit and loan interest rates. These actions will enable reductions in the monetary policy rate (the BI Rate) to be followed by more rapid movement in bank deposit and lending rates.

At the same time, the liquidity crunch calls for ongoing monitoring and efforts to find solutions. The possible actions to resolve the segmentation and liquidity shortage include: first, tenor extension for the Bank Indonesia short-term facility. This is necessary to assist banks faced with liquidity difficulties due to the still high perceptions of interbank risk. Second, expand the scope of assets that may be pledged for the Bank Indonesia short-term facility. Third, promote banking consolidation so that the banking system operates with greater aggregate efficiency. Fourth, strengthen the linkage programme and provision of quality information held by the Credit Bureau on the MSME sector to encourage lending to MSMEs, especially through loan channelling to rural banks.

Policy Direction for the Banking System

The ongoing global financial crisis has impacted economies around the world, including Indonesia. Within the banking industry, this phenomenon has potential to diminish the lending capacity and appetite of banks, exacerbate the difficulties of banks in maintaining asset

quality, reduce profitability and ultimately erode bank capital adequacy for ensuring the sustainability of bank operations. For these reasons, Bank Indonesia prepared a series of policy actions for the banking system in early 2009. These policy actions are expected to strengthen bank resilience in support of financial system stability while providing a stimulus for economic growth in the midst of still adverse world economic conditions.

To create more flexibility and space for bank lending, Bank Indonesia envisages the following measures: First, expand the banking sector role in lending to micro, small and medium enterprises (MSME credit). To this end, Bank Indonesia has issued a regulation lowering the risk weighting for MSME loans guaranteed by loan guarantee/insurance institutions, including SOEs and non-SOEs, subject to certain requirements. Second, improve bank efficiency in financing to promote activity in the real sector. This policy consists of adjustments to existing Bank Indonesia requirements concerning asset quality. These adjustments include improvements on quality assessment of productive assets and improvements in the Allowance for Asset Write-off categories. Third, strengthening bank role in expanding service to outreach customers. In view of the increasing diversity of bank office networks with potential to give banks a greater role through expanded service to outreach customers, Bank Indonesia has amended the regulations governing commercial banks, including Islamic commercial banks. These amendments include more defined provisions concerning bank office networks, simplification of the reporting mechanism for opening cash offices and outdoor cash activities (mobile cash services, payment points, ATMs and so on), with banks required only to report these activities in the bank business plan report, simplification of the procedures for upgrading/downgrading of office status and a regulation banning Controlling Shareholders from pledging or securing bank shares as collateral with third parties.

Further actions to reinforce the national banking system amid the present conditions of the ongoing global crisis include: first, extension of the transition period for implementing operational risk in the capital adequacy calculation for compliance with Basel II. Bank Indonesia has taken the decision to extend the transition period for the Basel II operational risk calculation from the original deadline of full implementation in 2009 to phased implementation. Second is improvement in bank financial transparency and bank financial statements. Bank Indonesia has published a Circular Letter on the adoption of the Accounting Guidelines for Banks in Indonesia (PAPI) version 2008. The PAPI is a reference for banks in preparing and presenting their financial statements in


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compliance with the Statements of Financial Accounting Standards and other applicable regulations. PAPI was published ahead of schedule to allow banks time to build their understanding and make thorough preparations in the needed areas including business processes, accounting technology and information systems and relevant training and deployment of personnel. Third is the strengthening of bank risk management. Improvements to risk management at banks will be introduced in risk management regulations pertaining to liquidity risk and to new bank products and activities. Fourth are improvements to the relevant regulations governing mergers, consolidation and acquisitions. To support the consolidation of the national banking system, the merger approval process has been shortened for banks conducting mergers in two stages, beginning with acquisition and following with the merger process itself. In the fifth action, banks may avail a USD repurchase agreement facility with Bank Indonesia. One action by Bank Indonesia aimed at safeguarding exchange rate stability during the current situation of global crisis is to bolster the supply of foreign currency on the domestic market. Under this facility, banks holding foreign currency-denominated Government of Indonesia Bonds are able to exchange with Bank Indonesia for foreign currency in repo transactions for tenors of 1 month.

To support the Bank Indonesia policy direction outlined above, Bank Indonesia has taken some internal actions pertaining to strengthened application of risk-based supervision through improvement of the Know Your Bank (KYB) principles, higher quality of bank supervision recommendations through establishment of a Panel of Experts, enhancement of the early warning system and capacity building for supervisors in monitoring bank liquidity and strengthened role of Bank Indonesia coordinating offices in supervising banks within their working regions.

Payment System Policy Direction

The payment system policy is continued to be directed at fulfilling needs on payment instrument and services, supporting the effectiveness of monetary and banking policy, and maintaining the stability of the financial system. Concerning money circulation, the policy of 2009 is a continuation of last year’s policy which are based on three pillar which are: (i) increasing safety, reliability and efficiency of money circulation, (ii) increasing numbers

of cash centers, (iii) increasing the quality of money. Meanwhile regarding non-cash payment, the policy is consistently focused on 4 principals, namely to: mitigate risk, increase efficiency, access equality and consumer protection.

The strategy to fulfill currency needs is done by providing sufficient amount of currencies and using third party services in distributing the currencies. Furthermore, the currency distribution strategy is done by managing flows of currencies from and to Bank Indonesia regional office (KBI) and also to widen the scope of cooperation with transport operators.

In order to accommodate the rapid growth of electronic money, Bank Indonesia is in the midst of preparing a regulation on e-money. This regulation is focused on three primary aspect including items such as regulation on payment system aspect, prudence and consumer protection. In general the main aspects of this regulation is : (i) Payment system characteristic in which there is a requirement to obtain permit from Bank Indonesia in order to be able to execute e-money related activity, direct and indirect monitoring from Bank Indonesia to e-money providers, regulation of clearing and settlement for e-money activities, and also to urge national efficiency in e-money activity through the implementation of interoperability system between providers; (ii) Prudential aspect in the form of a maximum limit of Rp 1,000,000.- for e-money. This maximum limit also applies to transfer using e-money; (iii) Consumer protection in the form of a regulation that require providers to present complete information on the rights and responsibilities of parties involved in e-money, e-money product transparency, regulation on how to settle claims as well as to provide redeem facility. Furthermore, in order to strengthen the prudential aspects of e-money, provider is also required to manage operational and financial risk using technologies which are proven by audits from independent security auditor.

As a guidance for regulating e-money, Bank Indonesia set a general principal namely that: 1) E-money is not a saving account; 2) E-money is issued by bank and non-banking institutions which are located in Indonesia and are a legal entity; 3) Floating fund managed by non-bank institution is required to be 100% guaranteed by banks; 4) E-money can be used for payment and transfer; 5) E-money issued in Indonesia is denominated in rupiah and is only used in Indonesia.


Chapter 1

In Minister of Finance Decree No. 1 of 2008, the Government set the inflation target for 2008 at 5% with ± 1% deviation. This target was adopted in view of the optimism for world and domestic economic stability at the time. The two basic assumptions used to determine the inflation target were the relatively stable condition of world oil prices and modest fluctuation in the exchange rate. World oil prices were assumed to average 75 US dollars per barrel, while the average exchange rate for 2008 was projected at Rp 9,241 to the US dollar or slightly down from the preceding year. Despite this, deteriorating external conditions means that outcomes for both key indicators far exceeded the assumptions. Oil prices soared to 94.0 US dollars per barrel for 2008 as a whole, while the exchange rate weakened by a significant 5.8% to Rp 9,666 to the US dollar.

The deviation from the two basic assumptions, brought about mainly by external conditions, caused 2008 inflation to climb well beyond the prescribed target. CPI inflation in December 2008 reached 11.06% (yoy), compared to the Government-set target of 5%±1%. The factors influencing inflation on the fundamentals and non-fundamentals side far exceeded earlier predictions, causing 2008 CPI inflation to overshoot the targeting range (Table 1.24, Chart 1).

Core inflation, illustrative of the condition of fundamentals, climbed in 2008 to 8.29% (yoy), ahead of the previous forecast at 6.3% (yoy). The high core inflation outcome was fuelled by the twin

factors of vigorous imported inflation and rising public expectations, while pressure from the output gap remained minimal as predicted. The strength of imported inflation in the core inflation figure resulted mainly from the sharp rise in world oil prices and food commodity prices on the international market. This condition was also exacerbated by the exchange rate, which underwent significant depreciation (about 5.8% compared to 2007). On the other hand, the strong inflation expectations were explained more by negative impact from policy decisions to raise strategic administered prices, as well as expectations of rupiah depreciation.

In regard to non-fundamentals, the inflation outcome was also well above earlier forecasts. Administered prices inflation reached 15.99% (yoy), up considerably from 3.3% one year earlier. Volatile foods inflation mounted significantly to 16.48% compared to the preceding year’s inflation at only 11.41%. The inflationary contribution of these non-core items came to 5.58%, divided into 2.59% contributed by volatile foods inflation and 2.99% from administered prices. Accordingly, the overall non-core contribution was ahead of the previous year, recorded at only 5.48%. The sizeable contribution of non-fundamentals to inflation this year is related to sharp price movements in non-oil and gas commodities on world markets, led by prices for CPO, corn, soybean and cereal grains. These price variations were then transmitted to commodities in the volatile foods category. Similarly, the significant contribution of administered prices to inflation resulted

Box: Evaluating Achievement of the Inflation Target

Variable2008

Target Realization

ASSUMPTION- Exchange Rate 9,241 9,666- Oil Price (minas, USD/barrel) 75 94

PROJECTION- GDP 6.8% 6.14%- Core Inflation 6.30% 8.29%- CPI 6.30% 11%

INFLUENCED FACTORS

- Exchange RateSlightly depreciate 1,09% compare

to 2007Significantly depreciate 5,4% compare

to 2007- Inflation Expectation Stable High- Output Gap Low Low- Administered Price Minimum (3.4%) Very high: (Fuel Price increase 28,7%)

- Volatile Food Minimum (8.7%)Very high, related to international

food price increaseCPI Inflation Target 5.0% 1%

Source : BPS-Indonesia Statistic (processed)

Table 1. Inflation Target 2008: Assumption and Realization


Chapter 1

mainly from the 28.9% fuel price hike at the end of May, prompted by world oil prices that had reached about USD150 per barrel. In addition to external factors, added pressure on administered prices inflation came from shortages of strategic commodities such as bottled LPG and kerosene, related to the ongoing kerosene to LPG conversion programme. Nevertheless, pressure from these non-fundamentals was eased by relative price stability for rice.

Policy Mix for Inflation Control

To minimise the impact of external turmoil on the domestic economy and especially inflation, the Government and Bank Indonesia have adopted a series of policies. In response to future inflationary pressure, Bank Indonesia raised the policy rate (BI Rate) by 125 bps during 2008 to 9.25% in November (Chart 2). Added to this, Bank Indonesia has pursued various

policies to safeguard rupiah stability. While market intervention is one such action, Bank Indonesia has also pursued a series of other policy actions as follows: 1) extension of the FX swap tenor in a temporary action to satisfy demand for dollars, 2) supply of foreign currency for domestic companies, and 3) reduction in the foreign currency statutory reserves ratio to free up US dollar liquidity for bank transactions with customers.

In related actions, the Government has implemented a series of price stabilisation policies, including: 1) VAT subsidy for domestic sales of bulk and packaged cooking oil, cereal grain imports and domestic flour sales, 2) market operations for cooking oil, 3) import duty exemptions for soybeans, 4) import tax reduction on soybeans, cereal grains and wheat, and 5) subsidised sale of soybean raw material for tofu/soybean cake makers.

Chart 1. Realization and Target of Inflation Chart 2. BI Rate and CPI Inflation


Chapter 1

In Indonesia, external debt has historically served as an important source of financing for economic development. However, external debt can also become a source of vulnerability for the domestic economy, as happened in the 1997/1998 crisis. Indonesia’s external debt position steadily mounted after 1999 (Chart 1), but the experience of the 1997-1998 crisis taught the Government and private sector to exercise greater caution. As a result, external borrowing has been marked by improvement in the external debt burden indicators, which are now safely within the thresholds established by the World Bank (Chart 2).

The world economic outlook for 2009, decidedly gloomier than in 2008, is predicted to bear down on domestic economy through tightening of foreign capital inflows. The question then arises

about risks to the servicing of Indonesia’s external debt in 2009. However, with various actions taken by the government and private sector, external debt obligations in 2009 are expected to remain manageable.

In December 2008, the external debt position stood at USD149 billion,� consisting of USD77.8 billion in government external debt, USD60.6 billion in private external debt and the remaining USD10.7 billion in domestic securities held by non-residents. Disaggregated by original maturity, 90.2% comprised long-term debt and only 9.8% short-term debt. However, when analysed by remaining maturity, short-term external debt accounted for a larger proportion at 15.96% compared to original maturity (9.8%), due to long-term debt maturing in 2009 (Chart 3). Nevertheless, debt service payments (DSP) on private external debt are forecasted at only 3.6% of GDP, down from 6.95% of GDP in 2008.� Government and private debt service payments in 2009 are projected at USD27.5 billion, divided into principal and interest.

1. Government Debt Service Payments

The government external debt position of USD77.1 billion,� disaggregated by source, consists of debt

1 Not including “Currency and Deposits” and “Other Debt Liabilities” in the SDDS-IMF report format.

2 Based on the December 2008 external debt position and the GDP assumption in the balance of payments at March 1, 2009.

3 This external debt does not include USD8.0 billion in debt from issued Government Securities held by non-residents.

Chart 2. Foreign Debt Vulnerability Indicators

Chart 1. Indonesia Foreign Debt Outstanding

Chart 3. Foreign Debt Outstanding by Original and Remaining Maturity

Box: Indonesia’s External Debt and Repayment Plan for 2009


Chapter 1

extended by multilateral and bilateral creditors, export credit and leasing facilities and debt raised from issuances of global bonds. In 2009, the USD10.1 billion debt service payments on this total external debt are divided into USD7.1 billion in principal and USD3.0 billion in interest.

On the funding side, the USD10.1 billion in these government debt service payments will be financed through the 2009 State Budget. In the Budget inflows for 2008, Government plans to draw on new loans totalling USD9.1 billion, to be used among others for payments on government external debt. Part of these loan funds will be raised from multilateral and bilateral creditors, with program loans and project loans totalling USD5.8 billion. A further USD3.3 billion is planned from issuances of foreign currency-denominated Government Bonds and Sharia-compliant Government Securities (Sukuk).

To ensure readiness for contingencies, the Government has been negotiating USD6.5 billion in standby loan commitments or deferred drawdown options from multilateral and bilateral creditors. So far, Indonesia has received commitments with total worth of USD5.5 billion, consist of the World Bank (USD2 billion), the Asian Development Bank (ADB) and Australia (USD1 billion each) and the Government of Japan (USD1.5 billion). Negotiations are in progress with the IDB and France, with expected commitments at USD0.5 billion each.

Under the plan for issuing foreign currency Government Securities, on 26 February 2009 the Government raised USD3.0 billion on Global Medium Term Notes (GMTNs), surpassing the planned issuance of foreign currency Government Securities valued at USD2.3 billion. The GMTN issue comprised two tranches, the first for USD1.0 billion with a five-year tenor, maturing in May 2014, yield at 10.5%, price 99.455% and carrying coupon at 10.375%. The second tranche is for USD2.0 billion with a ten-year tenor, maturing in March 2019, with yield at 11.75%, price 99.276% and carrying coupon at 11.625%.

2. Private Debt Service Payments

Outstanding private external debt totals USD60 billion ,4 of which USD17.4 billion principal and interest) falls

4 This external debt does not include USD1.9 billion debt from issuances of private sector securities held by non-residents.

due in 2009.5 This repayment accounts for 63.3% of Indonesia’s total short-term external debt (USD27.5 billion). The private sector debt repayment obligations are dominated by USD14.3 billion 82.2%) in non-bank external debt (corporate), with the remainder comprising external debt servicing by banks at USD3.1 billion(17.8%).

The private external debt payment obligations in 2009 do not fully reflect the magnitude of pressure on the exchange rate. The experience of the 1997 crisis taught Indonesia’s private sector a costly lesson on covering exposures to foreign currency liabilities. One action is to sell products in foreign currency only for export (natural hedge). Besides this, private external debt has flexible repayment terms with the availability of options for deferring repayment if funds are still needed for working capital, as well as rollover or rescheduling. This flexibility is extended mainly by creditors with ownership ties, as in the case of external debt from parent companies and affiliates, and external borrowings by foreign and joint venture companies in Indonesia.

To illustrate (diagram 1), based on the private external debt position for December 2008, about 30.6% of private external debt was raised from parent companies and affiliates. External debt from such creditors with ownership ties can potentially be rolled over if funds are still required for business expansion or working capital. Such arrangements do not exclude the possibility of rescheduling if the debtor suffers liquidity difficulties. About 54.1% of the external debt position for the same period comprised debt owed by foreign and joint venture companies. This composition suggests that the foreign owners are likely to extend assistance if debtors experience difficulty in meeting their external debt payments.

Other flexible forms of private external debt are banker’s acceptances (BA) and trade credit (TC), as well as external debt contracted as revolving loan agreements. External debt in the form of BA and TC is generally short-term and is taken out on underlying commercial transactions for purchase of raw materials. By their nature, BA and TC transactions involve offsetting of draw down against payment, and therefore pressure on the exchange rate is minimal.

5 Includes planned payments of banker’s acceptances and trade credit executed in 2008, but does not include estimated payments on BA and TC executed in 2009.


Chapter 1

Diagram 1. Private Foreign Debt

Within the overall private sector external debt position at December 2008, external debt in BA and TC accounted for about 6.3%.

Within the context of revolving external debt, the private sector may draw down and repay external debt as needed as long as sufficient balance remains within ceilings established by creditors. This can work indirectly to ease pressure on external debt repayment risk, including pressure on the rupiah exchange rate. Within the overall December 2008 private external debt position, revolving external debt came to about 9.8%.

With various anticipatory measures in place to safeguard external debt servicing by the government and private sector, Indonesia’s external debt servicing risk in 2009 is predicted to remain manageable. The Government is able to fulfil its commitments to repay maturing external debt by issuing bonds, drawing down program loans and holding standby loan commitments from creditors. The private sector has the ability to arrange repayment schedules under flexible terms and conditions, arrange natural hedging and rollover and reschedule debt under options available from creditors.


Chapter 152 Performance of the Indonesian Economy, Outlook and Policy Direction

EXPLORING THE OUTLOOK FOR GLOBAL ECONOMIC RECOVERYIntroduction | The Financial Crisis and Its Impact | Global Policy Role in Resolution of the 2008 Crisis | Outlook for Global Economic Recovery

II.

54 Chapter 2 Exploring the Outlook for Global Economic Recovery

In recent years, the world has passed through a number of economic crises. The changing nature of the crises over time has resulted in differing impacts on the global economy. Indonesia is a relatively open economy, and as such the economic outlook is closely tied to the speed with which the global economy can muster a recovery. Against this background, and in line with the preceding chapter discussion, then this part explores the outlook for future global economic recovery while describing the roots of the problems and resulting impacts in tandem with the various lessons that can be learned from the crisis.

The present global economic crisis is closely associated with the overspending by characteristics in the United States, particularly since the end of the 1990’s, that necessitated massive financing. This economic behaviour gave opportunity to the emergence of innovative, aggressive, exotic financial products promising staggering gains, packaged as derivatives products. This led to asset price bubbles and financial practices known as leveraging. The rapid ascent of financial innovations and transaction volume generated high profits during normal times in the financial sector of the world until mid 2007. Overly restrictive measures were not deemed necessary on the assumption that market forces would be sufficient to achieve self-assessment and self-adjustment.

When subprime mortgages defaults started to emerge in 2007, economic agents, market

EXPLORING THE OUTLOOK FOR

GLOBAL ECONOMIC RECOVERY

II.

55Chapter 2Exploring the Outlook for Global Economic Recovery

players and world economic authorities began to view the overly aggressive activity in the financial sector with alarm. The aggressive leveraging techniques had begun to reap financial losses on a massive scale, surpassing all earlier forecasts. These losses took on a new dimension when financial institutions in advanced countries began toppling one after another, exposing fundamental institutional weaknesses involving disregard of banking prudence. So serious was the 2008 crisis that many began drawing comparisons with the Great Depression of 1929. This came about because of the much greater than expected fallout for the world economy from slowing economic growth, increased financial risk profiles and plummeting business and consumer confidence. In a similar vein, widespread indications emerged of rising unemployment

and deteriorating welfare, including in some developing nations.

Although the 2008 global crisis has severe impact, crisis resolution measures have been formulated with the objective of preventing even further economic slowdown. Hopes revived with the implementation of a series of fiscal, monetary and banking policy packages. Even so, the complexity and scale of the crisis leaves economic agents filled with alarm. For these reasons, it is necessary to keep moving forward, reinforce and expedite the various measures for global economic recovery. The massive scale and complexity of the crisis also demands policy coordination and consistency among nations and global institutions to pave the way for more rapid economic recovery compared to the crises of the past.


The United States Twin Deficits and Financial Product Innovations

Global economic developments preceding the crisis were overshadowed by two phenomena: the stubborn twin deficits in the US that impacted global economic balances and sharply ascending oil prices. The first was marked by a towering current account deficit in the US, paired by the approximately the same size of surplus in other developed economies, Asian emerging markets and oil exporting countries. The second, however, was fuelled by rising global demand, jitters over future supply of oil and speculative action on the world commodity and financial markets. The twin deficits sowed the seeds for the current economic crisis.

Overspending in the US, the world’s largest economy, dating back to the end of the 1990’s led to massive inflows of funds to support this spending, due to the need to finance the current account deficit, fiscal deficit and savings-investment gap. The heavy inflow of funds into the US at the time came from surplus-generating countries and was invested in low risk financial instruments, comprising Treasury Bills, Treasury Notes, and Treasury Bonds.

The influx of world liquidity that initially flooded the US economy to cover the twin deficits kept the US financial sector flush with funds throughout the 1990’s. This also led to excess liquidity in the US that put downward pressure on interest rates. These developments were also consistent with the relatively stable global economic conditions in the early 2000’s and the downward trend in interest rates across the globe. The low rates in the US during this extended period stimulated the debt-financed economic activity even more. Bullish activity then fostered the emergence of increasingly complex financial products packaged as derivatives. Alongside this, low interest rates prompted investors to seek higher yield assets for their investments. Stronger risk appetites also encouraged investors to take on increased risk in consequence of the choice of higher yield assets. Low interest rates were then translated into availability of low cost funds, paving the way for excessive lending and investment growth. The combination of all these factors sowed the seeds for the global credit bubble that ultimately burst in response to defaults in the subprime credit sector in the US.

Another phenomenon arising from the substantial interest rate differential between advanced nations and emerging markets was the carry trade.1 The carry trade was one of

1 The carry trade is a foreign currency trading mechanism in which a person borrows from one country in that nation’s currency and invests these funds in assets denominated in another currency,

2.1INTRODUCTION


the causes of excess global liquidity, as it offered major incentives and held strong attraction for investors. This activity brought high returns for investors, and therefore fuelled heavy inflows into emerging markets offering higher interest rates.

Added to this, speculative activity intensified on financial markets. A wide range of derivative products were created, using home mortgages as underlying instruments. These products were created to transfer the credit risk incurred from home mortgages. The broad diversity of innovations in financial instruments progressively opened opportunities for creditors to sell their rights to receive mortgage payments in a process called securitisation. These securities were then known as Mortgage Backed Securities (MBS) and Collateralised Debt Obligations (CDO).2 If home owners defaulted at any time, the payments received by MBS and CDO investors would be reduced. Risk of default mounted in line with the increasing levels of household and corporate debt in recent years. In the end, the default risk on US mortgages would have global impact, because instruments like MBS and CDO created an intricate web of linkages between the US property market and the global financial market.3 Financial product innovation forged ahead, creating ever more sophisticated and complex financial products. MBS and CDO investors could hedge their risks by buying a product known as Credit Default Swaps (CDOs). This chain of securitisation began to show signs of creating moral hazard. The process enabled actors at each link in the chain of mortgage transactions to make money while passing risk up the chain. Over time, this process contributed to the property boom.

Leverage ratios maintained by financial institutions climbed significantly during the 2003-2007 period. Leveraging is an activity in which a company borrows at a low rate of interest and uses the funds to invest in higher yield assets. Many financial institutions, and especially investment banks, issued debt instruments and the funds thus raised were invested in MBS assets, some with very strong ratings. At that time, economic players began holding expectations of a perpetual rise in housing prices,

offering higher yield or returns. The carry trade phenomenon frequently involves borrowing in yen or euros to finance placements in AUD, NZD, PHP and so on.

2 Most mortgages in the US are held by mortgage pools (funding institutions holding MBS and CDO). Of the total mortgage lending 10.6 trillion US dollars (mid-2008), US$6.6 trillion is packaged as MBS and CDO. Investors holding or purchasing MBS and CDO are also exposed to a range of risks, encompassing credit risk, asset price risk, liquidity risk and counterparty risk.

3 Total MBS tripled from 1996 to 2007, reaching US$7.3 trillion. The share of subprime-based securities mounted from 54% in 2001 to 75% in 2006.

while debtors were confident of their ability to keep up mortgage payments. This strategy proved highly profitable during the property boom, but then triggered enormous losses when the bubble burst, housing prices tumbled and mortgage defaults soared.

On the other hand, low interest rates and easy loan application procedures encouraged a surge in high risk lending. Products such as subprime mortgages flourished, being extended imprudently even to debtors without verifiable sources of income. More problematically, the financial market met funding needs through the creation of more sophisticated derivative products valued at substantial multiples of the underlying value. These products eventually attracted keen interest from world economic actors. On one hand, the production innovation deepened the US financial market, but incurred risk that was undetectable at normal times.

Amid the imbalances in world macroeconomic conditions, the erstwhile booming US economy reacted negatively in the face of the shock of sharply rising oil prices in 2007 (Chart 2.1). Low interest rates in advanced nations fuelled a depreciating trend in their currencies. The size of the US current account deficit also prompted the US government to accommodate the weakening in the dollar. This downward trend in the dollar caused many investors to seek alternative placements outside dollar-denominated assets. As a result, the commodities market became an alternative venue for investor funds. This trend was evident in the sharply rising position of commodity transactions (led by oil) held only for speculation (non-commercial contracts) during that period (Chart 2.2).

This speculative activity took place alongside rising concerns over tightening oil supplies attributable to the

Chart 2.1. International Oil Price


geopolitical problems in African Region and Middle East, high demand from China and storms off the US coast. The combination of these factors sent oil prices spiralling upwards. The sharp rise in oil prices was quickly followed by increases in other commodity prices. Soaring oil prices exacerbated the condition of global imbalances. As the world’s largest consumer of energy, the US had to import more oil to keep pace with domestic demand. This widened the current account deficit, causing the dollar to depreciate and function as an automatic stabiliser.

The weakening trend in the dollar and high commodity prices fuelled inflationary pressure in the US. This inflationary pressure then spread globally as prices for imports mounted. Higher prices for imported commodities were ultimately transmitted to domestic prices, pushing up inflation in advanced nations and also the developing world. Some countries responded to this inflationary pressure by tightening monetary policy with announcements of higher interest rates. At the end of 2007, the global monetary policy trend shifted to a loose bias. In the US, the 2004 - 2006 interest rate hikes caused higher-risk debtors (subprime category) to experience difficulties repaying or servicing their debts.

Chronology of the Subprime Crisis

The subprime crisis in the US began, among others, with expansionary government policy. Soft policies in place several years before the crisis fostered widespread high-risk lending. Furthermore, mounting incentives to borrow (such as easy loan application terms) supported by a long-term trend of rising housing prices encouraged borrowers to apply for home mortgages on riskier terms, expecting to refinance these loans at lower rates.

Defaults and foreclosures mounted dramatically as initial fixed rate periods on loans came to an end and adjustable rates (ARM) moved higher. Low interest rates and the heavy inflows of foreign funds created conducive conditions on the credit market during the years before the crisis.4 Subprime mortgages contributed extensively to increased home ownership and heavy demand in the property sector. High demand for houses spurred rising housing prices.5 Relaxed borrowing terms and expectations of perpetual gains in housing values encouraged many subprime debtors to apply for loans at adjustable rates (ARM). This credit offers easy terms to debtors, applying a low interest rate during an initial grace period, followed by a change to the market interest rate.

Mid-2007 marked the beginnings of the crisis triggered by subprime defaults, which then led to the bursting of the property sector bubble. In September 2008, average US housing prices were down 20% from the high in mid-2006. This drop in housing prices left debtors unable to obtain refinancing, and many could no longer afford the heavier monthly instalments. The large numbers of debtors defaulting on their mortgage payments, with banks and creditors foreclosing and repossessing homes, increasing the supply of houses available for sale. The growing inventory of houses for sale put added pressure on housing prices. The formation of an asset price bubble was driven to a large extent by property speculation.6 Banks and creditors kept offering loans to debtors, even those categories as high risk such as illegal immigrants. At the time, creditors tended to ignore the low credit ratings held by these subprime borrowers.

The problems that surfaced with the defaults on subprime mortgages raised questions over the role of rating agencies. Hitherto, subprime-based CDOs and MBS had consistently been rated above investment grade. The high ratings at the time were justified because assessment was based on customary risk management practices, such as overcollateralisation (surplus guarantee when taking out the debt) or guarantees against default. The high ratings encouraged investors to buy up subprime-based securities, thus helping to finance the property boom (Diagram 2.1). From Q3/2007 to Q2/2008, rating agencies

4 Home ownership levels in the US were up 69.2% in 2004 compared to 1980.

5 From 1997 to 2006, the average house price in the US soared 124%, leading to a housing price bubble. Escalating housing demand and prices were accompanied by rising levels of consumption. By end-2000, US household debt soared from 705 billion US dollars in 1974 to 7.4 trillion US dollars.

6 During 2005 and 2006, 40% of home purchases (1.65 million units) were made for investment purposes. In other words, about 40% of home purchases were not intended for owner-occupier use.

Chart 2.2. Non Commercial Contract in Oil Market


downgraded credit ratings for MBS valued at 1.9 trillion US dollars, resulting in share price losses for companies with heavy exposures to MBS.

Defaults in the subprime sector sent MBS assets tumbling in value with the largest US investment banks booking enormous losses. During September 2008, Lehman Brothers declared bankruptcy, while Bear Stearns and Merrill Lynch were taken over by other banks. The collapse of three of the five leading investment banks in the US exacerbated the instability of the global financial market. Two other investment banks, Morgan Stanley and Goldman Sachs, elected to become commercial banks. The falling value of MBS assets left CDS investors exposed to substantial losses. Insurance companies such as American International Group (AIG), MBIA and Ambac suddenly faced massive potential losses from CDS holdings when a wave of mortgage defaults hit the US. AIG even had to be rescued by the Government because of huge exposures, totalling some 440 billion US dollars.

On the micro level, the crisis was exacerbated by factors in both the property and credit markets. These included the inability of home owners to keep up mortgage payments, weak assessment of loan applicants by creditors, rampant speculation and housing construction during the boom period, risky mortgage-based financial products, high individual and corporate debt levels, overly accommodating monetary policy and inadequate

government regulation. In the end, however, at the root of all the problems lay moral hazard. During the period of stable global economic growth, increasing capital movements and economic stability early in the decade, many market actors sought higher returns without comprehensively assessing risk and failed to perform the proper due diligence. At the same time, unsound risk management practices amid the proliferation of ever more complex financial product innovations and excessive leveraging created vulnerabilities in the financial system. Policy makers, supervisors and governments in some developed nations were unable to detect the growing risk on financial markets in the midst of the rush to create and innovate financial products.

The fallout on the global financial market and real sector began to set in after the gridlock and mortgage defaults triggered by subprime borrowers. As it turned out, the linkages between the housing sector and financial instruments were extremely strong. One of the products formed in these linkages was mortgage-backed securities (MBS), in which market value is based on mortgage payments and housing prices. These products enabled financial institutions and investors worldwide to invest in the US property market. Financial and banking institutions across the world flocked to invest in these products. The spreading impact of the crisis created liquidity and solvability difficulties on the global financial market. This situation was worsened by a growing crisis of confidence

Diagram 2.1. Subprime Crisis Chronology


among market actors due to absence of clarity over the size of losses and extent of potential for counterparty default. Tight liquidity was reflected in the soaring London Interbank Offered Rate (LIBOR) (Chart 2.3). However, the crisis intensified beyond original expectations. The collapse of the US property market and tight liquidity on money markets quickly sent the US stock market tumbling on falling share values.7 The property and stock market losses then put pressure on consumer spending, one of the engines of US economic growth. The subprime crisis ultimately impacted economic performance on a global scale. Falling house prices had a wealth effect, which eventually squeezed household consumption. The steady drop in housing sales also led to reduced purchases of household durables and other retail wares. Many living in rented housing faced evictions caused by rising numbers of foreclosures.

The crisis of confidence that hit the banking sector also triggered a credit crunch. This arose due to the lack of confidence of banks in lending to each other, due to heightened fears of default. This loss of confidence prompted banks to impose tighter conditions on lending.

7 From 1 January to 11 October 2008, US corporate stock prices sustained losses at about 8 trillion US dollars.

The tight credit market also led to a substantial drop in motor vehicle sales. From October 2007 to October 2008, Ford sales plunged 33.8%, while sales for General Motors and Toyota came down 15.6% and 32.3%, respectively. This evidence confirmed that the impact of the crisis had reached the global automotive industry, possibility necessitating government intervention.

Chart 2.3. LIBOR Rate and T-Bills Spread


The global crisis and especially the current US crisis are repetitions of past crises. To analyse the depth of the current crisis in impact on the financial sector and the real sector, comparisons are made with past crises as described in the sections below.

Impact on the Financial Sector

The global crisis began when financial markets were plunged into turmoil. Turbulence on the US financial market that began with the US subprime mortgage crisis spread and unfolded into a liquidity crisis threatening the solvency of major financial institutions. Share trading nosedived in keeping with announcements of falling profits by listed companies and loss of confidence in counterparties. The Dow Jones index, after posting a record high at 14,164 in October 2007, sank to a low of 7,552 in November 2008, representing a 46% index decline in only 13 months. Similar market deterioration quickly spread to stock markets around the globe. In mid-2008, three major stock markets of the world (US, Eurozone and Japan, see Graph 2.4) had already entered the bearish phase.

These developments can be compared with the period of 23 October until 13 November 1929, when the Dow

Jones Industrial Average (DJIA) plunged 39% on market speculation. The Dow Jones then remained low for a considerable period, until 1933. In the comparable example of 1998 Asian crisis, financial market turmoil prompted a surge of capital flight from emerging markets. This financial turbulence devastated capital markets in Asia. By September 1998, Asian share prices had plummeted from 348.38 in July 1997 to 104.06, a drop of about 70%. Similarly, the emerging market stock index fell about 52% from 561 in July 1997 to 240.31 in August

THE FINANCIAL CRISIS AND ITS IMPACT

2.2

Chart 2.4. Stock Prices Indices in Europe, Japan, and USA


Chart 2.8. Retail Sales in Europe

unemployment. As a result, household consumption came under sustained pressure, as indicated by the sharp decline in household income and expenditure (Chart 2.7). Confirmation of this also came from a downward trend in consumer confidence, marked by rapid decline despite a modest rebound on the back of falling oil prices. The housing sector crisis in the US has outlasted earlier forecasts. This prolonged deterioration is partly explained by weakening household consumption and limited availability of home mortgage financing. The liquidity crisis in the financial system and the collapse of mortgage lenders resulted in further battering of the US housing sector. The economic slowdown drove up unemployment as companies, particularly in the financial sector, shed excess employees. In December 2008, US unemployment reached 7.1%, the highest level posted since 1992. World economic growth was estimated to have slowed from 5.2% in 2007 to 3.4% in 2008. In advanced nations, the economic slowdown has been quite severe. Activity in

1998. However, the index losses on emerging markets that year were relatively minor compared to the current crisis in which 66% has been lopped off share values. However, compared to the present crisis, Asian stock indices came down by a slightly higher margin of about 67% (Chart 2.5).

Impact on the Real Sector

The 2008 global crisis has also hit world economic growth, which slowed in comparison to 2007 (Chart 2.6). In the US, economic contraction set in during Q3/2008 and is estimated to have worsened in the fourth quarter due to the effect of the housing crisis that escalated into a financial crisis which finally hit the real sector. Falling housing and stock prices alongside mounting unemployment bore down on domestic consumption, which represents the main driving force for the US economy. The steady deterioration in industrial activity led to job losses and only limited new vacancies that pushed

Chart 2.5. Stock Prices Indices in Asia, Emerging Markets, and the World

Chart 2.6. World Economic Growth

Chart 2.7. USA’s Personal Income and Expenditures


Chart 2.9. Unemployment Rate in USA Chart 2.10. USA Economic Growth

developed nations has begun to slow in response to the spreading financial crisis. In the Eurozone, economic activity is also in decline, reflected in weakening indicators for production and consumption (Chart 2.8).

In departure from the present crisis, the 1929 crisis caused the prolonged economic slowdown and high unemployment. In 1930, US unemployment climbed from 3.2% to 8.7%. Next, in 1931, unemployment mounted again to 15.9% before reaching a peak in 1933 at 24.9% (Chart 2.9).8 Unemployment not only spread in the US, but also reached high levels in the UK, France and Germany. In 1930-1938, unemployment in these countries averaged 15.4%, 10.2% and 21.8%, up from the 1921-1929 averages of 12%, 3.8% and 9.2%, respectively.9 The steep drop in economic growth was confined largely to the US, where the economy contracted about 31% from 1929 to 1932 (Chart 2.10).

However, the 1998 crisis had adverse impact on falling demand in developing countries and in turn declining export performance and consumer and investor confidence in developed nations. As a result, developed countries recorded slower economic growth during 1998. The economic crisis spread almost worldwide, causing world economic growth to plummet from 3.5% in 1997 to 2.6% in 1998. During 1998, developing economies charted only 2.5% growth, down from 5% in the preceding year. This downturn took place across almost all of Asia. Some Asian emerging markets even recorded negative growth. Alongside this, growth in industrialised nations slowed to 2.6% from the 3.5% of the preceding year. In 1997-1998,

8 “The Great Depression: Its Causes and Cure,” Steve Kangas (1997).

9 Eichengreen and Hatton (1988).

Asian emerging markets underwent a steeper decline in growth compared to the current crisis.

The events described above show strong evidence that financial crisis in a global scale usually has a comparable impact on the economy as in the crisis of 1929, but with variations in depth, spread and period of recovery (Table 2.1). This can be seen from the impact of the crisis on the financial sector, unemployment and stagnating economic growth in 1929 that persisted far longer than for the present crisis as described above

On the global financial market, the collapse in stock indices in the current crisis has spread further and with greater severity than during the 1929 crisis, but recovery is also predicted to be faster. Furthermore, considerable time was needed to stabilise the financial sector in 1929, among others because of the absence of banking deposit insurance in the US at the time. The government-owned Federal Deposit Insurance Corporation with authority for insuring customer deposits plays a crucial role in stabilising the financial sector. Corporate bankruptcies in the financial sector led to heavy job losses that persisted over a considerable time. However, the current stock index losses are not as severe as during the Asian crisis of 1997 and 1998.

Nevertheless, the present crisis has had more extensive impact, seen in terms of economic slowdown, compared to the crises of the past. The crisis has had the most severe impact in advanced nations and is spreading to the developing world. By comparison, recovery after the economic contraction in 1929 (primarily in the US, UK and Germany) took considerable time. The difference in the policy responses of the two periods accounts


for the difference in magnitude and duration of the recovery. The fiscal and monetary policy responses now under way are more precisely targeted compared to 1929. The more appropriate policy response in regard to intensity, timelines and scope of coordination is expected to mitigate the worst of the second round effects. In view of these differences, the magnitude of impact and time needed for recovery from the crisis are different. Another distinguishing characteristic is the current level of technological advancement and rapid pace of globalisation, which gives the present crisis considerably greater magnitude of impact and velocity of transmission compared to the 1929 crisis.

Contagion Effect on Other Countries

The worst consequence of all this is that the paralysis of the US financial sector has spread to world financial markets. Risks profiles on liquidity lending and borrowing mounted sharply during 2008, especially after the bankruptcy of investment houses such as Lehman Brothers. Liquidity suddenly dried up across the world and the engines of the global economy began to slow in consequence.

No. Impact1997-1998CrisisandRussian

CrisisGreatDepression(1929-1932) 2008Crisis

1 Financial markets in several countries plunged into turmoil. This came as a result of factors leading to collapse in stock indices, corporate bankruptcies result in worker layoffs.

October 1998, share prices fall across Asia. Asian and emerging market indices down 70% and 52.7% in 1997-1998. Corporate bankruptcies push unemployment to average 7% (USA).

In 1929, Dow Jones index tumbled 39%. Dow Jones remained low until 1933. Considerable time was necessary to bring stability to the financial sector, among others due to absence of banking deposit insurance in the US at the time. Corporate bankruptcies push unemployment to very high levels (10,000 banks bankrupted in 1929-1932). US unemployment: mounted from 3.2% to 8.7% in 1930, surged again in 1931 to 15.9% before reaching peak at 24.9% in 1933.

Stock prices in the US, Europe and Japan plunge about 47%, 51.5% and 55.6% within the past year. Similarly, emerging market stock indices fall about 60%. Index losses surpass those of the Great Depression. Corporate bankruptcies fuel rising unemployment. US unemployment rises to about 7,1% in 2008, the highest level reached since 1992. However, the global crisis has relatively modest impact in Asia reflected in small numbers of bank employee layoffs.

2 World economic slowdown results from spreading financial crisis, deteriorating household welfare and weakened exports

Economic growth (1997-1998) in developing nations slows from 5% to 2.5%, in developed economies from 3.5% to 2.6%. World economic growth down from 4.0% to 2.5%. (Source: WEO, January 2009.)

Sharp downturn in economic growth mainly in the US, with growth slowing 31% from 1929 to 1932.

Economic growth (2007-2008) in developing nations down from 8.3% to 6.3%, in developed economies from 2.7% to 1%. World economic growth slips from 5.2% to -3.4%. (Source: WEO, January 2009.)

3 Deteriorating balance of payments due to movement in commodity prices linked to the slowing world economy, while exchange rate turbulence drains international reserves

Growth in world trade volume slides from 10.3% to 4.7% (source: WEO, January 2009).

Falling volume of world trade Growth in world trade volume narrows from 7.2% to 4.1% (source: WEO, January 2009).

4 Global inflationary pressure, among others from exchange rate depreciation

Inflation in emerging markets (1997-1998) falls from 13.4% to 12.8%, in advanced countries from 2.1% to 1.4%. World inflation eases from 6.1% to 5.5%, but in Asian emerging markets mounts from 4.99% to 8.64% and in ASEAN from 5.26% to 25.33%. (Source: WEO, January 2009).

The decline in purchasing power resulted in weak demand, causing the 1932 US economy deflation.

Inflation (2007-2008) in emerging markets up from 6.4% to 9.2%, in developed economies from 2.1% to 3.5%. World inflation climbs from 4% to 6%. (Source: WEO, January 2009.)

Table 2.1. Comparison of the Impact of Global Crisis in 2008 with Previous Crisis


saw growth drop considerably in Q4/2008, while newly industrialised Asian countries, such as Hong Kong, Singapore and Taiwan underwent economic contraction due to plunging exports of high tech or capital intensive products. China and India, which rely more on domestic demand, also felt some impact, although not to the extent of other Asian nations. Falling domestic consumption was reflected in reduced imports, which in China contributed to an enlarged trade surplus. Economic growth in developing nations is estimated to have slowed to 6.3% (yoy) at end of year. Even so, it must be underscored that Asian economies are regarded as quite resistant to crisis. The resilience of Asian economies is largely because these countries are not excessively dependent on exports to the developed world.

Across Asia, the deteriorating trend in external demand and global commodity prices has put pressure on the balance of payments. In early 2008, world commodity prices were steadily rising, fuelled by demand from emerging market countries and the weakening in the US dollar.10 In subsequent developments, prices fell sharply in line with the recession triggered by the global financial crisis that reduced demand for oil. Oil prices then declined further, despite three consecutive product cuts announced by OPEC in September, October, and December11. World commodity prices also fell in tandem with the oil price trend. The deteriorating oil prices in Q3/2008 also sent

10 In early 2008, WTI stood at 95 dollars per barrel, before breaking the 100 dollar barrier for the first time in January that year. Other factors include heavy demand from developing nations, the geopolitical crisis in Nigeria, a major world oil producer, supply shocks caused by the storms that battered the US coast and non-fundamental factors such as the depreciation in the dollar brought about by Fed Funds Rate cuts. After further price movements in December 2008, the average prices for WTI and Minas crude for 2008 overall reached 99.9 and 94.9 US dollars per barrel.

11 Totalling 4.2 million barrels per day.

The present global crisis is spreading quickly, taking its toll on other nations. Most economies around the world have been impacted by the fallout from the global economic crisis through two main channels: trade and financial. In trade, exports have come under increasing pressure with falling prices that have dealt heavy blows to resource-based commodity exporting countries. In the financial transaction channel, the impact of the global economic crisis has spread to Asia, as indicated by bearish stock markets and depreciating exchange rates caused by the risk aversion behaviour of foreign investors. In Japan, the economy was already in recession, and this condition is expected to worsen. The Japanese economy has charted negative growth during the past two quarters (-4.3% in Q4-2008 alone), even worse than US’ already faltering economic growth of -0.8%, yoy. The economic slowdown in Japan has been driven more by weakening exports hit by the sharp appreciation in the yen, falling global demand and slowing corporate capital expenditures (Chart 2.11). In view of these developments, economic growth in advanced nations during 2008 is estimated at only 1% (yoy), down from 2.7% in 2007. Emerging markets have also suffered from the fallout of the global economic crisis (Chart 2.12).

The economic slowdown in developed nations has impacted the regional economy through falling external sector performance, especially in the case of countries with large external exposure. Most Asian exporting nations have suffered from contracting demand from advanced economies. Almost all Asian stock markets have come under pressure as reflected in the stock market turmoil that has eroded wealth and plunged confidence indices to new lows. Economic growth has slowed in most of Asia as a result of the global economic crisis. Major Asian economies, such as Malaysia and Thailand

Chart 2.11. Japan’s Export by Country of Destination Chart 2.12. Asian Economic Growth


prices tumbling for commodities such as soy beans and CPO, due to the drop in demand for production of biofuels. Further decline in commodity prices was triggered by the global recession that hit demand for world commodities. In exporting nations, weakening

international commodity prices impacted the balance of payments. These balance of payments difficulties placed greater constraints on availability of international reserves for cushioning against external shocks. The monetary policy response to the 2008 crisis is described in the following section.


GLOBAL POLICY ROLE IN RESOLUTION OF THE

2008 CRISIS

2.3

Given the depth of the current global economic crisis, policy responses have been aimed primarily at overcoming the turbulence on global financial markets and stimulating domestic demand. Authorities’ first priority should be to restore the financial sector stability as well as to arrest the worsening economic slowdown. These actions may involve the well-orchestrated combination of the monetary, fiscal, and real sector policies directly aimed at the source of the problem in the financial sector as well as to preserve the demand.

The policy responses pursued by the monetary and fiscal authorities in the US demonstrate their willingness to implement a combination of policies or policy innovations that they believe will have positive impact on the market and real sector. The following sections present a more detailed description of these policy responses, encompassing monetary, financial sector and fiscal actions.

Monetary Policy

Spurred by alarm over the steep economic downturn, monetary policy response in various regions has generally pursued a highly expansionary course. The crisis triggered a swift swing from tightening to easing monetary policies stance very common in the world as the result of the quick response from authorities to the current challenges. It was made possible due to the concurrent easing of inflationary pressure.

Inflationary pressure in developed and developing nations maintained an upward trend early in 2008 and began to ease in the second half of the year, following the trend of high world commodity prices since 2007 (Chart 2.13). The surging inflation at the time is explained by world Chart 2.13. IMF Commodity Price Index


oil prices, which reached a high in July 2008 and pushed world inflation to a peak in August that year (Chart 2.14). Inflation in developing nations mounted from 6.4% to 9.2% and in advanced nations from 2.1% to 3.5%, while world inflation moved up from 4% to 6% (Charts 2.15 and 2.16).

However, the financial market crisis has plunged oil prices to unexpected depths, taking the wind out of world inflationary pressure. CPI inflation fell back and resumed the trend for the targeted range set by individual nations. The declining inflation has created room for central banks to shift their focus to the deteriorating economic growth outlook and to respond by cutting interest rates even close to the zero bound.

Authorities then started to do monetary unorthodoxy by incorporating various programmes for liquidity injection and rescue of strategic financial institutions. In developed nations, central bank monetary policy adopted an easing bias to support measures to ease pressure on financial markets and arrest economic decline.12 Some central banks and governments in advanced nations also took the step of nationalising financial institutions like AIG (US) and Fortis (Belgium) to prevent fallout from systemic risk on the financial sector.13 In addition, governments and central banks announced guarantees for deposits as well as the private and public debts to free up lending and restore confidence in financial markets. The US Fed was also active in massive injections of liquidity into the credit market by guaranteeing asset-backed securities.

12 Except in Australia, which raised its reference rate in February and March due to mounting inflationary pressure from soaring world commodity prices.

13 Bankrupted financial institutions include Lehman Brothers, Washington Mutual and Indy Mac.

Throughout 2008, a growing number of advanced countries changed course to an aggressively loose monetary policy stance. The US, as the centre of the world financial crisis, slashed its policy rate by 400 bps during the year, more than announced by any other country.

US monetary policy sought not only to contain the direct impact of the financial crisis on the economy. Another objective was to curb the risk of an adverse feedback loop, in which the weakening of the economy can plunge the financial crisis to new depths that in turn will bring on yet more weakening of the economy. Alongside this, central banks in the UK, Canada and the Eurozone announced more moderate rate cuts ranging from 150 to 350 bps (Chart 2.17).

Although global interest rates have progressively eased, economies continue to face a liquidity crunch. Massive

Chart 2.14. World Inflation

Chart 2.16.Inflation in Developing Countries

Chart 2.15.CPI Inflation in Developed Countries


Chart 2.17. Policy Rate in Developed Countries

pullouts by investors from major financial institutions have triggered serious liquidity shortages. To address this, developed nations have turned to liquidity injections, provision of short-term lending facilities to the banking system and takeover of large amounts of short-term debt. The liquidity injections are extended in the form of bridging funds for financial institutions deemed to have major influence on the global financial system. This funding measure has been taken in the US, UK and Germany. At the same time, the US Fed has extended other lending facilities through the Terms of Auction Facility, Primary Dealer Credit Facility, Term Securities Lending Facility, Asset Backed Commercial Paper and Money Market Mutual Funds. To resolve the credit crunch, the Federal Reserve has also bought up commercial paper with a high rating. Efforts to boost liquidity have also been reinforced by cooperation among central banks in provision of swap facilities. Swap facilities have been extended temporarily by the Federal Reserve to the Bank of England, European Central Bank, Swiss National Bank and Bank of Japan in unlimited amounts.

On the other hand, the Fed also opened the USD Swap Agreement with Singapore, Korea, Brazil, and Mexico authorities to help drawing down the pressures in the global USD demand so as to promote stability all throughout the world.

The financial crisis in advanced nations, now spreading to the developing world, has unfolded into a crisis of confidence with devastating impact on stock markets and asset prices in Asia. Growing alarm over the rapid spread of the crisis has prompted developed nations to switch from the previous tight bias to loose bias. China and

Korea, for example, embarked on gradual reductions in interest rates during Q3/2008 after increasingly tangible signs of economic deterioration. Some countries have joined forces in coordinating their rate cuts. The purpose of this is to create coherence for world market actors that will enable financial market stability to be more easily achieved.

Fiscal Policy

Due to the increasing limited room for manoeuvre in monetary policy, then fiscal policy plays important role. These policies, which follow the Keynesian line, became the preferred course of action by developed nations during the second half of 2008. Massive government spending in coordinated actions by developed countries through tax cuts, creation of infrastructure and public work projects and provision of benefits to households and companies make up the stimulus for the world economy. The IMF supports the importance of this fiscal stimulus role. In its calculations, the needed fiscal stimulus amounts to about 2% of world GDP. Assuming a multiplier equal to one, the fiscal deficit could boost global growth by 2%. Such an increase would go a long way towards reducing the risk of a deep economic recession. The focus of the stimulus packages is on targeted expenditures and tax cuts. In the short-term, the stimulus offers assurance of arresting the decline in demand and output, provided that developed nations manage it within the proper limits and coordinate their timing. The fiscal policy in developed nations comprises an extra expansive fiscal stimulus to boost domestic demand.14

In Asia, governments have not only turned to monetary expansion, but have attempted to quell market turbulence by various means such as bans on short-selling and insurance of public and interbank deposits aimed at restoring the confidence to the banking system. Despite the considerable upheaval on financial markets, the comparatively sound condition of Asian banks means that the global crisis will have relative muted impact in Asia. This is reflected in the low numbers of bank job losses in the region. However, the threat of slowdown in domestic economies is looming even larger, compelling governments to take expansionary fiscal measures to prevent impact or provide a cushion to bolster the resistance of domestic economies. Initially, fiscal policy

14 In the President Bush era, the fiscal stimulus totalled 168 billion US dollars, including tax rebates for households and industry, or about 1.0% of GDP. However, newly elected President Barack Obama plans to create 2.5-3 million jobs alongside tax cuts and construction of infrastructure, and is ready to launch a 175 billion US dollars stimulus.


in developing nations sought to ensure ready availability of domestic supplies, which triggered a surge in world commodity prices. Added to this, some countries also imposed Domestic Market Obligations, export bans, cuts in import taxes and increases in domestic retail oil prices until the first half of 2008. However, following the drop in world commodity prices and weakening of domestic economies, governments in Asia have now turned to fiscal expansion.

The crisis and the various policy responses will bring change to the future world economic order. Fiscal conditions will be very different to those before the crisis. Fiscal deficits needed to promote demand in the short-term will result in significantly increased debt in the long-term. In many countries, government intervention in financial institutions and asset purchases will increase gross borrowing. However, the value of assets acquired may be higher, and therefore in net terms, the debt will be reduced. Under these conditions, government fiscal management remains in a leveraged position, which calls for a more flexible fiscal policy stance.

Real Sector Policy

The current economic crisis has entered the stage of a worldwide slowdown in economic growth. Liquidity has suddenly dried up across the world and the engines of the global economy are slowing in consequence. While economic activity has tumbled in the US and world financial sector, the same fate has not befallen the real sector and manufacturing. Falling demand has impacted the real sector and manufacturing through two channels. First, funding sources for credit began to dry up, making less funds available for working capital and consumption and especially for investment. The credit squeeze on working capital and consumption diminished the capacity of US business to maintain production levels during normal times. Similarly, the diminished availability of investment credit has resulted in delays in planned capacity expansion, thus slowing the rate of expansion in the economy. In the second phase, falling production capacity at normal levels in upstream sectors of the economy and weakening consumption had second round impacts in downstream economic sectors. As a result,

Policy Country

1 Overcoming Liquidity Problem

- Relaxing Policy RateUSA, Europe, UK, Canada, Australia, New Zealand, South Korea, Hong Kong, China, etc

- Liquidity InjectionUSA, Europe, Australia, Hong Kong, Indonesia, Malaysia, Japan, South Korea

- Central Bank Expansion For Domestic Market USA, Europe, Australia, Hong Kong, Indonesia, Japan, New Zealand

- Providing US Dollar Swap Lines With The Fedres USA, Europe, Australia, Japan, Korea, Singapore, Mexico

2 Overcoming Solvency Problem

- Facilitated Sales of Financial Institution USA

- Write Off Non Performing Asset USA, Europe

- Injection/investing on Capital USA, Europe, Hong Kong

- Nationalization of Bank And Financial Institution USA, Europe

3 Restoring Economic Agent’s Confidence

- Prohibiting Short Selling USA, Europe, Australia, Indonesia, Korea

- Providing Deposit GuaranteeUSA, Europe, Australia, Hong Kong, Indonesia, Malaysia, New Zealand, Singapore, Taiwan, India

- Providing Guarantee for Bank Debt USA, Europe, Australia

4 Fiscal Stimulus

- Tax Cut USA, Europe, Japan, China, Korea, Malaysia, Thailand

- Infrastructure Project Construction USA, Europe, Australia, China, Hong Kong, Korea, Malaysia

- Creating Rural Job Thailand

- Providing Benefit for Household/business Europe, Australia, China, Korea

- Providing Benefit for Unemployment USA, Europe

Table 2.2. Summary of Policy to Overcome Crisis in 2008


the operation of sectoral backward and forward linkages in the economy also weakened. During the last two quarters of 2008, the progressive slowing of the wheels of the economy set in across the full range of upstream to downstream activities. In the end, unemployment began to climb near the end of 2008, accompanied by falling business and consumer confidence. This completed the cycle for perpetuation of the economic crisis.

The difficulties in the financial sector have brought on a liquidity crunch, disrupting transactions in the real sector. If this persists, the spectrum of problems within the economy will only expand further, mainly for two reasons. First, weakening of the interaction in sectoral backward and forward linkages in the economy. Second, unemployment problems related to reduced capacity of the real sector to absorb manpower. So far, there is no tangible sign of real sector policy in advanced nations aimed primarily at resolving issues related to sectoral linkages. So far, the actions taken are related mainly to the demand side in the real sector and actions to bring liquidity back on stream to support production. It appears that the US government has responded to the difficulties in the US automotive manufacturing sector by providing funds for working capital, although the immediate action plan for insolvency problem has not been taken yet.

Lessons Learned

The global economic condition in 2008 generally reflects the importance of immediate action and conservative attitude to respond to any early indications of crisis. Indications of turmoil from the subprime mortgage crisis began to surface in early 2007. At that time, however, many still believed that impact would be limited and only temporary. Despite the escalation in oil prices, the pace of global economic growth engendered quite strong confidence in the stability of the global economy. However, economic stability in developed nations quickly tumbled when oil prices mounted sharply amid the ongoing financial crisis. The relatively buoyant condition of the global economy changed drastically to gloom in the face of surging oil prices. To address this, sustained actions to bolster macroeconomic stability are essential. The oil price shock, which has demonstrated the ability to rock balance of payments stability, demands more serious response. In this regard, energy diversification will become a key factor. On the other hand, there must exist in the world, the new financial architecture which promotes a balance between the possibility for modern financial innovations in the future and the prudential

practice standards, while also guaranteeing transparencies and good governance standards, all of these to thwart any possible reoccurrence of financial crisis in the future. Some important points offering valuable lessons for future consideration in responding to the future potential for a range of economic shocks are presented below.

Better Financial Sector Risk Management

The prudential and conservative practice in the financial institution will always have to be adopted at any time by the management. Weaknesses in risk management and imprudence were the primary causes for the outbreak of the financial crisis in America. The extraordinary impact of the crisis has reminded us that we must not be dazzled by reputation or myths of hitherto world famous financial institutions such as Lehman Brothers. Sound risk management and prudence are always essential in the management of funds from the public in a financial institution.

The present crisis has exposed the limitations of financial institution regulation and supervision on the domestic and international level. In this kind of situation, risk management becomes crucial. Risk management can be implemented through more stringent regulation, especially on financial markets, to prevent transfers of assets and risks without clear underlying transactions. Measurement of systemic risk is crucial. For this reason, new regulations are needed, in addition to instruments capable of mitigating systemic risk.

It is obvious that better risk management will insulate banks from any financial catastrophy in the future and economic shocks.

FinancialSectorTransparency

One very vital area for attention is that of transparency and monitoring of financial sector activity. On the other hand, solid resilience in the financial sector is proven to bolster the resilience of the domestic economy. For that purpose, accurate and comprehensive information, that can meet the demand for more accessible and transparent reporting regulation is needed. The information does not only cover data from banking system, but also covers non-bank financial institution such as insurance, hedge funds, and stock market.

Innovation in financial products also need the present of transparency, that can help investors understand the associated risks s attached to certain financial product. Based on experience, financial innovation, in the absence


of transparency and regulated financial market, will potentially trigger a crisis. The crisis then can quickly cause market players to lose faith in financial system. This condition will finally affect real sector as intermediary function restrained. High degree of inter-linkage between financial and real sector make financial system stability vital for the sustainability of real sector. With that condition, financial system policy decision making should also take into account the impact to the real sector. The policy to recapitalize banks and troubled assets disposal in the financial system, become one of the agenda to improve the financial system.

During the present crisis, several advanced nations have followed Indonesia’s response to the Asia crisis of 1998. The UK and US, for example, has recapitalized eight major banks that could have triggered systemic risk had rescue actions not been taken. Under this program, the write-off of non-performing assets is a consequence of the government injections of equity.

Many countries have also increased the deposit guarantee limit in an attempt to restore the confidence of economic actors in the financial system. These guarantees vary from specific amounts to unlimited backing. Bans on short selling have also become one policy option adopted in the area of stock market trading.

In practice, this series of monetary and financial market policies faces limits. First, interest rates are already low, especially in the US and Japan, limiting the room for delivering an economic stimulus through monetary policy. Second, the policies adopted on the financial market require complex difficult processes of implementation. The adjustment processes in the new financial system will only begin with clarity over the programs to be pursued and the rules for their implementation. The policies will create a highly consolidated financial sector in which governments hold sizeable stakes. Government will be confronted with issues over how to manage their participation in the financial sector. Related to this, attention will be necessary to the importance of maintaining a level playing field with private financial institutions and the progressive transfer of government ownership in these financial institutions to the private sectors.

In the initial response to the crisis, developing nations manifested a fair level of resistance compared to advanced economies. Many factors converged to help emerging economies avoid the worst of the impact suffered by developed nations. Among these, the financial sector in

developing countries had relatively little exposure to toxic assets in the US. Nevertheless, the contagion effect in the form of capital flight, plunging exports and depreciation in the exchange rate on a global scale eventually posed a serious threat to domestic economies.

The Need for Conducive Macroeconomic Policies that Minimize any Possibility of Future Bubble in The Economy.

Learning from the current crisis, we have to stay alert in every condition, including in the stable economic condition. Stable world economy with contained inflationary pressure during the pre-crisis time, had caused over-optimism toward economic outlook and generate excessive capital flows. This expectation had resulted in soaring assets price and created bubbles. Amid inadequate regulation and supervision in the financial market, those bubbles then became bigger and increase accumulation of risks. The absence of strong regulation would trigger crisis when the bubble finally burst. Therefore, proper macroeconomic policy to prevent the creation of the bubble in the economy is crucial.

Based on an observation among countries, the impact of the crisis was relatively insignificant in the country with relatively strong economic fundamental. The magnitude of the global crisis had forced some countries to come under IMF assistance program. This condition is indispensible from macroeconomic and financial condition as well as supporting policy. Other important factors are economy without trade regulation, inefficient regulation and bureaucracy, as well as regulation uncertainty. Development in 2008 showed that sound fiscal and monetary policy will trigger positive market perception and can mitigate pressure on macroeconomic stability. Various monetary policies to stabilize exchange rate, including coordination with the government to manage foreign exchange demand from state-owned company, was able to ease excessive pressure on rupiah.

SolidResilienceinFinancialSector

The outbreak of the crisis, which quickly unfolded into a crisis of confidence in the financial system, created a gridlock. This reflects the present weaknesses in the financial markets, which will ultimately impact the real sector due to paralysis of the intermediation function. The strong interdependence between the financial sector and real sector has taught us a lesson that financial market stability is crucial to the survival of the real sector. Policy direction must therefore take account of impact on the real sector. On the other hand, solid resilience in the


financial sector is proven to bolster the resilience of the domestic economy. In addition, regulation or policy mix in the financial sector need to be done appropriately, so that it would not disrupt financial deepening.

The overshadowing threat of economic slowdown underscores the importance to a nation of maintaining robust economic fundamentals. Consolidation of the domestic economy must move forward with proper cooperation between the fiscal and monetary authorities to minimize the impact of crisis. A coherent, integrated policy response is the best option for providing a cushion

for the economy to withstand the onslaught of crisis. Proper policy formulation will help the economy recover quickly from crisis.

In learning from what happened in the US, where weak financial sector regulation triggered a crisis with global impact, it is essential for economic actors to remain prudent and alert. Specifically, monetary and fiscal authorities must emphasize prudential aspects in policy making and in implementation. Financial markets need to operate smoothly, but not without supervision from the competent authorities.


At least two fundamental factors will have a crucial bearing on global economic recovery. First, aggressive implementation of stimulus packages is expected to bring immediate improvement to the real sector. Second, efforts to resolve the gridlock brought about by the liquidity crunch will play a vital role in financial system recovery, enabling the financial system to operate smoothly and perform the intermediation function. Activity in the real sector activity will be greatly strengthened by lending growth.

Economic recovery can move faster if policies are adopted with the proper magnitude and timing and are also coherent with overall global economic policy. The precise policy formulation and timing will depend to a large extent on individual nations in keeping with their particular characteristics. Governments must work quickly to develop comprehensive, coordinated policies for the financial sector and real sector. Launching of poorly-targeted policies will incur considerable costs and ultimately burden the economy. However, given that the main issues in the 2008 crisis stem from systemic and institutional problems in the financial sector, global economic recovery will not proceed as quickly as originally estimated.

Other than these internal factors, regional and bilateral cooperation with other crisis-hit countries may improve

resilience to the contagion effect of the crisis. For example, in February 2009 ASEAN+3 countries agree to increase the pooling fund to USD 120 billion to strengthen the Balance of Payments of any member country under macroeconomic and financial duress. Early in the crisis, some developed nations announced coordinated interest rate cuts. This action provided a lift to expectations on financial markets, although not for long.

Faced with a rapidly deteriorating outlook and falling inflationary pressure, central banks in some advanced nations have slashed interest rates and strengthened incentives for lending. Central banks in developing economies, including Indonesia, have also moved to relax the monetary policy stance while increasing market liquidity.

To halt the stagnation in economic growth, some countries have also announced fiscal packages to stimulate their economies. For this reason, the new economic projections accommodate substantial fiscal expansion. The fiscal stimulus in the G-20 countries is projected to reach 1.5 percent of GDP.

The risk of deterioration could escalate, given that the scale and cope of the present financial crisis has plunged the global economy into the worst condition experienced since the Great Depression of 1929. The most important

2.4OUTLOOK FOR GLOBAL ECONOMIC RECOVERY


risk that must be anticipated is that of a vicious circle taking down the financial market and real sector in an accelerating spiral. This will happen if the issues of gridlock and uncertainty on the financial market are left unresolved. In a similar vein, the risk of deflation is climbing in some advanced nations, while the corporate sector in developing nations is ravaged by limited access to external financing. Despite the vital support from fiscal policy, any sharp increase in public debt may trigger market reaction leading to losses. This calls for a carefully crafted communications strategy to assure sustainable long-term growth.

Nevertheless, the possibility also exists for more rapid recovery in the global economy, that is, if global financial conditions improve faster than expected. Stronger policies will provide an immediate boost to consumer and business confidence and resolve the credit crunch, while producing a more rapid, substantial improvement in global growth.

As a rule, the effectiveness of fiscal stimulus in bolstering the global economy depends on two factors: the size of the stimulus and method of implementation. In this regard, the US Government targets a fiscal stimulus of $787 billion to be used mainly to fund infrastructure projects. The Eurozone and Japan also plan fiscal stimulus packages on a substantial scale to promote economic growth. Meanwhile based on IMF forecast, the US, Europe, and Japan economic growth in 2009 will likely to contract, and not until the end of 2010 that they will see positive economic growth.

Another factor influencing the speed of global economic recovery is the level of concentration in the fiscal policies implemented. A fiscal package can operate through three

channels: fiscal stimulus for infrastructure, indirect fiscal stimulus through income tax cuts and the direct fiscal stimulus through transfers to the public.

Despite the varied composition of the fiscal stimulus envisaged by the G-20 nations, one third of the stimulus is to be allocated to reductions in direct and indirect taxation and about two thirds to financing infrastructure.15 The hopes of many depend primarily on US efforts to deliver a stimulus package in concert with other developed nations. The speed of global economic recovery will be strongly influenced by the aggressiveness with which the stimulus package is implemented and the selection of its targets. Although the package will essentially stimulate aggregate demand overall, if concentrated on expenditure for infrastructure, the time required for the benefits to be felt in recovery will be longer than for a stimulus through tax cuts and direct transfers. Another difference concerns the magnitude of the economic growth impact to be created. A stimulus in infrastructure will produce greater multiplier effects on economic growth than other measures. The worst case scenario would be an insufficiently aggressive stimulus package launched by developed nations with slow timing, not matched by concrete bail out measures in the US financial sector. If this happens, the deleveraging process will continue until a feedback loop or downward spiral sets in, with the gridlock in the financial sector weakening the real sector and inevitably stirring negative sentiment on the world market.

The prognosis is that economies will recover from the 2008 crisis more quickly than during the Great Depression era of the 1930’s. Economic recovery is forecasted to begin in Q4/2009. This prediction is based on the determination of advanced nations to concentrate on fiscal stimulus packages for infrastructure in combination with aggressive monetary relaxation measures, as well as recovery in the banking and financial sector. However, whether the economic recovery will follow a “V” or “U” shaped curve will depend to a great extent on the speed and combination of economic recovery measures and the details of implementation by developed nations. All this will eventually bring opportunities and challenges for regional economies in general and Indonesia in particular.

15 “Group of Twenty”, Meeting of Deputies, London, UK, IMF (31 January, 2009).

EconomicGrowth 2007 2008Projection

2009 2010

World 5.2 3.4 0.5 3.0

USA 2.0 1.1 -1.6 1.6

Euro Area 2.6 1.0 -2.0 0.2

Japan 2.4 -0.3 -2.6 0.6

Table 2.3. World + G3 Economic Growth Outlook

Source: IMF, World Economic Outlook, January 2009

(millions of USD)


Box: The Fall of Lehman Brothers

On September 14, 2008, Lehman Brothers, the fourth largest investment bank in the US, filed for bankruptcy because of a solvency/capital crisis. The 158-year-old institution, which had withstood the onslaught of past crises including the Great Depression, was unable to raise additional capital to cover losses on exposure to unsecured debts, including subprime mortgages in the US. The Lehman Brothers story serves as an important lesson for all financial institutions in maintaining a balance between risk management and maximising profits. In asset management, it is important to diversify placements to avoid concentration of potential risk in any one form of placement.

The fall of Lehman Brothers was caused by gridlock on financial markets. Crisis of confidence escalated, prompting banks to refuse transactions with Lehman Brothers. The causes of the Lehman Brothers collapse were almost identical to those of Northern Rock in the UK. Lehman, one of leading investment banks in the US, had a very complex trading business with exposure to high-risk securities, such as subprime mortgage based securities and all their many derivative products.

The US Government and the Fed took action by attempting to match Lehman Brothers with potential buyers. Bailout was not a policy priority. The stance of the US authorities towards Lehman Brothers appears to have been a move to prevent moral hazard from the Bear and Stearns bailout action. The US authorities were evidently unwilling to place any US financial institution automatically in the category of “too big to fail.” With facilitation from the US Government and the Fed, Bank of America and Barclays entered into negotiations for the purchase or acquisition of Lehman Brothers. The Lehman Brothers bankruptcy became inevitable after negotiations for the acquisition by Bank of America and Barclays faltered. Barclays pulled out, being unable to obtain assurances of US Government guarantees of protection against the losses sustained by Lehman Brothers. In the end, Bank of America took over Merrill Lynch for USD50 billion.

The Lehman Brothers bankruptcy in early September 2008 was marked by debts at USD613 billion, owed mainly to Mizuho Bank and Citigroup Hong Kong. To quell investor panic, Lehman Brothers announced the third quarter financial statement with losses of about

USD3.9 billion and plans to sell 55% of the assets of its investment management unit and divest USD25-30 billion of its holdings in commercial real estate. However, these efforts failed and Lehman Brothers stock continued in a free fall to 29 US cents per share.

The impact of the subprime mortgage crisis on Lehman Brothers began to surface in the second half of 2007, although the company was still booking a profit. In Q4/2007 (December 13, 2007), Lehman Brothers managed to report a profit of USD870 million, with overall earnings for 2007 at USD4.2 billion. This performance was achieved after closure of a subprime mortgage-related business unit that resulted in the loss of 1,200 jobs.

In 2008, downward spiral of Lehman Brothers intensified. Responding to steady deterioration of mortgage market and financial markets in the US, Lehman Brothers suspended mortgage-related transactions in the US property market on January 17, 2008. To cope with the accumulation of losses on subprime mortgages and its derivative products, Lehman added USD4 billion in capital on April 1, 2008. Despite this, worsening performance forced Lehman to announce dismissals of about 1,400 employees on May 16, 2008. On June 9, 2008, Lehman estimated Q2/2008 losses at USD3 billion and announced a plan to bolster capital by USD6 billion. Fears over the quality of Lehman Brothers assets forced JP Morgan, one of the Lehman counterparties, to demand guarantees from Lehman. This move initiated concern on Lehman investors. To ease the burden, Lehman announced a plan to sell its investment management unit and add capital. Waves of employee dismissals followed, with 1,500 employees shed on August 29, 2008.

Lehman was plunged into further financial difficulty after JP Morgan renewed their demand for a USD5 billion guarantee on all customer transactions with Lehman Brothers. Panic mounted after the asset structured securities valued at USD5 billion fetched only USD1 billion. Although Lehman was later able to settle USD8 billion in obligations to JP Morgan, the USD3.9 billion losses in Q3/2008 and planned balance sheet consolidation met with negative investor response. Lehman shares eventually tumbled by over 94% during 2008. Hit by a nosedive in the value of illiquid assets


worth USD60 billion, Lehman Brothers’ capital slipped into negative territory. US authorities acted quickly to put together a deal for Lehman Brothers with potential buyers, but negotiations with Bank of America and Barclays broke down. Lehman Brothers filed with the US Bankruptcy Court after efforts to rescue the 158-year-old investment bank met with failure.

The Lehman bankruptcy resulted in about 5,000 job losses. The collapse of Lehman also triggered a spike in risk perceptions on the global financial market, setting into motion a crisis of confidence among financial market agents and tightening market liquidity. This led to renewed surge in capital outflows from emerging markets, putting pressure on global exchange rate and financial market stability.


Box: Credit Default Swaps (CDS): Mechanism and Development

The global financial crisis in 2008 is inextricably linked to a range of derivative products suspected of causing the crisis and providing the medium for its spread. One much debated financial product is Credit Default Swaps (CDS). Operating as a hedging instrument, CDS products were originally intended as a form of insurance or protection against risk of loss from obligor or bond issuer default on repayment of debt or issued bonds. Depending on the nature of the reference assets, CDS can be divided into two main categories: first, sovereign CDS in which the underlying assets are issued by a nation/government, and second, private CDS in which underlying assets are issued by the private sector.

Over time, rapid growth took place in CDS transactions alongside the boom in subprime mortgages and their derivative products. Reflecting this trend was the 180% increase in outstanding transactions at end-2007.1 While influenced by deteriorating trend in global economic fundamentals, sharp rise in outstanding CDS was also closely related to the downturn in global sentiment. The steep surge in the CDS spread temporarily indicated comparatively powerful influence of sentiment on movement in CDS spreads.

1 International Swaps and Derivatives Association Market Survey, 2008

On the other hand, CDS is also used as an indicator of repayment ability of a debtor or bond issuer. The implication is that debtors with a high CDS rate are also required to pay high rates of interest on their debt or issued bonds. When financial markets are tight, high CDS spread will increase the difficulty of raising funds on the financial market, because debtors or bond issuers will have to pay higher interest. In turn, the high interest expense means that many companies and institutions face difficulties in raising financing and may even face bankruptcy.

The Mechanism of CDS Transactions

CDS is financial instrument traded over the counter to mitigate credit default risk. The potential risks arising from a loan (default, downgrading of rating, etc.) are transferred by the payment of a premium. An illustrative example of the CDS transaction mechanism is presented in Diagram 1.

In CDS transaction, protection buyer pays fee to protection seller to cover risk of default in the debt instrument that is held, or the reference credit. In return, the CDS buyer will receive a lumpsum payment (all or in part) from the protection seller if the debtor or bond issuer defaults on repayment obligations (2b). In contrast, if the debtor or bond issuer is able to pay

Diagram 1. CDS Transaction Mechanism


Chart 1. CDS of The Emerging Market

(no credit event), the protection buyer receives no payment from the protection seller (2a).

A protection seller is also able to transfer claim rights on the reference credit to another protection seller. In this case, the protection seller is able to profit from the spread of the incoming premiums over premiums paid. While mitigating risk on one hand, the proliferation of the CDS trade was also linked to speculation over default by issuers of debt securities as a result of the mounting pressure on the global economy. Against this background, CDS instruments were ultimately traded by economic agents in the international financial sector on the same level as other financial derivatives, even though protection buyers did not properly own claims. In this regard, transaction settlement was normally conducted through netting based on discounting of securities against the face value established as reference.

CDSAmidthe2008Crisis

The past three years were marked by remarkable growth in outstanding CDS from USD8,422 billion at end-2004 to USD62,173 billion in 2007.2 This boom in CDS was also bolstered by the availability of CDS index futures contracts that began trading on major world exchanges. Added to this, the growth in CDS transactions was also supported by measures to standardise contracts, including a contractual clause pertaining to event of default.

2 ISDA Market Survey, 2008

The rapid growth in CDS contracts, on one hand, contributed to financial deepening in terms of hedging instruments and alternative investments. On the other hand, however, the brisk ascendance of these transactions also appeared to be linked to the boom on more speculative forms of trading, in line with deteriorating market expectations brought on by the global financial crisis. Indications of this were reflected in the growing number of CDS contracts, even exceeding the amount of underlying debt obligations used as reference assets. The rapid proliferation of CDS transactions is widely believed to have intensified the fallout from the global crisis in 2008 due to a chain reaction of losses that spread among the parties involved in CDS contracts. Losses mounted because the CDS contracts were negotiable, some even converted again into second derivatives that were also bought and sold, with the effect that default on one obligation would trigger sizeable losses that had to be borne by CDS protection sellers.

Transparency of CDS Transactions and Role of Policy Communications

Although CDS index futures are traded on markets, CDS contracts essentially comprise over the counter transactions and therefore tend to lack transparency because of the absence of standardisation. Concerning this, only the investor and counterparty are properly informed of the terms of trade in the contract, including initial spread, reference entity, reference credit, restructuring type and currency. Although a


CDS may have same reference credit and reference entity, contract valuation may be different because of varying expectations of default risk and assessment of counterparty risk.

Due to lack of transparency of contracts, CDS spread is highly susceptible to speculation during times of heightened uncertainty. This was evident, for example, when the Indonesia CDS widened from about 260 bps in September 2008 to 1250 bps in

October 2008. The rapid surge in the Indonesia CDS spread was misrepresentative of Indonesia’s relatively stable economic fundamentals and strong growth. In addition, Indonesia’s sovereign rating was also favourable when compared to other countries in the region. In view of substantial wave of negative sentiment that continues to batter the Indonesian economy, various policy initiatives for strengthening macroeconomic stability also need to be reinforced, accompanied by more robust policy communication and dissemination.

ECONOMIC INTEGRATION AND THE CHALLENGES OF THE GLOBAL CRISISIntroduction | Flows of International Trade | Integration of Capital Flows

III.

One factor that differentiates the current financial crisis from those of the past is the difference in level of crossborder economic integration. Economies have now become very much intertwined, and the issues of territoriality that constrained international relations in the past have declined. In a global economy, the space traversed by movements of goods and capital is no longer limited by absolute lines of demarcation. Distance has become relative. Economic integration has brought countries together with other countries in a borderless community. The transmission of these economic linkages through trade and financial channels operates with ever increasing speed. In a very short time, the turmoil on the United States financial market has affected financial markets worldwide, and now the impacts have been spreading to the real sector.

The current level of economic integration is marked by increased growth in world trade, close international linkages among financial markets, rising volume of foreign investment and high mobility of foreign portfolio capital. The Indonesian economy has been very much part of this dynamic, involving the integration of movement of goods and capital. This fact is reflected in the rising proportion of exports, imports, foreign direct investment and net foreign assets (NFA) to GDP, and expanding foreign ownership in financial market instruments. The Indonesian economy is inevitably affected by the ups and downs of this world economy.

ECONOMIC INTEGRATION ANDTHE CHALLENGES OF THE GLOBAL CRISIS

III.

82 Chapter 3 Economic Integration and the Challenges of the Global Crisis

On one hand, the integration of the domestic economy into the global economy has brought fresh dynamism and benefited the Indonesian economy in many ways. Integration of the domestic financial market into the global financial markets increases access to offshore capital that can be used to accelerate growth in domestic aggregate demand. Nevertheless, economic integration also poses the risk of instability. The benefits of economic integration have been eroded by asymmetric information and distortions in the global and domestic economy. The reality is that flows of information on financial markets are imperfect in both transparency and accuracy. As a result, investors tend towards herding, taking their cues from other investors perceived to possess better information.

The recent global economic turmoil has had significant effects on Indonesian economy. This is related to the fact that capital inflows in Indonesia remain dominated by

portfolio investments which is susceptible to a reversal. At the same time, Indonesia has relatively limited inflows of long-term investments due to the lack of significant improvement in competitiveness. In addition, the lack of adequate capacity in industries supporting the manufacturing sector also remains a further key obstacle that has to be resolved. On the other hand, the global economic turmoil has disrupted Indonesia’s international trade, characterized by a substantial decline in exports and imports which are still dominated by primary commodity and low technology products.

In responding to the developments outlined above, the challenges facing this more integrated economy has become more complicated. Policies designed to maximise benefits and minimise risks from economic integration are essential. Moreover, international cooperation related to the trade system and financial system has become more important.

83Chapter 3Economic Integration and the Challenges of the Global Crisis

INTRODUCTION

of capital and goods in and out of the country, but also in various indices of openness.1

The major factor driving the rapid pace of international movement of goods is the availability of faster and lower cost transportation with greater cargo capacity, information technology and steady reduction in protectionism. This also applies to Indonesia. Technological progress has shortened the ‘distance’ between producing and consuming countries2.

In addition to transportation and technology, various forms of multilateral and bilateral cooperation have also paved the way for increased crossborder movement of goods and services as well as capital. Indonesia’s membership in the World Trade Organisation (WTO) and accession to the ASEAN Free Trade Agreement has undeniably contributed to the growth in Indonesian trade and investment flowing into Indonesia. Similarly, bilateral

1 For example, the most recent data from the Chin-Ito Financial Openness Index shows that compared to other ASEAN countries, only Singapore has a more open financial market than Indonesia.

2 Research by Bank Indonesia, for example, points to a tendency for higher volume of trading in major export commodities with more nearby trading partners, compared to exports to trading partners at greater distances.

3.1

In recent decades, Indonesia has become more integrated into the global economy, as indicated by various indicators of economic openness. During the 1980-2008 period Indonesia recorded a substantial expansion of non-oil and gas exports, from 8.4% of GDP to 20.9%. Similarly, during the same period Indonesia also recorded a significant rise of non-oil and gas imports, from 13.9% of GDP to 17.9%.

Capital flows also underwent remarkable growth during the 1980-2008 period. Over 1980-2008 period, the ratio of FDI to GDP in Indonesia increased from 0.2% to 1.3%. Similarly, during that period portfolio capital flows expanded rapidly. If in 1988 foreign ownership on the Indonesian stock market was restricted to a maximum of 49%, in 2003 the market was opened to 100% foreign ownership, except in the banking sector. In 2008, foreign ownership on the stock market reached 60%.

An empirical study by Bank Indonesia also shows that the domestic financial market is well integrated into the global markets. The domestic financial market moves closely with the movements in global financial markets, in which the movements in global financial markets significantly influence activity on the domestic financial market. The integration of the Indonesian economy with other economies is not only evident in the expanding movement


agreements with other nations have played an important role in expanding foreign trade and inflows of capital.

On one hand, economic integration has strengthened economic activity through increased flows of goods and access to sources of capital. On the other, however, economic integration has rendered domestic economy more vulnerable to external influences. Through improved efficiency in allocation of resources, trade liberalisation has the potential to boost economic growth. A study by Karras (2003)3, for example, demonstrates that a permanent increase in a country’s trade by 10% of GDP can boost growth in GDP per capita by 0.25%-0.3%. On the financial side, Ranciere et. al (2006) show that the financial liberalisation of a country can also strengthen average economic growth over the long-term.4

Economic integration has undeniably placed developing nations in a position of being impacted by turbulence in other countries, for example, by soaring world commodity prices and the recent global financial crisis. The latest global financial crisis began showing clear adverse impacts on Indonesia towards the end of 2008. The economic woes in developed nations have resulted in significant loss of demand for goods exported by developing countries, including Indonesia. China and India, the two nations expected to provide growth momentum for the world

3 Karras, Georgios, (2003), “Trade Openness and Economic Growth: Can We Estimate the Precise Effect?” Applied Econometrics and International Development. Euro-American Association of Economic Development.

4 Ranciere, Romain, Aaron Tornell and Frank Westermann, (2006).”Decomposing the Effects of Financial Liberalization: Crises vs. Growth,” Journal of Banking and Finance, Vol 30 (12).

economy amid the current crisis, are also showing signs of flagging economic growth.

The level of economic and financial integration is one factor that may influence the depth of the domestic financial market and velocity of transmission of external shocks into the domestic economy. The global crisis has had an adverse impact on capital inflows into developing nations, with Indonesia no exception. The balance sheet consolidation under way at financial institutions in developed nations and change in the risk appetite of foreign investors has triggered capital outflows from emerging markets. Faced with financial difficulties at home, foreign investors pulled out large quantities of funds from the Indonesian financial market in 2008. The steep fluctuations on the capital market and foreign exchange market due to the exodus of foreign capital in the second half of 2008 shows just how much integration has strengthened the transmission of global economic shocks into the domestic economy.

Against this background, this chapter attempts a closer examination of the implications of the global economic and financial crisis on the Indonesian economy, which has become more integrated into the global economy. Analysis focuses on the developments, structure and performance of Indonesian trade, capital inflows in Indonesia, the impact of the global crisis on these trade and capital movements, and the international cooperation now in place. This section closes with conclusions and recommendations for the necessary measures that must be steadfastly pursued to maximise the benefits and minimise the risks of an increasingly integrated economy, especially now with the world economy facing crisis.


Exports Structure and Performance

One of the main benefits of integration into the world economy is the greater openness of export markets to domestic products. The opening of these markets does not in itself bring instant and optimum benefits for the domestic economy. The structure and performance of exports has a major role in the benefits of this openness and the way in which economic turmoil in other nations influences trade and the economy as a whole.

FLOWS OF INTERNATIONAL TRADE

3.2

The 1980-2008 period saw remarkable changes in Indonesia’s export structure and performance. During this time, exports of non-oil and gas merchandise and oil and natural gas in nominal terms increased by an average of 8.83% per annum. Significant progress also took place in the structure of exports. Based on category of commodity, the export structure underwent significant change in 1988-2000 as shown in Table 3.1 and Chart 3.1, with Indonesia moving away from its traditional dependence on oil exports. Since 2000, however, this export structure

Chart 3.1. Exports Value by Sector

Table 3.1. Exports Share by Sector

1988 2000 2007 2008*

Fuel 39.9% 25.2% 25.6% 29.1%

Manufacturing Product 22.5% 19.9% 16.6% 15.1%

Machine and Transportation Equipment 0.7% 17.3% 13.3% 12.6%

Raw Material 13.7% 6.9% 13.1% 10.9%

Other Manufacturing Products 6.3% 16.0% 10.5% 9.1%

Vegetable and Animal Oil 2.8% 2.9% 8.8% 11.0%

Chemical Material 1.8% 5.1% 5.9% 5.5%

Food Stuffs 10.3% 5.6% 5.2% 5.7%

Goods and Other Specific Transaction 1.6% 0.6% 0.6% 0.6%

Beverages and Tobacco 0.4% 0.4% 0.4% 0.4%


has stayed relatively unchanged. In the 2000-2008 period, the only major growth exports were vegetable oil and livestock products.

Indonesia’s non-oil and gas export structure, like before, is concentrated in primary and manufactured products. In 2000, manufacturing—led by electronic equipment and textiles and textile products (TPT)—claimed a dominant role. Compared with other developing countries in Asia, Indonesia’s exports are relatively exceptional, in which exports are dominated by oil and gas as well as low-technology industrial products (Tabel 3.2). Meanwhile, exports of other developing countries in Asia are in general dominated by electronic appliances and office machinery.

In analysis by export destination, the importance of the Japan and US markets for Indonesia’s exports have declined in recent years, in contrast to the expanding share of Indonesia’s exports to China. In 2007, China became Indonesia’s fifth largest export market, displacing Singapore and Korea (Table 3.3). Nevertheless, Japan, the United States and the Eurozone remain Indonesia’s

most important export destinations5. Indonesia’s large volume of exports to Japan and the US is consistent with the concentration of Indonesia’s export commodities in oil and gas, and textiles. Oil and natural gas made up 49% of Indonesia’s exports to Japan in 2007, while garments comprised 36% of Indonesia’s exports to the United States. The implication of this is that any slowing of economic growth in the major export destinations will bear down significantly on Indonesia’s exports. The shift in Indonesia main trading partners is in line with the significant changes in the pattern of international trade, in which there is an increased in intra-trade activities between Asian countries (Box: Recent Development in Asian Economic Integration).

Although diversification of export commodities may give some ideas on susceptibility of exports to shocks affecting a particular commodity or country, diversification of export commodities is not necessarily related to the productivity of exports. For the most part, there has been little change in contribution of each commodity to export productivity. According to the productivity index for 2000 to 2007, the major export commodities with above-average productivity in Indonesia include organic chemicals, office equipment and telecommunications equipment (Table 3.4).6 However, productivity of the most important exported commodities in 2007, namely crude oil, refined products and natural gas, was only moderate. On the other hand, some less important exported commodities, representing smaller shares of total exports, nevertheless boast high productivity and are strongly

5 The Eurozone countries are: Austria, Belgium, Cyprus, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.

6 Calculated by in which K is commodity and C is the exporting country.

Destination Country Share2007 Cummulative Share

Japan 20.7 20.7

Europe 11.6 32.4

USA 10.2 42.6

Singapore 9.2 51.8

China 8.5 60.2

South Korea 6.6 66.9

Malaysia 4.5 71.4

India 4.3 75.7

Australia 3.0 78.7

Thailand 2.7 81.3

Table 3.3. Exports Composition by Destination Country

Source: COMTRADE (processed)

Table 3.2. Three Largest Contributor to Exports Commodities in Several Countries

No. Country Commodity Share2007

AverageShare

2000-2007

1 China Office Machines 13.6% 12.3%

Clothing and Accessories 9.5% 11.5%

Telecomm & Sound Equipment 12.0% 10.7%

2 Indonesia Oil & Oil Products 22.0% 11.5%

Natural Gas & Its Derivatives 17.5% 9.3%


3 India Non-Metal Mining 10.5% 13.6%


Textile Yarn, Fabric,etc, 6.6% 9.8%

4 Korea Electrical & Machine Equipment 13.7% 15.1%


Motor Vehicles 13.2% 11.7%

5 Malaysia Electrical & Machine Equipment 21.2% 24.0%

Office Machines 15.4% 17.5%


6 Philippines Electrical & Machine Equipment 20.9% 43.9%



7 Singapore Electrical & Machine Equipment 28.5% 29.4%


Oil & Oil Products 13.6% 9.8%

8 Thailand Electrical & Machine Equipment 12.4% 14.0%


Motor Vehicles 8.3% 5.8%


competitive (with a high Revealed Comparative Advantage (RCA).7 These products consist of pulp and paper and rubber-made goods.8 Conversely, pharmaceutical materials and products are high productivity commodities but with low RCA.

Analysis of the productivity information for each commodity and total export productivity shows that the contribution of each commodity to export productivity shows little change from 2000 to 2007 (Chart 3.2).

Most of Indonesia’s major export commodities are upscale products, with high export productivity.9 However, primary commodities and low-technology products tend to be downscale products. Indonesia’s upscale products with strong opportunity to compete include natural gas, carton board, coal, furniture and non-ferrous metals. However, some major commodities while in a favourable

7 RCA is defined as a competitiveness indicator measured by comparing the share of a nation’s exports to total world exports. An RCA of <1 or near zero indicates weak competitiveness. The higher the RCA, the greater the competitiveness.

8 Less important export commodities are defined as exports ranking from 20 to 50 by share of total exports.

9 If a positive difference exists between commodity productivity and export productivity is positive, these products are categorised as upscale products, and conversely if the difference is negative, as downscale products.

competitive position have low productivity. These products include metal ores and vegetable oils and fats. In the case of organic chemicals and office equipment, their productivity is high but these products offer Indonesia only limited opportunity for competing on the international market.

Analysis of export productivity suggests that the opportunity to compete on the global market exists for some primary and non-primary commodities. Major commodities with opportunities to compete internationally include metal ores, natural gas, vegetable oils and fats, coal, fish and crude oil. Meanwhile, non-primary commodities with opportunity to compete include timber and cork, textile fibres, gold, paper pulp and downstream vegetable oil products. On the other hand, primary commodities with less well positioned to compete are organic chemicals, office equipment and communications equipment (Chart 3.3).

Imports Structure and Growth

One benefit of an open economy is the improved availability of goods for the needs of the domestic market. In a more open economy, foreign-made goods can be imported more easily for the domestic market. These

Table 3.4. Productivity of 20 Indonesia’s Major Exports Commodities (2000 PPP, thousands of USD)

Code Commodities 2000 2001 2002 2003 2004 2005 2006 2007 Share RCA

51 Organic Chemical 17.74 18.34 19.55 20.11 21.09 21.52 22.10 24.10 2.07% 0.99

75 Office Mach. & Aut. Data Processor 16.11 17.22 17.73 17.91 18.94 20.39 21.47 23.30 3.40% 0.36

76 Telecommunication & Repro. App 16.52 17.60 17.77 17.76 18.43 19.71 20.22 21.07 4.49% 0.45

77 Electrical Mach, Apparatus 14.63 14.13 14.56 14.78 15.63 16.25 18.03 20.35 4.31% 0.48

64 Paper, Paperboard & MFD Thereof 15.21 15.52 15.98 16.15 17.35 17.84 19.09 19.66 3.22% 2.34

89 Misc Manufactured Articles 12.62 14.03 14.14 14.69 14.45 15.40 17.16 19.12 1.99% 0.50

83 Travel Goods 9.63 9.85 10.84 12.16 12.49 13.30 15.48 16.98 0.16% 0.31

82 Furniture 11.91 12.66 12.7 12.76 13.47 14.11 14.57 16.08 2.31% 1.76

34 Gas, Natural & Manufactured 12.29 15.62 16.18 16.19 16.20 15.69 17.70 15.89 9.27% 7.05

68 Non-ferous Metals 8.85 9.61 10.09 10.34 11.08 13.58 12.93 15.84 2.48% 1.55

32 Coal, Coke & Briquettes 11.79 12.00 12.61 12.54 12.56 14.43 15.09 14.99 4.08% 11.68

63 Wood & Cork Manufactures 7.64 7.87 8.85 8.59 8.22 8.73 11.69 14.70 4.06% 1.29

33 Petroleum & Petroleum Products 9.34 9.54 9.18 9.81 10.30 11.00 12.20 13.50 11.54% 1.87

65 Textile Yarns, Fabrics & Products 8.12 9.44 9.14 9.61 10.82 11.61 11.94 12.91 4.63% 1.61

3 Fish, Crust, Mollusc & Their Prep. 8.26 8.46 8.79 8.63 9.59 10.09 11.37 11.75 2.36% 3.13

85 Footwear 7.15 6.96 7.37 7.64 8.08 9.25 9.64 10.99 2.01% 2.39

84 Clothing 5.86 6.26 6.53 6.38 6.65 8.38 9.45 9.98 6.63% 1.67

23 Crude Rubber 5.57 5.76 6.50 6.55 6.56 7.64 7.30 8.56 2.80% 18.71

28 Metalliferous, Ores & Metal Scr 4.43 4.30 4.42 5.11 5.73 5.80 7.58 8.13 4.55% 4.42

42 Fixed Vegetable Oils & Fats 5.42 4.41 5.45 5.47 5.58 5.98 8.74 6.98 5.03% 19.26

7 Coffee, Tea, Cocoa, Spices 2.35 2.47 2.38 2.77 2.89 3.06 3.12 3.59 1.81% 4.26


foreign goods are needed to satisfy domestic demand, whether as raw materials in domestic production or for consumption and investment. Import structure, of course, may influence the way in which external shocks affect trading activity and the economy as a whole.

So far, Indonesia’s imports have been dominated by non-oil and gas merchandise, which average over 70% of Indonesia’s total imports (Chart 3.4). Since 2004, non-oil and gas imports have steadily climbed, despite a temporary dip in the wake of the October 2005 fuel price hike that weakened domestic demand (Table 3.5). However, mid-2006 marked the onset of resurgent import growth, which peaked in mid-2008. In the January-November 2008 period, non-oil and gas imports forged ahead at 41.0% (yoy). Robust domestic demand spurred by the pace of domestic economic activity and soaring commodity prices were the key factors in the rapid growth in non-oil and gas imports during 2008.

The non-oil and gas import structure is relatively stable, with about 90% consisting of raw materials and capital

goods. Capital goods and raw materials also dominate import growth with expansion at 52.8% and 38.2% (yoy). Meanwhile, during the January-November 2008 period, imports of consumption goods grew by 24.7% (yoy).

The soaring growth in imports of non-transportation capital goods is explained by high import

Chart 3.2. Contribution of Commodity to Exports Productivity

Chart 3.3. Major Commodities Competition in the International Market

Chart 3.4. Imports Share : Oil & Gas and Non-Oil & Gas


Chart 3.5. Oil Trade Balance Chart 3.6. Oil and Gas Trade Balance

telecommunications equipment for business expansion by several Indonesian telecommunications providers (Table 3.6). In the raw materials category, there has been high growth in imports of industrial raw materials, led by nickel, iron and synthetic rubber.

In the oil and gas sector, Indonesia’s net oil imports are covered by net exports of gas. Since 2004, Indonesia has been a net importer of crude oil. However, Indonesia retains its position as net exporter of gas, thus keeping the positive oil and gas trade balance (Charts 3.5 and 3.6). Indonesia’s rising oil imports are driven by high demand

Table 3.5. Non-Oil and Gas Imports

Commodity2004 2005 2006 2007 2008

Value Share(%) Value Share

(%) Value Share(%) Value Share

(%) Value Share(%)

Total Imports 42,738 100.0 58,108 100.0 62,775 100.0 71,871 100.0 100,154 100.0

Consumer Goods 3,126 7.3 4,165 7.2 4,932 7.8 7,241 10.1 9,033 9.0

Raw Material and Additive 31,259 73.1 41,837 72.0 45,086 71.8 50,502 70.3 69,815 69.7

Capital Goods 8,354 19.5 11,411 19.6 12,147 19.4 13,498 18.8 20,623 20.6

Others n.a. n.a. 696 1.2 608 1.0 630 0.9 682 0.7

(millions of USD)

Table 3.6. Capital Goods Imports*

Commodity 2003 2004 2005 2006 2007 2008

Machine Specialized For Particular Industries 1,180 2,026 3,083 3,195 4,341 5,875

72322 - Mechanical Shovels, Excavators and Shovel 72 262 257 187 249 559

72842 - Machinery for Working Rubber or Plastics 102 204 260 184 207 396

72849 - Machinery Having Individual Functions, N.e.s. 34 84 190 102 138 198

72512 - Machinery for Making or Finishing Paper or Paperboard 8 14 112 142 66 181

72311 - Bulldozers and Angledozers 62 67 124 125 210 165

General Industrial Machine and Eq., N.e.s., and Mach. Parts, N.e.s. 1,892 2,694 3,866 3,715 4,181 6,057

74319 - Other 87 113 134 84 72 183

74527 - Other Packing or Wrapping Machinery 80 148 178 90 116 182

74315 - Compressors of a Kind Used In Refrigerating Equipment 59 140 90 98 106 175

7422 - Fuel, Lubricating or Cooling Medium Pumps 29 54 56 76 107 170

74271 - Pumps for Liquids, N.e.s. 33 35 50 54 72 111

Telecommunications and Sound-recording and Reproducing Apparatus and Equipment

600 1,225 3,387 3,762 4,923 6,923

76417 - Other Apparatus for Carrier-Current Line Systems 42 49 61 108 1,359 2,521

76411 - Telephone Sets 3 5 7 12 547 1,529

7611 - Television Sets 25 39 48 52 164 352

76381 - Television Receivers, Colour (Incl. Video Monitors and Video Recording)

7 18 46 101 468 117

Total import of capital goods - 410 5,217 6,807 9,033 9,292 10,672 15,571

(millions of USD)

Notes : Classification based on Standard International Trade Classification (SITC)*) excluded transportation equipments


for domestic consumption while domestic oil production is in decline. The tax stimulus issued at end of 2007 is expected to revitalise investment in the oil sector and pave the way for increased oil production.

Input-output analysis conducted in 2005 for manufacturing, the leading sector in the Indonesian economy, shows that most manufactured imports are used for household consumption and investment. The input-output data indicates that 44.2% of imports for manufacturing were used for households and a further 30.7% for investment (Table 3.7). If examined in closer detail by industry subsector, imports for the oil refining industry are used mainly for Government consumption. On the other hand, most chemical industry imports are used for export production, while the predominant share of imported industrial machinery and electrical equipment is for investment. In the textiles and food subsectors, the majority of imports are used for household consumption.

Although the US and Japan remain Indonesia’s top export destinations, Indonesia’s imports come predominantly from Asian countries, led by Singapore, China and Malaysia (Table 3.8). The high volume of imports from Singapore is explained by Indonesia’s heavy dependence on oil refinery products from that country.

Indonesia’s imports do not much differ from those of other countries in Asia, in which oil is among the top three imports in all countries (Table 3.9). However, oil contribution in Indonesia’s and India’s imports shows that both countries have a very high proportion, reaching almost 30% of total imports.

External Influences on Indonesia’s Exports and Imports

The structure of exports and imports has direct or indirect implications for how external turbulence affects Indonesia’s exports and imports. This in turn influences economic activity in Indonesia as a whole. Changes in economic activity in export destination countries, changes in international prices and movement in exchange rates are factors that may affect economic activity through their influence on exports and imports.

Table 3.7. Share of the Final Demand of the Imports Industry

No SectorPrivate

Consumption (%)

GovernmentConsumption

(%)

GrossFixedCapital

Formation (%)

ExportofGoodsandServices(%)

1 Oil Refinery 12.21 14.73 5.67 7.52

2 Chemical 10.62 12.88 5.95 19.07

3 Machine and Electrical Equipment 9.70 5.04 32.12 13.49

4 Transport Equipment and Maintenance 9.05 5.39 11.19 5.13

5 Food Processing 2.97 0.13 0.01 0.06

6 Textile, Clothing and Leather 2.79 0.21 0.16 0.60

7 Sugar 2.65 0.15 0.02 0.15

8 Pulp, Paper and Paperboard 2.49 4.14 0.51 2.62

9 Other Food 1.99 0.37 0.03 0.17

10 Rubber and Plastic 1.85 0.87 0.98 0.85

11 Oil and Fat 1.58 0.01 0.00 0.04

12 Other 1.42 1.37 1.08 0.95

13 Fertilizer and Pesticide 1.36 0.39 0.03 0.39

14 Iron and Steel 1.34 2.13 12.42 2.75

15 Metal 1.17 1.22 7.95 1.02

ShareofTotalImports 44.2 5.5 30.7 17.5Source: BPS-Statistics Indonesia (processed)

Table 3.8. Imports Composition by Country of Origin

CountryofOrigin Share2007 Cummulative Share

Singapore 13.2 13.2

China 11.5 24.7

Euro Area 10.3 35.0

Japan 8.8 43.8

Malaysia 8.6 52.4

USA 6.4 58.8

Thailand 5.8 64.6

Saudi Arabia 4.5 69.1

South Korea 4.3 73.4

Australia 4.0 77.4

Source: COMTRADE (processed)


Bank Indonesia estimates show that any economic slowdown in Indonesia’s major export trading partners has significant adverse impact on Indonesia’s non-oil and gas exports. If analysed by individual export commodity, the strongest impacts are on exports of metals, papers and coal. However, if analysed by impact on the growth of individual export destination countries, the strongest impact on Indonesia’s exports is from stagnating economic growth in Singapore, the US and Japan. By contrast, economic slowdown in China has relatively little impact on Indonesian exports. Given the high elasticity of exports to income in the export destination countries and the share of Indonesia’s exports to those nations, stagnating economic growth in the destination countries in 2009 will have significant downward impact on Indonesian exports.

The decline in Indonesia’s non-oil and gas exports to Singapore is especially pronounced in primary export commodities such as metals, telecommunications equipment and office equipment, the exports of which are highly elastic to incomes in export destination countries.

Loss of exports to the US affects mainly garments, while exports to Japan are down primarily in metals, paper and coal. Exports to China, while not representing a very high total, have taken a downturn mainly in organic chemicals, metal products and paper.

Given the integration of the Indonesian economy into the global economy, any changes in international prices will also affect Indonesian exports. Findings from a Bank Indonesia study demonstrate an overall increase in international prices results in significant rise in Indonesia’s exports. The primary commodities sensitive to movement in international prices are rubber, CPO and coal, while other commodities such as coffee and tin show only low elasticity.

External economic shocks can impact exports not only through depressed economic growth in trading partner nations and international prices, but also their effect on the exchange rate. Movement in the exchange rate has significant influence primarily on exports of primary commodities, such as crops and minerals. Analysis of the sensitivity of individual commodities shows that commodities produced with low import content, such as aluminium, copper, shrimp and fisheries products, are quite sensitive to movement in the exchange rate.

Although, in general, international turmoil affects the trade through exports, the international turmoil may also affect import trading activity. Upheavals in the global economy affect Indonesia’s imports through the effect on the exchange rate. Bank Indonesia estimates show that growth in non-oil and gas imports is significantly influenced by nominal rupiah exchange rate among others.

The extent to which domestic products depend on imports influences the sensitivity of these products to exchange rate movement. The higher is the level of import substitution (meaning less domestic reliance on imported goods), the greater is the elasticity of the imports for these products to movement in the exchange rate. Examples of this are the cigarette industry, textile products and the food processing and preserving industries. In contrast, for products rely heavily on imported content, such as the machinery and tools industry and iron and steel production, import demand is not significantly affected by movement in the exchange rate.

Table 3.9. Three Largest Imports Contributor in Several Asian Countries

No. Country Commodity Share2007

AverageShare00-07

1 China Electrical & Machine Equipment 21.9% 19.4%



2 Indonesia Oil & Oil Products 35.1% 28.2%

Organic Chemicals 6.0% 7.5%

Iron & Steel 7.0% 6.3%

3 India Oil & Oil Products 29.0% 29.0%

Non-Metal Mining 4.4% 8.0%

Gold 7.9% 7.9%

4 Korea Oil & Oil Products 20.8% 18.7%

Electrical & Machine Equipment 12.9% 15.7%


5 Malaysia Electrical & Machine Equipment 29.7% 34.9%



6 Philippines Electrical & Machine Equipment 14.4% 34.9%



7 Singapore Electrical & Machine Equipment 24.5% 26.9%



8 Thailand Electrical & Machine Equipment 13.9% 16.5%



Source: CEIC (processed)


INTEGRATION OF CAPITAL FLOWS

developed nations - have encouraged global investors to channel funds into emerging markets. How financial market integration benefits domestic economy, of course, depends on the structure of capital inflows.

So far, Indonesia’s capital inflows have been dominated by short-term capital. More sustainable flows of foreign direct investment (FDI), however, remain on the low end of the scale (Charts 3.7 and 3.8). In addition, other forms of capital movement in the wake of the crisis have showed tendencies to net outflows, particularly due to the lower

Capital Inflow Structure

The financial sector liberalisation since the 1980’s has led to the growing integration of Indonesia’s financial market into the global financial markets. This integration has been driven not only by domestic factors, but also by external factors, including global liquidity conditions and the risk profile of global investors. Furthermore, the more attractive investment returns in emerging market countries - compared to investment yields in

3.3

Chart 3.7. Structure of Capital Inflow to Indonesia Chart 3.8. Capital Inflow Composition


drawing on new government external debt compared to payments on matured government external debt.

In analysis of international investment position, Indonesia ranks low in ratio of FDI to total foreign capital, unlike most other developing nations in Asia, where FDI ratios are quite high. Recent data show that in Indonesia the ratio of FDI to total foreign capital is ahead only of that in the Philippines and Korea (Table 3.10).

Financial markets are marked by varied degrees of integration. A Bank Indonesia study found that stock markets are the most integrated, as indicated by the strong correlation in the movements of domestic and foreign stock indices. In consequence of the close integration of the domestic stock market with global stock markets, the global market has considerable influence on domestic share prices. On the other hand, the bond market is relatively new and only beginning to show

indications of integration into the global bond market. Global financial markets also have significant influence on the domestic bond and foreign exchange markets, although not to the same extent as on the stock market.

Characteristics of Portfolio Investment

The domination of portfolio investment in Indonesia’s foreign capital inflows is clearly linked to the more liberal regime for foreign investment on Indonesia’s financial market. Since 2004, short-term capital inflows (portfolio investments) have poured into Indonesia at a faster rate than the debt instruments issued by the government or monetary authority (Charts 3.9 and 3.10). This is influenced by perceptions of lower risk in instruments issued by governments and central banks. At this time, global investor risk appetite is a key factor in the crisis of

Chart 3.9. Private and Public Portfolio Investment Chart 3.10. Foreign Portfolio Composition

Table 3.10. Comparison of International Investment Position

ItemsIndonesia Thailand Philippines Malaysia Singapore India Korea

2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 2007 2008June 2007 2008

SeptNet IIP (billions of USD) -146 -151 -58 -59 -31 -27 -7 -6 161 155 -77 -49 -232 -155

Assets 74 94 146 107 50 67 157 225 753 880 331 378 588 541

Liabilities 220 245 204 167 82 94 164 230 593 725 408 427 820 696

o/w FDI 55 59 95 77 17 20 54 77 211 233 103 120 120 95

Portfolio 57 72 64 47 29 34 66 103 133 173 125 108 457 327

Equity 32 41 57 39 7 10 46 68 114 154 104 87 320 174

Bonds 25 30 7 8 22 23 20 35 19 19 21 21 136 153

Ratio (%)

FDI to liabilities 24.8 24.1 46.4 46.3 20.7 21.1 32.9 33.3 35.6 32.1 25.2 28.0 14.6 13.7

FPI to liabilities 25.7 29.3 31.2 28.0 35.2 35.6 40.1 44.8 22.5 23.9 30.5 25.3 55.7 46.9

Equity to Portfolio 55.7 57.7 88.9 82.4 23.9 30.2 28.0 29.6 19.2 21.2 83.1 81.0 70.1 53.3

Bonds to Portfolio 44.3 42.3 11.1 17.6 76.1 69.8 12.1 15.2 3.3 2.7 16.9 19.0 29.9 46.7

Source: SDDS, IMF (processed)


confidence and deleveraging on global financial markets. However, under normal conditions, high yield, subdued macroeconomic stability and variety of investment choices are key attractions for global investors in Indonesia’s financial market (Charts 3.11, 3.12 and 3.13). When market risk is better, global investors prefer to invest their money in government bonds in developing nations. In contrast, when risk deteriorates, investors shift their investments from emerging market government bonds to developed nation government bonds (paying lower rate of interest).

The findings of a Bank Indonesia study also indicate that foreign capital inflows are strongly influenced by two external factors: foreign investor risk appetite and global liquidity conditions. According to the study, risk appetite has a significant effect on all forms of capital inflows on the foreign exchange market, including foreign placements in Bank Indonesia Certificates (SBIs) and Government Securities. However, while global liquidity has a significant influence on total foreign capital inflows and the foreign exchange market, it does not significantly affect foreign investment in SBIs and Government Securities. The Bank Indonesia study discovered that foreign investment in Government Securities is influenced by developments in the current account and yield – measured as Uncovered Interest Parity (UIP) and Covered Interest Parity (CIP) – and developments in the domestic economy.

On the other hand, foreign investment in equities influenced by the greater openness of the Indonesian capital market compared to the markets of other countries in Asia. Indonesia has looser regulations on foreign ownership on the stock market, compared to other ASEAN countries. In Indonesia, foreign ownership of shares is permitted up to 100% of listed non-banking stocks,

while maximum foreign ownership in banking sector is 99%.10 This is well above the limits imposed in Malaysia, Singapore and Thailand, where maximum foreign ownership is 49%, and the 51% cap in the Philippines.

The more integrated domestic financial market into the global financial market has brought positive benefits such as market deepening, enrichment of financing sources and, at certain times, supply of foreign currency. The presence of foreign investors has fuelled the vibrant growth of the domestic financial market, as indicated by soaring market liquidity and improved efficiency. These developments are reflected in market capitalisation and significantly increased frequency of trading (Charts 3.14 and 3.15). The economy has also benefited from more open access to sources of financing with greater variety of investors – both domestic and foreign. In addition, foreign capital inflows at times also play a role in closing the gap

10 Maximum foreign ownership of banking stocks is only 30% in Malaysia, 49% in Thailand and 51% in the Philippines.

Chart 3.11. Yield Comparison of Money Market in 2008 Chart 3.12. Yield Comparison of 5 Years Bonds in 2008

Chart 3.13. Yield Comparison of Stocks in 2008


between excessive demand for and available foreign currency.

The integration of the domestic financial market into the global financial markets also has a number of downsides. The downsides became starkly apparent with the collapse in the rupiah and excess volatility in the 1997/1998 crisis, when the rupiah lost 85% of its value during the July 1997-June 1998 period. The damaging effects of financial market integration were also visible in falling domestic financial asset prices. During the 1997/1998 crisis and later in the 2008 global financial crisis, the Indonesian Composite Stock Index plunged dramatically. In June 1997-September 1998, the index tumbled 62%, with similar movement following in February 2008-November 2008, when index losses reached 54%. Falling asset prices were also reflected in yield on Government Securities, which mounts sharply during times of crisis. In 2005, yield reached 16%, while the 2008 crisis was marked by yield surging to 20%.

Crossborder movement of funds are positively correlated with turbulence on the domestic market and exchange rate volatility, particularly during times of capital reversal. Capital reversal may lead to depreciation in the rupiah and deterioration in domestic financial asset prices. Furthermore, crossborder movement of funds may affect financial system stability through the mechanisms of currency mismatch and maturity mismatch in the financial sector. From a macro perspective, the presence of foreign funds may also complicate the tasks of monetary management, especially when these funds lead to high exchange rate volatility and thus increase in the money supply. For example, in 1998, the economy was undergoing contraction, but the tumbling exchange rate necessitated a tight monetary policy. Similarly, with the

“mini-crisis” in 2005, economic growth in the second half of that year slowed below forecasted levels, but pressure on the exchange rate from capital reversal compelled the adoption of a tight monetary stance.

Characteristics of FDI

The rise in net inflows of FDI to Indonesia has taken place in two main surges, with support from policies for trade and investment liberalisation. First was characterized by the rapid growth in FDI in export-oriented manufacturing of textiles and textile products, as indicated by expansion in textile exports during the 4 years leading up to 1993. The second wave of FDI growth took place in early 1995 in response to the investment liberalisation policy of June 1994 that eased restrictions on foreign ownership, lowered import tariffs and opened some sectors previously declared closed to foreign investment (Chart 3.16).

Chart 3.14. Stocks Capitalization and Bonds/GDP Chart 3.15. Depth of Stocks and Government Bonds Market

Chart 3.16. FDI Flows and Growth of Indonesia’s GDP


Trade liberalisation, among others involving tariff cuts for imported goods, had helped boosting FDI inflows, especially during the period preceding the 1997/1998 crisis. Under bilateral and multilateral commitments to free trade, Indonesia has lowered its import tariffs, so that the present average import tariff is now close to zero percent. As a result, Indonesia ranks as one of the lowest tariff nations in Asia. The reduced tariffs have become an important incentive for foreigners to invest in Indonesia, especially for investments using imported raw materials. A study by Rashmi Banga (2003) on data from 15 Asian nations discovered, among others, that fiscal incentives and tariff reductions attract FDI to emerging market nations.11 In addition, a Bank Indonesia study has

11 Rashmi Banga (2003) “Impact of Government Policies and Investment Agreements on FDI Inflows,” Indian Council for Research on International Economic Relations, New Delhi Working Papers 116, Indian Council for Research on International Economic Relations, New Delhi, India.

confirmed the hypothesis of the positive influence of tariff cuts on FDI.

FDI inflows are not only affected by trade liberalisation, but also by economic growth. High economic growth will create greater investment opportunities, including for foreign investment. This is supported by the findings of a Bank Indonesia study covering mainly the post-crisis period, in which rising levels of investment was in line with the improved economic growth.

Investment risk has a major influence on FDI in Indonesia. One of the risks carefully weighed by FDI investors is political stability (Chart 3.17). The Bank Indonesia study shows that improved political stability in Indonesia has a very strong influence on promoting FDI into Indonesia, surpassing even the influence of economic growth. This is consistent with the Dunning theory, claiming that investment risk is a major factor considered by foreign investors when investing in certain country.

Following the capital flight in the wake of the 1997/1998 crisis, FDI in Indonesia has grown at a slower rate. This decline is not only the result of the contracted economy and slowed economic growth, but also high investment risk. The crisis created uncertainty over returns on investment, due to the wide fluctuation in the exchange rate. However, after 2000, economic growth regained momentum, stimulating renewed growth in foreign investment in Indonesia albeit less vigorously than in other crisis-hit Asian countries (Chart 3.18). For example, the FDI to GDP ratio in Indonesia for 2008 was below that of Malaysia, Thailand and India (Chart 3.19).

Chart 3.17. Net FDI and Political Risk

Chart 3.18. FDI Flows to Southeast Asia Chart 3.19. FDI to GDP Ratio in Several Countries


The slowing FDI growth in Indonesia is also evident from the relatively limited change in Japanese FDI in Indonesia compared to other developing nations in Asia. The FDI stock of Japanese companies in Indonesia plunged by a drastic near 10 billion US dollars from the pre-crisis level of 17.2 billion US dollars in 1996 to 7.9 billion US dollars at the end of 1997. One decade later , in 2006, this FDI position stood at only 7.5 billion dollars, with investment rising to 8.3 billion US dollars in 2007. This contrasts dramatically with Thailand, where Japanese FDI was almost on par with the 1996 level before mounting to 20 billion US dollars at the end of 2007. Similarly, when compared with other countries in the region, such as Singapore, Malaysia and the Philippines, Indonesia has charted the slowest post-1997 crisis growth in FDI from Japan (Table 3.11).

Attempts to discover the causes of the slower rate of FDI in Indonesia have been the subject of several studies, including Barry Eichengreen and Hui Tong (2005), a JETRO Survey (2005) and Kinoshita (2003).12 Barry Eichengreen and Hui Tong (2005) concluded that the size of FDI in China will stimulate increased FDI in countries producing the components and capital goods used in production and assembling in China, commonly described as the production network. However, Eichengreen and Hui Tong (2005) also claim that Indonesia is not part of this production chain.

The JETRO survey (2005) appears to confirm the findings of the Eichengreen and Hui’s study. According to Japanese-affiliated manufacturing companies in Asia,

12 In Thee Kian Wie (2006): “Policies for Private Sector Development in Indonesia,” ADB Institute Discussion Paper, 46.

the cost ratio for imported materials/parts used by manufacturing companies in Indonesia is 71% or more. By comparison, the same ratio in the Philippines, Malaysia and Thailand ranges from 50% to 70%. This is explained by the lack of adequate supporting industries for Indonesian manufacturing, forcing Japanese manufacturers engaged in assembling in Indonesia to import many materials, parts and components in large volumes. This ultimately influences which economic sectors will attract foreign companies to invest in Indonesia.

In view of the limited sources of FDI, developing nations like Indonesia must compete to attract inflows of FDI. Since the 1997/1998 crisis, Indonesia’s competitiveness has failed to record significant improvement. One determining factor in competitiveness for investment is the supporting capacity of a nation’s infrastructure. Strong infrastructure will support cost and time efficiency in investment that is essential for production of goods. For this reason, good quality infrastructure, especially for transport and communications, will help bring in more investment into a country. The ranking of infrastructure in comparison to other nations suggests that Indonesia still needs to improve the quality of infrastructure to attract foreign investors (Table 3.12).

A study by Bank Indonesia shows that more rapid progress in infrastructure will stimulate faster FDI growth in Indonesia. Changes in condition of infrastructure (transport and telecommunications) follow the same direction as inflows of FDI (Chart 3.20), with infrastructure improvements taking place mainly in the post-crisis period

Table 3.11. Japan’s FDI in Several Asian Countries

1996 1997 2000 2006 2007

World 258,653 271,967 278,445 449,680 546,839

Asia 79,151 77,258 49,311 107,653 132,986

China 8,098 21,248 8,699 30,316 37,797

Asia NIES 28,328 33,344 23,153 39,042 46,560

Taiwan 4,048 5,218 3,565 6,328 7,742

Korea 3,464 8,831 4,192 10,669 12,103

Hong Kong 9,406 8,296 6,543 7,776 9,129

Singapore 11,410 11,000 8,853 14,270 17,586

ASEAN 4 41,558 20,446 15,568 34,313 42,055

Thailand 15,752 5,723 4,767 14,839 19,776

Indonesia 17,193 7,907 4,765 7,457 8,315

Malaysia 5,750 4,709 4,003 7,763 8,184

Philippines 2,863 2,107 2,033 4,253 5,780

Vietnam n.a. n.a. n.a. n.a. 1,711

India 785 785 1,171 2,315 4,218Source: JETRO

(millions of USD)

Country Ranking

Germany 1

Canada 6

USA 7

Japan 11

United Kingdom 18

South Korea 15

Malaysia 23

Thailand 29

India 72

Indonesia 86

Philippines 92

Vietnam 92

Table 3.12. Ranking of Infrastructure in Several Countries, GCI 2008

Source: Word Economic Forum, 2008


Chart 3.20. Transportation, Communication, and FDI Chart 3.21. Land, Water, and Air Transportation

(after 2002). Improvements in transport and energy infrastructure also play a vital role in foreign investment in Indonesia. Investors are attracted to a nation with a good Infrastructure Quality Gap index, calculated on the basis of measurements taken of roads, ports, aviation and power infrastructure.13 Better infrastructure, especially in roads and communications, enables production to operate faster and more efficiently. Indonesia has managed improvements to infrastructure mainly in the area of transportation (Chart 3.21), with construction under way of toll roads and roads to areas with difficult access. Improvements have also been made to maritime transport and aviation. The emergence of new airlines has stimulated investment in Indonesia, due to the easier access to regions across the country. Significant improvements in land transportation, particularly in 2005, have also coincided with FDI growth in Indonesia.

13 World Economic Forum, 2007

Investment competitiveness is also influenced by labour productivity and industrial relations. In a study by Kinoshita (2003), during 2002 more than 40 Korean companies and 10 Japanese companies relocated from Indonesia to other countries, including Vietnam. Several export-oriented domestic companies also followed suit. Among the reasons for relocation were the frequent labour disputes and substantial wage increases partially linked to government policy concerning the Provincial Minimum Wage.

Not only has growth slowed, but in the post-crisis period, foreign investment in Indonesia has been marked by a shift from the secondary sector to the tertiary sector. In the tertiary sector, the transportation, warehousing and communications subsectors have recorded rapid growth since 2002 (Chart 3.22). This is consistent with the growing value of imports in the transport and telecommunications sector. At the same time, FDI in the manufacturing

Chart 3.22. Foreign Investment in Indonesia (1997-2007)


sector has mounted significantly since 2005 (Table 3.13). Nevertheless, the increased FDI in the manufacturing sector has brought only limited expansion in production capacity for the domestic economy, given that some of the capital inflows are used in purchases in privatisation programmes and for foreign investor acquisitions of domestic companies. FDI entering Indonesia also tends to have market seeking motives, and therefore to a certain extent substitutes for international trade. Research by Bank Indonesia has found FDI flowing into Indonesia does not have a cause and effect relationship with exports, but that FDI has a positive effect on import demand.

The view that FDI in Indonesia has limited ties to global production networks and is motivated more by the

drive for market expansion is confirmed by data on FDI outflows from the United States (2007) and United Kingdom (2006). Only a small proportion of FDI from the United States is invested in Indonesia in comparison to Singapore, Thailand and Malaysia (measured against the corresponding total FDI outflows from the United States to the Asia-Pacific region). Analysed by sector, FDI from the United States in Indonesia is also dominated by mining and services, while manufacturing accounted for only about 3.5% (353 million US dollars) at end-2007 (Table 3.15). In contrast, almost 40% of United States-originated FDI in Thailand, Malaysia and the Philippines is in the manufacturing sector. Similarly, sectoral disaggregation of UK’s FDI in Indonesia shows that only a small percentage of investment by British companies finds its way to

SECTOR 1999 2000 2001 2002 2003 2004 2005 2006 2007

1 Manufacturing -1,602 -3,269 -1,724 -1,169 -450 834 5,265 1,691 3,413

2 Financial Institutions -90 -57 84 1,409 667 238 781 1,028 1,268

3 Trade -175 -41 -129 230 -353 -214 60 382 249

4 Construction 50 -271 -305 39 61 -18 130 85 205

5 Mining - Quarrying -211 -275 -234 -242 232 98 1,227 322 240

6 Agriculture -103 25 -119 385 180 141 12 230 396

7 Services -335 -424 -406 -677 -933 228 547 591 1,046

8 Housing -231 -144 -342 0 0 -18 18 -14 -4

9 Others -49 -93 -104 168 2 607 301 599 116

TOTAL -2,745 -4,550 -3,279 145 -596 1,896 8,337 4,914 6,929

Table 3.13. FDI in Indonesia by Economic Sector(millions of USD)

Total Industry Mining Manufacturing Wholesale Information Deposits Company

Finance and Insurance Excluding Deposits Company

Professional Services

Parent Company Others

World 2,791,269 147,319 531,315 183,038 111,866 91,768 531,933 63,791 927,578 202,661

Asia and Pacific 453,959 30,366 102,677 33,105 24,678 22,523 89,476 17,365 102,128 31,641

Australia 79,027 13,544 13,883 3,702 10,239 2,062 11,246 3,822 14,244 6,285

China 28,298 2,129 15,007 3,136 645 1,169 794 1,287 1,815 2,317

Hong Kong 47,431 (*) 3,680 7,475 1,197 2,270 9,514 3,832 17,648 1,815

India 13,633 219 2,918 530 4,132 2,013 1,263 1,821 401 336

Indonesia 10,049 7,056 353 153 -57 534 585 -11 391 1,046

Japan 101,607 5 19,273 8,552 4,554 648 45,874 1,654 11,494 9,553

South Korea 27,151 -1 10,930 1,638 721 6,954 4,221 1,265 140 1,282

Malaysia 15,699 (D) 5,933 188 105 (D) 652 240 (D) 1,725

New Zealand 5,385 332 1,344 470 293 (D) 1,337 351 (D) 848

Philippines 6,684 22 3,387 426 38 558 (D) 68 (D) 502

Singapore 82,623 402 13,748 3,369 2,535 2,219 4,663 2,579 51,690 1,418

Taiwan 16,374 (*) 4,974 2,095 259 968 7,301 229 156 392

Thailand 14,983 (D) 6,798 1,075 16 1,800 1,185 230 125 (D)

Others 5,015 640 448 295 1 (D) (D) (*) -83 (D)

Addendum:

EU (27) 1 1,376,926 12,010 239,409 84,992 71,509 52,001 242,347 36,103 531,241 107,315

OPEC2 43,778 15,379 8,979 1,251 258 1,631 1,118 772 12,578 1,813

Table 3.14. USA’s FDI Historical-Cost Basis, 2007

Source: bea.gov (processed)

(millions of USD)


Indonesian manufacturing (in data published by the UK Office of Statistics, less than 5% of approximately 1.5 billion US dollar investment in 2006). The remainder of this investment flows into the primary and tertiary sectors. Telecommunications, transportation and financial services dominate the non-manufacturing sectors, while chemicals dominate investment in the manufacturing sector.

International Cooperation

The economic dynamics described above are closely related to Indonesia’s participation in various fora for international cooperation. In regard to international trade, the existing international cooperation has had a positive impact on export growth. Through this cooperation, Indonesia has gained greater market access with major trading partners, such as Japan, China, the European Union and the United States. Beyond this, Indonesia has gone on to establish itself with other trading partners such as Turkey, Mexico and India, with their role envisaged as an alternative solution to offset declining trade with major trading partner nations. A study by Bank Indonesia also shows that international cooperation under Bilateral Investment Treaties (BLTs) with some countries has influences on inflows of foreign investment into Indonesia. In trade and investment cooperation with fellow ASEAN members and ASEAN dialogue partners, such as Korea, Australia-New Zealand (ANZ) and China, Indonesia plays an active role in support of establishment of the ASEAN Economic Community (AEC) in 2015. To boost foreign investment, Indonesia also intensified cooperation with Canada in 2008 with the conclusion of the Foreign Investment Promotion and Protection Agreement (RI-Canada FIPPA).

In regard to prevention and mitigation of crisis, international cooperation such as the Chiang Mai Initiative implemented under Bilateral Swap Agreements (CMI-BSAs) can mitigate the negative impact of a crisis, although such arrangements cannot fully prevent a crisis or ensure recovery. Indonesia is actively involved in the Chiang Mai Initiative Multilateralisation (CMIM) aimed at providing short-term lending needed by ASEAN countries to manage external imbalances. In forums on a broader scale, Indonesia closely tracks developments in multilateral cooperation in the IMF and G20. Throughout 2008, Indonesia not only carried forward various existing collaborative arrangements, but also bolstered cooperation with strategic partners within bilateral, regional and multilateral frameworks in order to mitigate

the impact of the global economic crisis. In 2008, the IMF made available a new, more flexible loan scheme tailored to the needs of IMF Members. This scheme, the Short Term Liquidity Facility (SLF), is designed for countries with good macroeconomic conditions but facing balance of payment pressures due to the global crisis. Indonesia is one of few eligible countries, but has not drawn on the facility because of the secure position of the balance of payments. In the G20 forum, Indonesia is an active participant in various meetings convened to discuss the necessary strategic measures for countries to deal with the worsening global economic crisis.

Looking forward, international cooperation for liberalisation in movement of goods and more rapid movement of payments and investments will continue to move ahead. Furthermore, given the magnitude of the impact of the crisis on the Indonesian economy, redoubled efforts need to be directed towards reinforcing international cooperation for crisis prevention and resolution. Some steps have been taken in this direction, including the Chiang Mai Initiative for Multilateralisation (CMIM) aimed at mitigating crises, surveillance and improving access to financing. In addition, various agreements have been reached that are expected to improve movement of goods and payment flows and support future crisis prevention and resolution. Among these is the present drive to establish ASEAN as an international production base within the ASEAN Economic Community (AEC) framework in 2015 building on the FTA, the ASEAN Comprehensive Investment Agreement (ACIA) and reinforced monitoring, crisis management and information sharing within the Executive Meetings of East Asia Pacific Central Banks (EMEAP) forum.

Conclusions and Policy Implications

The expanding role of trade and external capital flows in the Indonesian economy over the last two decades or so clearly attests to the integration of Indonesia into the global economy. On one hand, this growing integration has benefited Indonesian economy through improved availability of goods for domestic needs, larger markets for domestic products, access to financing and availability of investment capital. On the other hand, however, the growing integration of the economy has downsides, such as the heightened susceptibility of the domestic economy to economic turmoil in other countries and the increased complexity of the economic policies that must be put in place.


How these implications work for Indonesian economy as a whole will depend, of course, to a great extent on the structure and depth of the integration. On the trading side, the diversity and nature of traded commodities coupled with the diverse range of trading partners can influence the benefits and risks of this trade. Similarly in regard to capital flows, the nature and source of capital inflows in Indonesia will strongly influence the benefits and risks of these capital movements. So far, Indonesia’s exports rely mainly on primary commodities and low technology manufacturing, while the most important share of imports are used for household consumption. Although China and other Asian countries have expanded in their share of Indonesia’s trade in recent years, Indonesia’s most important trading partners are still the major industrialised nations, namely, the United States, Japan and the Eurozone. The nature of this trade means that Indonesia cannot escape the influence of commodity price fluctuations and the weakening of the global economy, such as has happened in recent years.

In Indonesia, capital inflows are dominated by portfolio investments, which tend to be short-term, while inflows

of longer-term FDI remain quite low. This structure of capital inflows leaves Indonesia relatively vulnerable to capital reversal, which has implications not only for the financial market, but also for the economy as a whole. Large-scale capital reversal at a time of crisis, such as has occurred several times with Indonesia, is clearly proven to have triggered the weakening of the rupiah, high inflation, economic slowdown and complications in monetary policy.

In looking at Indonesian economy that has become more integrated with other economies, various policies to reap the optimal benefits and to mitigate the negative effects from the integration need to be continued and strengthen. In regard to trade, improved competitiveness and expansion of the market for Indonesian products is one key measure that must be taken further. Alongside this, it is essential to continue actions to bolster capital inflows by attracting greater volume of long-term investment and improving the prudential aspects of attracting and managing shorter-term capital inflows. Finally, to increase the benefits and minimise risks from economic integration, it is essential to keep building towards improved international cooperation.


Box: Latest Developments in Economic Integration of Asia

and the ASEAN-6 (Indonesia, Malaysia, Philippines, Singapore, Brunei and Thailand) will become a free trade zone by the end of 2010. Therefore, if this agreement is successfully implemented, trade with China by ASEAN countries, including Indonesia, is projected to see significant growth.

For ASEAN itself, one key area of progress in strengthening trade relations among fellow ASEAN members came with the signing of the ASEAN Economic Community Charter in November 2008, set to be implemented by 2015. The objective of the ASEAN Economic Community (AEC) is to establish ASEAN as a single market and production base with more rapid, free movement of goods and services among ASEAN members. The establishment of the AEC will also enable business agents and trained, skilled labour to move more freely among member nations. The AEC is envisaged as a means of promoting intra-ASEAN trade and reducing the region’s dependence on exports to conventional destinations such as the United States and Europe. This is expected to mitigate the susceptibility of ASEAN nations, including Indonesia, to economic shocks in advanced nations.

Trade cooperation is obviously not sufficient in itself to reduce the susceptibility of Asian economies to the global crisis. Financial cooperation is also essential to minimise the negative impact of the growing interdependencies of financial markets. Cooperation in such areas as the Bilateral Swap Agreements-Chiang Mai Initiative (BSA-CMI) need to be taken to new levels for Asian nations to become less vulnerable to shocks impacting the economies of individual members and in the regional economy as a whole. The strengthened financial cooperation is expected to assist member

One phenomenon that has emerged in recent years is the rapid expansion in trading activity among Asian emerging markets. Although developed nations retain the lead as export destinations, exports to fellow Asian emerging markets show a positive trend. Within the ASEAN community, there has also been heartening growth in movement of trade. The share of intra-ASEAN exports widened from 18.9% in 1990 to 25.0% in 2007. Indonesia has also undergone similar development, with the share of Indonesia’s exports to ASEAN countries almost doubling from 10% to 19.5% in the 1990-2007 period (Table 1). On a broader regional scale, the share of exports from ASEAN plus China, Japan, South Korea and Taiwan (ASEAN+4) to other nations within the grouping mounted from 36.6% in 1990 to 46.5% in 2007.

The growth in Asian trade activity is closely tied to the brisk economic growth of the countries in the region, particularly China and India, and also the entry of China into the World Trade Organisation (WTO) at end-2001. The share of ASEAN exports to China and India climbed from 5% and 0.7% in 1990 to 11.6% and 1.8% in 2007. China is also taking on an expanded role as a trading hub for Asian goods exported out of the region. This is borne out by the fact that China imports more from Asia and exports in higher volumes to destinations outside Asia.

Besides China’s rapid economic growth and entry to the WTO, strengthened economic cooperation among Asian nations has also contributed to trade growth among Asian countries. One example of greater cooperation in promoting intra-Asia trade came with the signing of the China-ASEAN Free Trade Agreement (FTA) in January 2007. Under this accord, China

Table 1. Exportss Share of Asian, ASEAN, ASEAN+4 Countries and Indonesia

Country

Exports Destination

G3 DevelopingAsia ASEAN+4 ASEAN

1990 1999 2007 1990 1999 2007 1990 1999 2007 1990 1999 2007

Asian Developing Countries 53.1 50.0 39.0 33.1 37.9 44.3 43.8 44.8 48.7 11.2 12.8 12.9

ASEAN 54.3 49.0 34.5 34.9 41.2 52.4 48.8 47.7 58.6 18.9 21.7 25.0

ASEAN+4 51.7 49.5 38.7 33.3 38.1 44.3 36.6 40.3 46.5 11.6 13.2 12.8

Indonesia 67.9 50 .7 42.6 25.1 37.5 44.7 63.7 54.0 61.2 10.0 17.0 19.5

Source: Direction of Trade (DOT, IMF, processed)

(percent)


nations in resolving short-term liquidity difficulties. Under the regional financial cooperation, participating countries will benefit from easier access to emergency financing, for example, related to balance of payments support, without having to wait for international institutions to provide loans that frequently carry

stricter terms and conditions. In addition, given the contagious nature of the financial crisis, financial cooperation among fellow Asian countries is expected to prevent (or at least mitigate) the spread of crisis from one country to another and to minimise the negative impact of these events.


DOMESTIC FINANCIAL SECTOR PERFORMANCE AMID THE ONGOING GLOBAL CRISISDomestic Financial System: Resilience and its Role in Financing the Economy | Payment System

IV.

Greater integration of the global economy has enabled a crisis affecting one country to propagate rapidly to other countries. The financial turmoil that befell the US due to the subprime mortgage debacle quickly spread through the global financial system. Sudden and substantial capital flows in several countries triggered dire shocks in their respective financial systems, undermining stability. Consequently, countries in the region suffered severe economic contraction, which precipitate a stark decline in global economic growth. Against this unpropitious backdrop, Indonesia has faired reasonably well compared to her neighboring countries. Overall, Indonesia’s macroeconomic posture was satisfactory. Domestic financial system resilience --particularly the banking industry-- remained relatively robust as the result of policies implemented since the 1998 crisis. Well-maintained stability has supported domestic economy through a significant increase in economic financing.

Relatively low integration between the Indonesian financial sector and the global economy during this crisis period has been advantageous. Indonesian banking sector and financial institutions’ exposure to subprime mortgages is minimal. As a result, financial system volatility in Indonesia was not as severe as in other countries. However, Indonesia is not fully protected from the crisis when it worsen. Tight global credit --which peaked with the collapse of Lehman Brother--, has affected financial market stability in Indonesia.

AMID THE ONGOING GLOBAL CRISISDOMESTIC FINANCIAL SECTOR PERFORMANCE

IV.

106 Chapter 4 Domestic Financial Sector Performance amid the Ongoing Global Crisis

Market destabilization includes rupiah depreciation, a slide in the Jakarta Composite Index and increasing yield of Government Bonds (SUN). Interbank risks also intensified following the liquidity shortfall of Bank Century. Notwithstanding, Indonesia’s banking sector was also plagued by the problems associated with derivative products, albeit on a smaller scale compared to other countries.

In future, challenges emanating from the deteriorating global economy will beset the domestic financial sector. Efforts to minimize risk

and therefore maintain financial sector stability have a logical consequence of undermining the financial sector’s role in financing the real sector. Accordingly, the policies of Bank Indonesia will be directed towards maintaining the intermediation function of the banking sector. Meanwhile, Bank Indonesia also monitored the distribution of small business loans and MSME credit to ensure significant growth. Such credit is crucial for rural people to survive and even develop their businesses during the difficult times ahead in 2009.

DOMESTIC FINANCIAL SECTOR PERFORMANCE

107Chapter 4Domestic Financial Sector Performance amid the Ongoing Global Crisis

DOMESTIC FINANCIAL SYSTEM: RESILIENCE AND ITS ROLE

IN FINANCING THE ECONOMY

discipline when implementing prudent regulations succeeded in limiting Indonesian banks’ exposure to the larger problems associated with derivative products, as faced by a number of other developing and developed countries. Meanwhile, financial sector players were also encouraged to implement good governance principles and improve internal control. Financial sector players also showed an improvement at managing their risks such as liquidity risk, credit risk and market risk.

In general, commercial and sharia banks, the capital market, other non-bank financial institution and the payment system performed well during the first semester of 2008. The performance of banks, which represent the largest industry in the financial sector underpinned by relatively high capital, as well as expansive credit growth with good credit quality. This would ensure profitability and adequate liquidity. The capital market performed well, which indicated by the Jakarta Composite Index peaking at its highest level in the history of the Indonesian Stock Exchange, coupled with issuances of shares that easily surpassed the previous year.

During the second semester of 2008, in line with the increasing severity of the global crisis confidence in

During 2008, Indonesia’s financial system remained resilient, even at the end of the third quarter when the impacts of the ongoing global financial crisis struck. The inimical experience of the 1997/98 Asian Financial Crisis helped prepare the relevant authorities and players in Indonesia through increased discipline and additional precautions. It is proven, that they can maintain their central role in financing economic development.

Bank Indonesia and the Government continued to promulgate regulations and policies with prudential principles but providing enough room for bank intermediation and business financing through the capital market and other non-bank financial institutions; supported by a more capable and modern national payment system. Improved coordination between Bank Indonesia and the Government has improved surveillance quality in the banking sector and non-bank financial institutions as well as the capital market. Consequently, banks and national financial institutions’ exposure to subprime mortgages was minimal.

The expeditious takeover of Bank Century by the Government succeeded in safeguarding the national banking sector and payment system. Furthermore,

4.1


the global banking system waned. Lehman Brothers --which was named as the largest investment banking in the USA-- collapse. Despite the limited exposure of Indonesia’s banks and financial institutions to global assets and failing financial institutions, the impacts were still felt domestically through the withdrawal of foreign funds from domestic financial instruments. Tight global liquidity exacerbated market segmentation and tightened liquidity at several domestic banks. However at industrial level, liquidity remained adequate. To maintain public confidence, the Government raised the guarantee on deposits from Rp100 million to Rp2 billion.

The domestic capital market also suffered and trade halted temporarily. Nevertheless, due to a plethora of efforts undertaken by the Government, the capital market showed signs of improvement despite ongoing corrections throughout the year. The national payment system continued to run smoothly, supported by Government and BI policies that ensured the default of one private bank did not have any systemic impacts. Other financial institutions such as pension funds and insurance companies did not affected by the global crisis. In general, despite significant tests during the second semester of 2008 the financial system remained resilient. Consequently, the intermediation function of banks and other financial institutions continued to finance domestic development; supported by a reliable national payment system.

Commercial bank resilience reflected by well-maintained performance indicators, moreover by expansive credit growth conducive to financing the domestic economy. Credit quality remained positive with NPL in 2008, both gross and net, reaching their lowest point since the 1997/98 Asian Financial Crisis; far below the indicative target set by BI. However, credit growth outpaced the increase in deposits during tight global liquidity, which could affect interbank liquidity. Despite adequate liquidity, the tendency of escalating interbank segmentation tightened interbank liquidity. Bank profitability sustained by good credit quality in spite of the climbing interest rate. Bank capital exceeded the international benchmark, although it did decline when compared to the previous year with credit expansion financing the domestic economy.

Sharia banks relatively well protected from the ongoing global crisis, with optimal intermediation and low non-performing financing, which supported financing of the real sector. Furthermore, growth in assets and financing was impressive. In addition, sharia bank financing, which

dominated by domestic economic activities, continued to play a role in buttressing sharia banks from the impacts of the global crisis.

Similar to sharia banks, rural banks were also affected little by the global financial crisis, enabling the intermediation function to improve and MSM (micro-small-medium) credit to grow. Performance indicators of both conventional and sharia rural banks (BPR) were stable and tended to improve, which had a positive impact on real sector financing. The intermediation function of BPR also increased, which can support economic activity, particularly within the scope of MSMs. Credit quality was maintained, although the NPL of conventional BPR increased at year-end. In general, capital of rural bank remained strong, as indicated by the relatively high Capital Adequacy Ratio (CAR).

Due to integration between the domestic and global capital markets, impressive performance at the beginning of the year was rapidly corrected in the second half of 2008. This undermined financing of the domestic economy, in particular financing stemming from the corporate and government bonds markets. However, the series of policy measures carried out by the relevant authorities succeeded in minimizing the impact of global financial volatility. Despite JCI was corrected, financing real sector through initial public offering (IPO) or right issue was higher than previous year. Meanwhile, multi-finance companies, insurance companies and pension funds, remained buoyant and did not affected by the global financial crisis.

National payment system stability was well preserved, although the impact of the global crisis did affect settlement value in the money market and capital market during the second semester of 2008. Transaction value and volume in the national payment system, both cash and non-cash, experienced an escalating trend. Meanwhile, greater interbank money market (PUAB) segmentation forced Bank Indonesia to improve the debit clearing settlement mechanism in order to maintain liquidity in the financial system.

Financial sector stability will continue to face heavy challenges as an impact of the continuing global economic crisis. To curb the worst impacts of the global financial crisis and to increase the contribution of the financial sector to economic growth, financial players and the relevant authorities had to reinforce financial system stability and increase the necessary precautions. However,


it is important to be aware that such efforts have the potential to diminish the intermediation function of the financial sector, which demonstrated sound performance in 2008.

Commercial Banks

In general, the impact of the global crisis on commercial banks was minimized by the “conservative” characteristics of Indonesia’s banks. Their sources of funds primarily stemmed from deposits, which were placed mainly in credit or government securities. Banks prohibited from investing in high-risk assets such as equities, while investment in securities is limited to investment grade securities.

Various performance indicators for commercial banks were relatively sound, along with expansive credit growth

that supported reasonably high domestic economic growth. The capital ratio of banks was well maintained but declined slightly due to strong credit expansion (Table 4.1). Robust credit growth was associated with relatively high domestic economic growth and stimulated by Bank Indonesia’s efforts to enhance the bank intermediation function. Holistically, other performance indicators for commercial banks, such as profitability and liquidity, were good despite mounting global risk.

Credit expansion in 2008 far exceeded 2007, with investment credit experiencing the highest growth. During 2008, credit growth reached Rp308 trillion (29.5%), stimulated by the increase in working capital credit, investment credit and consumption credit (Table 4.2). The dramatic increase in investment credit growth compared to working capital credit and investment credit indicated conducive growth in domestic investment and high expansion in imports of capital goods.

Table 4.1. Indicators of Commercial Banks

1) Including channeling loan 2) Monthly average NII

Main Indicator 2000 2001 2002 2003 2004 2005 2006 2007 2008

Total Assets (trillions of Rp) 1,030.5 1,099.7 1,112.2 1,196.2 1,272.3 1,469.8 1,693.5 1,986.5 2,310.6

Deposits (trillions of Rp) 699.1 797.4 835.8 888.6 963.1 1,127.9 1,287.0 1,510.7 1,753.3

Credits (trillions of Rp)1 320.5 358.6 410.3 477.2 595.1 730.2 832.9 1,045.7 1,353.6

LDR (Credits/Deposits, %) 45.8 45.0 49.1 53.7 61.8 64.7 64.7 69.2 77.2

NII (trillions of Rp)2 1.9 3.2 3.6 4.1 5.5 5.9 6.9 8.0 9.4

ROA (%) 0.9 1.4 1.9 2.5 3.5 2.6 2.6 2.8 2.3

Gross NPLs (%) 18.8 12.1 8.1 8.2 5.8 8.3 7.0 4.6 3.8

Net NPLs (%) 5.8 3.6 2.1 3.0 1.7 4.8 3.6 1.9 1.5

CAR (%) 12.7 20.5 22.5 19.4 19.4 19.5 20.5 19.2 16.2

Table 4.2. Banks Credits

NotesPosition (trillions of Rp) Growth(%) Share(%)

2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008Economic Sector

- Agriculture 24.4 33.1 37.2 45.2 56.9 67.2 7.7 35.6 12.2 21.6 25.9 18.1 5.6 5.9 5.3 5.7 5.7 5.1- Mining 5.1 7.8 8.1 14.1 26.2 32.2 31.1 52.7 4.0 73.6 85.9 22.9 1.2 1.4 1.2 1.8 2.6 2.5- Manufacturing 122.4 144.9 171.3 184.0 205.6 271.2 -0.2 18.3 18.2 7.4 11.7 31.9 28.1 25.9 24.6 23.2 20.5 20.7- Electricity, Water

supply and Gas4.5 6.0 5.4 7.2 7.9 18.5 2.9 33.7 -10.2 34.1 10.0 133.3 1.0 1.1 0.8 0.9 0.8 1.4

- Construction 12.5 20.0 27.0 33.1 44.1 58.8 32.8 60.2 35.2 22.6 33.2 33.3 2.9 3.6 3.9 4.2 4.4 4.5- Trade 84.0 113.1 135.8 163.4 216.9 259.6 26.8 34.6 20.1 20.3 32.7 19.7 19.3 20.2 19.5 20.6 21.6 19.9- Transportation 16.3 17.7 19.8 27.1 36.8 62.6 29.7 8.2 12.3 36.6 35.8 70.0 3.8 3.2 2.9 3.4 3.7 4.8- Business Services 44.3 56.4 72.6 78.4 109.7 152.3 39.3 27.2 28.9 8.0 40.0 38.8 10.2 10.1 10.4 9.9 11.0 11.6- Social Services 10.8 8.1 10.0 12.0 13.9 15.7 135.7 -25.3 24.5 19.8 15.7 13.4 2.5 1.4 1.4 1.5 1.4 1.2- Others 110.8 152.5 208.4 227.7 284.0 369.6 19.3 37.6 36.7 9.3 24.7 30.2 25.5 27.3 30.0 28.7 28.3 28.3

Category of Use- Working Capital 231.2 289.6 354.5 414.7 533.2 684.7 11.9 25.3 22.4 17.0 28.6 28.4 53.1 51.8 51.0 52.3 53.2 52.4- Investment 94.5 118.7 134.4 151.2 186.2 255.9 12.0 25.6 13.2 12.5 23.2 37.4 21.7 21.2 19.3 19.1 18.6 19.6- Consumption 109.4 151.1 206.7 226.3 282.6 367.1 36.8 38.1 36.8 9.5 24.9 29.9 25.1 27.0 29.7 28.6 28.2 28.1

Currency- Rupiah 330.6 431.6 565.8 638.4 791.6 1,054.3 23.1 30.6 31.1 12.8 24.0 33.2 76.0 77.2 81.3 80.6 79.0 80.6- Foreign Currency 104.5 127.8 129.8 153.8 210.4 253.4 1.9 22.3 1.6 18.5 36.8 20.4 24.0 22.8 18.7 19.4 21.0 19.4

TOTAL 435.1 559.4 695.6 792.2 1,002.0 1,307.7 17.2 28.6 24.4 13.9 26.5 30.5 100.0 100.0 100.0 100.0 100.0 100.0Channelling 42.1 35.7 34.5 40.7 43.7 46.0 7.4 -15.3 -3.2 18.0 7.2 5.2


The highest credit growth affected the electricity sector, while credit for the mining and agricultural sectors slowed due to fluctuations in international prices. After the electricity sector, high credit growth experienced by the transportation and telecommunications sector, the services sector, and construction. High credit growth in the electricity sector was attributable to government efforts to meet increasing demand for electricity. Meanwhile, the mining, social services, agricultural and trade sectors grew at a slower pace compared to the achievement in 2007. The mining and agricultural sectors both experienced high growth, which subsequently slowed due to high international commodity prices.

The impact of expansive credit growth on the absorption of manpower was limited. Electricity, transportation, and telecommunications are capital-intensive sectors, which prevents large manpower absorption following credit growth. Conversely, economic sectors that absorb manpower, such as agriculture and trade, tended to slow down.

Credit growth surpassed that of deposits, which spurred liquidity risks at several banks, however at the industry level, liquidity remained adequate. Rapid credit growth of 29.5% - an increase of Rp308 trillion – was not balanced by growth in deposits, which grow at 16.1% or Rp242.6 trillion (Chart 4.1). To fulfill their credit commitments, banks liquidated their BI Certificates (SBI). Consequently, the composition of SBI in the banks’ earning assets contracted, which tightened bank liquidity. Bank Indonesia subsequently lowered the Minimum Reserve Requirement in order to help commercial banks loosen their liquidity.

Strategy of banks to accumulate low-cost funds influenced sluggishness of deposit growth. This condition then further aggravated by the decline in savings rates and the policies taken by several major banks at the beginning of 2008 to reduce high-cost funds such as deposits and focus on lower-cost funds. However, in line with the rise in interest rates to overcome inflation in the middle of 2008, the public’s desire to save their money at banks increased (Table 4.3). The Government responded to the deteriorating global financial crisis in the middle of September 2008 by expanding the coverage of the deposit guarantee scheme. This restored the public’s confidence in the banking sector, which helped drive growth in deposits. In terms of foreign currency, rupiah depreciation against the USD in Quarter-IV 2008 also helped boost growth in foreign currency denominated deposits. If the effects of the exchange rate were excluded, deposits in

Chart 4.1. Growth of Credits, Deposits and SBI

Table 4.3. Deposits

NotesPosition (trillions of Rp) Growth(%) Share(%)

2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008 2003 2004 2005 2006 2007 2008Demand Deposits 219.1 245.9 281.3 338.0 405.5 430.0 11.2 12.2 14.4 20.2 20.0 6.0 24.7 25.5 24.9 26.3 26.8 24.5

- Rupiah 150.1 171.0 193.8 249.5 309.3 307.7 15.3 13.9 13.3 28.8 23.9 -0.5 68.5 69.5 68.9 73.8 76.3 71.6

- Foreign Currency 69.0 74.9 87.5 88.4 96.2 122.3 3.3 8.6 16.8 1.1 8.8 27.1 31.5 30.5 31.1 26.2 23.7 28.4

Savings 240.7 296.8 281.5 333.9 438.5 498.6 25.0 23.3 -5.2 18.6 31.4 13.7 27.1 30.8 25.0 25.9 29.0 28.4

- Rupiah 240.7 296.8 281.5 333.9 434.5 476.7 25.0 23.3 -5.2 18.6 30.1 9.7 100.0 100.0 100.0 100.0 99.1 95.6

- Foreign Currency - - - - 4.1 21.9 - - - - - 434.7 - - - - 0.9 4.4

Time Deposits 428.8 421.5 565.0 615.1 666.7 824.7 -3.9 -1.7 34.0 8.9 8.4 23.7 48.3 43.7 50.1 47.8 44.1 47.0

- Rupiah 351.8 351.9 455.0 509.9 541.0 676.0 -3.5 0.0 29.3 12.1 6.1 25.0 82.0 83.5 80.5 82.9 81.1 82.0

- Foreign Currency 77.0 69.6 110.0 105.2 125.7 148.7 -5.6 -9.6 58.0 -4.4 19.5 18.3 18.0 16.5 19.5 17.1 18.9 18.0

Total 888.6 964.2 1,127.8 1,286.9 1,510.7 1,753.3 6.3 8.5 17.0 14.1 17.4 16.1 100.0 100.0 100.0 100.0 100.0 100.0

- Rupiah 742.6 819.7 930.3 1,093.3 1,284.7 1,460.4 8.1 10.4 13.5 17.5 17.5 13.7 83.6 85.0 82.5 85.0 85.0 83.3

- Foreign Currency 146.0 144.5 197.5 193.6 226.0 292.8 -1.6 -1.0 36.7 -2.0 16.7 29.6 16.4 15.0 17.5 15.0 15.0 16.7


Chart 4.3. Non Performing Loan (NPL)

the reporting year grew by only Rp201.6 trillion or 13.3% (Chart 4.2).

Although bank liquidity remained adequate, it was not evenly spread. This was the challenge faced by the monetary authority to stabilize the money markets; both rupiah and foreign exchange. From a micro perspective, banks became more vulnerable to liquidity after the withdrawal of secondary reserves in compliance with their credit extension liabilities. As a result, excess liquidity (BI Certificates, Fasbi/FTK and SSB) ebbed to its lowest level in August 2008. Increasing pressures stemming from the global liquidity crisis in Quarter-III 2008 affected confidence among banks. This led to inefficiencies in the interbank market. In addition, significant withdrawals of foreign investment from the domestic financial market tightened the forex market further.

The Government and Bank Indonesia took several policies to ease the pressure on liquidity and maintain financial system stability. The policies included allocating government funds to certain banks, extending the tenure of the repo liquidity facility at BI, loosening the minimum reserve requirement for rupiah and foreign currencies, as well as managing the supply and demand of foreign currencies. Efforts to free up liquidity as well as reduce speculation in the foreign exchange market were taken by issuing several regulations to facilitate the availability of foreign exchange for eligible banks and corporations. In addition, to raise public confidence in the banking industry and maintain financial stability through crisis prevention and management, the Government and Bank Indonesia promulgated several pertinent regulations related to bank management in handling their liquidity/solvency problems, increasing deposit guarantee coverage, and broadening the types of collateral acceptable for the

short-term funding facility from Bank Indonesia. So far, these policies have succeeded in loosening bank liquidity and placating the public in response to the recovery of banks in financial difficulty.

In the near future, bank aversion to various risks in order to maintain their resilience against a deteriorating economic outlook will retard credit expansion. Amidst an uncertain global financial market and swings in public confidence, banks will become more cautious in confronting the various risks that will affect their resilience. If such conditions persist, banks will reduce their fund disbursements in the form of loans.

From a quality perspective, credit growth in 2008 was relatively stable and supported bank profitability. The NPL ratio, gross and net, was relatively low (Chart 4.3) although nominally there was an increase in NPL, mainly from transportation and communications as well as the others sector. Profitability faced mounting pressures in the middle of the year due to a rise in interest rates and a decline in the price of SUN. However, the policies of Bank Indonesia and the Indonesian Institute of Accountants’ Financial Accountancy Standards Board enabled flexibility in the recording of SUN. The impact of exchange rate depreciation was limited since volatility was well controlled and the net open position of banks was relatively low. However, debtor losses due to rupiah depreciation need to be monitored as it could compound credit risk.

With the improvement in credit quality bank capital remained strong, such that upcoming credit expansion will depend on “willingness to lend”. Bank Capital Adequacy Ratio (CAR) during 2008 remained high, despite a slight

Chart 4.2. Growth of Deposits


declining trend from 19.3% (end of 2007) to 16.2% (end of 2008). With CAR far in excess of the international benchmark, capital to be used in credit expansion remains wide open.

Sharia Bank

Sharia banks did not severely affected by the global crisis, therefore, the relevant performance indicators continued to improve. This translates into near-optimal intermediation, which supported real sector financing. The performance of sharia banks in the reporting year was relatively impressive, as indicated by high asset growth, fund accumulation and financing. The strong growth experienced by sharia banks stimulated by three key factors: high domestic demand, low integration between sharia banks and the global financial system, and the moderate level of transaction sophistication. Improved performance further supported by better sharia bank resilience, as reflected by sufficient liquidity, declining non-performing financing and increasing capital adequacy ratio.

ShariaBanks

Significant expansion of the Sharia bank network during the reporting year played an important role in supporting the intermediation function of sharia banks. The sharia bank network expanded with the inclusion of two sharia commercial banks, two sharia business units, the merger of two commercial banks with their business units and the addition of a branch office network (including cash units, sub-branch offices, and sharia channeling units) totaling 182 offices (Table 4.4). The policy of establishing sharia

office channeling increased the volume of sharia banking industry business. The number of sharia channeling offices rose from 275 offices to 1,470 offices by the end of 2008. The coverage of the sharia bank network now reaches consumers in more than 75 cities/regencies in 32 provinces. Such office network development indicates strong public demand for financial services based on sharia principles.

The intermediation function of sharia banks continued to improve with a financing-to-deposit ratio (FDR) of above 100%. Similar to the credit disbursements of commercial banks, financing offered by sharia banks grew significantly during the reporting year. The financing extended (PYD) grew by 36.7% to Rp38.2 trillion in 2008 (Table 4.4), which in turn increased the Financing-to-Deposit Ratio (FDR) of Sharia Banks to 103.6%. In addition to deposits, another source of sharia bank financing originates from

Chart 4.4. Growth of Assets, Deposits, PYD, and FDR of Sharia Banking

Table 4.4. Sharia Banking Performance

Main Indicator 2003 2004 2005 2006 2007 2008

Organizations

Sharia Commercial Bank (SCB) 2 3 3 3 3 5

Sharia Business Unit (SBU) 8 15 19 20 26 27

Number of Office (SCB & SBU) 253 355 415 531 594 822

Number of Channeling Office - - - 456 1,195 1,470

Performances

Total Assets (billions of Rp) 7,858 15,325 20,879 26,722 36,538 49,555

Deposits (billions of Rp) 5,725 11,862 15,582 20,672 28,012 36,852

PYD (billions of Rp) 5,530 11,490 15,232 20,445 27,944 38,195

FDR (PYD/Deposits, %) 96.60 96.86 97.75 98.90 99.76 103.64

Gross NPFs (%) 2.34 2.35 2.82 4.75 4.05 3.95

CAR (%) - - - - 10.76 11.34


conventional banks with Sharia Business Units; therefore, FDR was relatively secure. Consequently, the assets of sharia banks grew by Rp13.0 trillion (35.6%) from the previous year to Rp49.6 trillion. Notwithstanding, the growth rates of assets, deposits and financing all slowed in the second semester of 2008 (Chart 4.4) as a result of tighter bank liquidity and less real-sector activity due to the global crisis.

The structure of sharia bank deposits improved, which was indicated by the domination of mudharabah (investment) deposits. The share of mudharabah deposits expanded to 54.7%, while wadiah demand deposits contracted to 11.5% (Table 4.5). The share of mudharabah savings did not change significantly (34.8%). However, deposit growth in the reporting year slowed compared to the previous year, indicated by a decline in the share of mudharabah savings from 47% to 31.9%. This contraction was caused by concerns surrounding the global crisis, which led to greater caution on behalf of the consumer.

The composition of deposits, which dominated by investment and individual consumer funds, minimized the liquidity risk of sharia banks. Liquidity risk primarily stemmed from fluctuations in the funds of corporate customers, who are generally more sensitive to the competitiveness of the return offered. The value of

corporate depositors saving/deposit is huge, 53% of the total DPK, although from the perspective of clients’ number or account is very small (1.9%).

The financing extended by sharia banks continued to expand, affected little by the ongoing global crisis. Growth in sharia bank financing in 2008 was the same as the previous year (36.7%); however, growth was strongest during the second and third quarters of 2008, reaching 46.6% (y-o-y). In Quarter-IV 2008, the growth rate slowed slightly in line with tighter bank liquidity and the unremitting impacts of the global financial crisis. Nonetheless, financing growth remained high and, as it is based on real transactions, this can be construed as sharia banks increasing their contribution to finance the real sector. The dominant share of Micro-Small-Medium financing further supports this, namely Rp27.2 trillion or 72.1% of the sharia bank total costs.

Sharia bank financing was dominated by murabahah financing, despite the share of musyarakah growing rapidly. The share of murabahah at the end of the reporting year reached 58.9%, a slight decline from the previous year (Table 4.6). On the other hand, the share of musyarakah increased from 15.8% to 19.4%. This increase was stimulated by the financing pattern of sharia banks in collaboration with micro-small financial institutions, such

Table 4.5. Composition of Sharia Banking Deposits

NotesTotal(billionsofRp) Growth(%) Share(%)

2006 2007 2008 2007 2008 2007 2008

Wadiah Deposits 3,416 3,75 4,238 9.8 13.0 13.4 11.5

Mudharabah Savings 6,43 9,454 12,471 47.0 31.9 33.7 33.8

Mudharabah Deposits 10,826 14,807 20,143 36.8 36.0 52.9 54.7

Total 20,672 28,012 36,852 35.5 31.6 100.0 100.0

Table 4.6. Sharia Financing

KeteranganTotal(billionsofRp) Growth(%) Share(%)

2006 2007 2008 2007 2008 2007 2008

Musyarakah 2,335 4,406 7,411 88.7 68.2 15.8 19.4

Mudharabah 4,062 5,578 6,205 37.3 11.2 20.0 16.2

Murabahah Receivable 12,624 16,553 22,486 31.1 35.8 59.2 58.9

Istishna Receivable 337 351 369 4.2 5.1 1.3 1.0

Qardh Receivable 250 540 959 116.0 77.5 1.9 2.5

Ijarah 836 516 765 -38.3 48.3 1.8 2.0

Total 20,445 27,944 38,195 36.7 36.7 100.0 100.0


in operational income share allocated for depositors to increase profit sharing and maintain competitiveness. Meanwhile, to mitigate financing risk, reserves were increased in order to maintain capital above the minimum CAR. This policy together with the preservation of asset quality was successful in raising the CAR of sharia banks to 11.34% during the reporting period.

Rural Banks

Rural banks (conventional and sharia) maintained relatively sound resilience against the global financial crisis. Performance indicators were sustained and improved, particularly with reference to the intermediation function that underpinned real sector financing. The increase in rural bank intermediation helped finance economic sectors, especially the micro, small and medium enterprises. The quality of credit/financing was relatively stable despite a slight rise in the NPL of conventional rural banks in the fourth quarter of 2008. The capital ratio of rural banks remained high, particularly for sharia rural banks. Meanwhile, the accumulation of funds escalated following the prevailing growth trend.

Conventional Rural Banks

The performance indicators of conventional rural banks continued to improve, which evidences positive impacts on real sector financing. The global crisis moderately affected rural banks, with NPL increasing during the fourth quarter. The accumulation of deposits as well as credit extension by rural banks improved in spite of a contraction in the total number of rural banks by 45. The number of rural banks declined because of internal consolidation and mergers, however, the service coverage of rural banks was unaffected. With the strong growth in commercial banks, credit extension by conventional rural banks outpaced that of deposits. Credit increased by Rp4.9 trillion (24.0%), while deposits grew by Rp2.6 trillion (14.0%), which resulted in a Loan-to-Deposit Ratio (LDR) of 119.4% (Table 4.7). The high LDR was relatively innocuous for rural banks as credit disbursements were not only funded by deposits but also by capital and loans as well.

Setting the interest rate was one strategy adopted by rural banks to attract deposits, which dominated by term deposits. The composition of conventional rural bank deposits did not change significantly with the share of term deposits accounting for Rp14.2 trillion (66.6%) and savings accounts totaling Rp7.1% trillion (33.4%). In general, rural banks offer a higher interest rate than

as sharia rural banks, cooperatives and baitul maal wa tamwil (BMT). This increase indicates that sharia banks are beginning to take a higher risk financing policy by encouraging profit sharing based financing.

The quality of sharia bank financing improved with a persistently low NPF ratio during the reporting year of 3.95% (Chart 4.5). The growth of profit sharing based financing, especially musyarakah, and the ongoing global financial crisis have not affected the financing quality of sharia banks. The NPF ratio was maintained below 5%. Sectorally, declining financing quality found in the manufacturing, trade, and social services sectors (Chart 4.6).

Additional risk in terms of fund accumulation and disbursement was well anticipated by sharia banks. Despite a slight contraction in profits during the reporting year, the Return on Assets (ROA) remained sufficient at about 1.57%. This was primarily caused by the increase

Chart 4.5. NPF of Sharia Banks

Chart 4.6. NPF by Sector


commercial banks; therefore, when commercial banks raise their interest rates it perceived as a threat to rural banks in terms of attracting funds. As a result, the average weighted interest rate of conventional rural banks exceeded that of commercial banks, namely 7.16% for savings accounts and 12.43% for term deposits. Furthermore, the average lending rate reached 31.91%. Under such circumstance conventional rural banks were able to maintain their efficiency by improving the ratio of operational costs to operational income (efficiency ratio) from 84.27% at the end of 2007 to 82.83% at the end of 2008.

Credit extension by conventional rural banks for consumption credit remained high with a share of Rp10.6 trillion or 41.7% of total credit. The allocation of productive credit was dominated by working capital credit at Rp13.0 trillion (51.1%), with investment credit totaling just Rp1.8 trillion (7.2%). Sectorally, most credit of conventional rural banks was allocated to the others sector and trade sector, with shares of 44.3% and 36.6% respectively. The share of credit extended to the agricultural sector was equal to the income of rural citizens; just 6.9%.

The quality of rural bank credit deteriorated in the last quarter of 2008, in particular credit to the trade sector and medium-large businesses. The NPL ratio of conventional rural banks climbed in the fourth quarter of 2008, from 6.94% in September to 9.88% in December.

Regardless of the rise in NPL, the capital adequacy ratio of conventional rural banks was well maintained. The realization of paid-up capital in compliance with the 70% requirement boosted conventional rural banks’ capital; therefore, expansive credit growth and the concomitant decline in credit quality during the reporting year did not significantly affect the Capital Adequacy Ratio (CAR),

which reached 23.34%. The level of CAR was high enough to act as a risk carrier as well as a contribute to higher credit growth.

ShariaRuralBanks

In accordance with the development of conventional rural banks, the performance indicators of sharia rural banks also improved. However, the global crisis did affect sharia rural banks in the fourth quarter with a slight rise in NPL. Institutionally, the service network of sharia rural banks broadened with an additional 17 sharia rural banks in 2008, making the total 131. The expansion of the service network facilitated an increase in business volume of Rp464.1 billion (38.4%) from the position at the end of 2007 to Rp1.67 trillion by the end of 2008. The accruement of funds also increased, growing by 35.4% to Rp962.9 billion, while financing increased by 40.7% to Rp1.24 trillion (Table 4.8). Such conditions raised the Financing-to-Deposit Ratio (FDR) of sharia rural banks to 128.58% higher than conventional rural banks. The source of funding of sharia rural banks stemmed from capital and loans, similar to conventional rural banks, therefore, the high FDR ratio did not affect the liquidity of sharia rural banks.

The financing disbursements of sharia rural banks closely correlate with the credit extended to Micro, Small and Medium Enterprises (MSME). All financing allocated by sharia rural banks is to the MSME sector. Consequently, growth fluctuates in accordance with the financing to MSMEs. Such fluctuations are clear from the trend of growth over the past three years. In 2006 growth reached 4.0%, subsequently slowing to 38.3% in 2007. However, in 2008 the growth of financing from sharia rural banks skyrocketed to 40.7%.

Debt-based financing with murabahah and profit sharing financing with musyarakah continued as the main

Table 4.7. Rural Banks Indicators

Indicator 2003 2004 2005 2006 2007 2008

Number of Rural Banks 2,141 2,158 2,009 1,880 1,817 1,772

Total Asets (billions of Rp) 12,635 16,707 20,393 23,045 27,741 32,533

Deposits (billions of Rp) 8,868 11,161 13,178 15,771 18,719 21,339

Credits (billions of Rp) 8,985 12,149 14,654 16,948 20,540 25,472

LDR (credits/deposits, %) 101.32 108.85 111.20 107.46 109.73 119.37

Gross NPLs (%) 7.96 7.59 7.97 9.73 7.98 9.88

CAR (%) - - 19.34 10.51 23.38 23.34


preference of sharia rural banks. Financing composition based on type did not change, with murabahah financing dominating an 80.5% share. Profit sharing financing through musyarakah accounted for a 9.0% share, and mudharabah was only 3.4%.

The financing quality of sharia rural banks was maintained in spite of a slight increase in the NPF (gross) ratio. Financing quality followed a positive trend until the third quarter of 2008, as indicated by a decline in the NPF (gross) ratio to 6.92% in September 2008. In the fourth quarter of 2008, the NPF increase to 8.54%, congruous to the economic slowdown precipitated by the crisis in the financial sector (Table 4.8).

The capital adequacy ratio (CAR) of sharia rural banks remained high despite being eroded by the decline in credit quality. The expansion of aggressive financing in the reporting year increased Risk-weighted Assets significantly. Meanwhile, the capital of sharia rural banks did not increase, therefore, the Capital Adequacy Ratio (CAR) declined to 25.47%. However, this level of CAR exceeded that of conventional rural banks and was sufficient to act as a risk carrier and support subsequent credit growth.

Micro-Small-Medium (MSM) Credits

The growth of MSM credit remained expansive with maintained quality, although precautionary measures taken to mitigate the impacts of the global crisis affected MSM credit extension during the fourth quarter of 2008. MSM credit growth (26.1%) surpassed that of the previous year to reach Rp660.7 trillion (Table 4.9). Based on the realization of the bank business plan, MSM credit allocation during the reporting year succeeded in eclipsing the target established at the beginning of the year. MSM credit expanded significantly in the first three quarters of 2008 but slowed in the final quarter. Notwithstanding,

MSM credit share of total bank credit (including rural banks) in 2008 declined to 49.5% due to stronger non-MSM credit growth (35.5%).

Commercial banks dominated MSM credit allocation. The position of MSM credit extended by commercial banks at the end of the reporting year reached Rp633.9 trillion or 95.9% of total MSM credit. This indicated that the share of MSM credit against the total credit of commercial banks (excluding channeling) was 48.5%. Meanwhile, rural banks (conventional and sharia) extended Rp26.79 trillion (4.1%) in MSM loans. The low MSM credit share of rural banks was due to the economic scale factor. However, rural bank credit remained orientated towards MSMEs with 99.15% of all rural bank credit going to MSMEs.

MSM credit principally comprised of consumption credit to the trade sector. The share of consumption credit continued to grow from 50.0% in 2007 to 52.0% in 2008. On the other hand, working capital and investment loans declined slightly (Table 4.9). Based on business sector, the trade sector received the most MSM credit (25.2%), followed by industry (7.0%) and business services (6.6%).

MSM credit was sustained despite an increase in NPL at the beginning of Quarter-IV 2008. Prior to the fourth quarter, MSM credit experienced an improving trend, shown by the decrease in gross NPL from 3.86% at the end of 2007 to 3.31% at the end of Quarter-III 2008. This illustrates that MSM credit quality, in general, was of better quality than total bank credit with a NPL gross ratio of 3.40%. MSM credit quality began to decline in the fourth quarter of 2008 - gross NPL rose to 3.53% in November - but rebounded at the end of the year to 3.22%. This level ensures that MSM credit quality was secure. Based on credit type, consumption credit was the best quality with a gross NPL ratio of 1.9%, followed by working capital credit (4.59%) and investment

Table 4.8. Sharia Rural Banks Indicators

Indicator 2003 2004 2005 2006 2007 2008

Number of Sharia Rural Banks 84 88 92 105 114 131

Total Asets (billions of Rp) 293.0 471.5 605.0 906.3 1,207.2 1,671.2

Deposits (billions of Rp) 184.9 267.1 353.6 530.2 711.3 962.9

PYD (billions of Rp) 193.0 328.1 435.9 636.3 879.7 1,238.2

FDR (PYD/deposits, %) 104.35 122.86 123.29 120.02 123.69 128.58

Gross NPFs (%) - - 10.64 8.29 7.99 8.28

CAR (%) - - - - 34.71 25.47


credit (4.95%). As a result banks preferred to extend consumption credit since it guaranteed better payment assurance than the other types of credit.

The extension of small business loans (KUR), which is one component of MSM credit, showed a significant increase with good quality. Since its launch in November 2007 until the end of the reporting year, the realization of KUR amounted to Rp12.62 trillion reaching a total of 1.671.668 debtors; therefore, the average loan per debtor was Rp7.55 million. By business sector, the trade, hotels and restaurants sectors received most of the small business loans (58.52%), followed by the agricultural sector (21.93%). East Java, Central Java and West Java represented the top three recipient areas with shares of 22%, 19% and 15% respectively. The concentration of KUR allocation on Java was mainly due to the concentrated coverage of the bank network. The quality of the small business loans was very high with a gross NPL ratio of 1.19%.

Other Financial Institutions

The favorable capital market at the beginning of the year experienced intense pressures due to the spread of the global financial crisis in the second semester of 2008. The value of stock issuances increased significantly at

the beginning of the year before tumbling by yearend. Taking 2008 as a whole, however, the value of stock issuances improved over the previous year. The Jakarta Composite Index, which peaked at the beginning of the year, eventually corrected significantly in the second semester of 2008. The government bonds market experienced mounting pressures and yield increased. Consequently, the target for government bonds issuances was not accomplished. However, this did not affect the State Budget due to the low realization of government expenditure. The realization of private bonds issuances also fell short of the established target. Furthermore, mutual funds faced pressures as well. Meanwhile, non-bank financial institutions such as finance companies, insurance companies and pension funds were not affected by the global financial crisis.

Stock Market

The stock market at the beginning of 2008 performed relatively well but was corrected significantly in the second semester of 2008. The Composite Index at the end of 2008 closed at 1,355; a drop of 50.64% compared to the previous year (Chart 4.7). This condition placed the Indonesian Stock Exchange (IDX) at Level 5 in Asia and the Pacific, with the worst performance after Vietnam -66%, Shanghai -64.81%, Shenzen -60.65% and Mumbai -53.83% (Chart 4.8). The Composite Index in 2008, as a whole, was

Table 4.9. MSMEs Credits

NotesPosition (trilions of Rp) Growth(%) Share(%)

2006 2007 2008 2007 2008 2007 2008

Category of Use

Working Capital 181.0 216.0 261.2 19.4 20.9 41.2 39.5

Investment 38.1 46.1 56.1 20.8 21.8 8.8 8.5

Consumption 208.9 262.1 343.5 25.5 31.0 50.0 52.0

Total 428.0 524.2 660.7 22.5 26.1 100.0 100.0

Economic Sector

Agriculture 15.0 17.5 21.2 16.5 21.5 3.3 3.2

Mining 1.3 1.5 1.8 16.5 19.4 0.3 0.3

Manufacturing 36.9 38.1 46.5 3.3 21.9 7.3 7.0

Electricity, Water Supply and Gas

1.5 0.3 0.6 -80.7 95.8 0.1 0.1

Construction 10.1 13.3 17.1 30.9 29.3 2.5 2.6

Trade 114.3 142.6 166.8 24.8 17.0 27.2 25.2

Transportation 6.6 7.2 8.7 9.0 20.1 1.4 1.3

Business Services 25.4 32.7 43.7 29.0 33.5 6.2 6.6

Social Services 6.0 6.7 7.6 10.8 13.8 1.3 1.1

Others 210.9 264.3 346.8 25.3 31.2 50.4 52.5

Total 428.0 524.2 660.7 22.5 26.1 100.0 100.0MSMEs Credits Ratio/TotalBanking Credits 52.9 51.2 49.5


relatively well maintained, reaching 2,830 at the beginning of the year, which was the highest level ever recorded since the beginning of IDX. However, Semester-II 2008 witnessed an abrupt swing with the index plummeting.

External fluctuations in the financial and commodities markets triggered the slide in the Composite Index, while domestically conditions were relatively stable. External volatility began when the global financial market bubble burst, which spurred the deleveraging process and retarded global economic growth. Such conditions decimated profits and even bankrupted financial institutions worldwide. Consequently, foreign investors quickly began to reduce their fund portfolios in emerging markets, which led to corrections in the indices of emerging market countries, including the Composite Index in Indonesia. In addition, tumbling mining and agricultural commodity prices on the world market also affected a decline in the Composite Index.

Relatively secure macro stability, as indicated by the response of Bank Indonesia in using its BI Rate to control inflation, robust economic growth, burgeoning foreign exchange reserves, as well as optimistic financial reports from share issuers indicating strong profit growth, all helped curb the decline in the Jakarta Composite Index. However, several domestic risks also influenced the shift in the composite index in 2008. These risks, among others, stemmed from sentiment regarding bank liquidity and concerns over the shrinking profit of share issuers on the mining and agricultural sectors along with the sharp drop in related commodity prices.

The policies of the Indonesian Capital Market and Financial Institution Supervisory Agency and the

Indonesian Stock Exchange (IDX) also played an important role in limiting a deeper Composite Index decline. The IDX suspended trade on 9th and 10th October 2008 in an attempt to provide time for investors to think rationally amidst the financial market turbulence happening at that time. On the same day the Indonesian Capital Market and Financial Institution Supervisory Agency also issued regulations regarding buyback. The government also encouraged state-owned enterprises (BUMN) to buyback through profit provision. The IDX banned shortselling and limited margin trade. These policies successfully curbed selling actions amid rapidly declining prices. In addition, the IDX upgraded the auto-rejection system to asymetric rejection and also extended the suspension of several issuers that would stress the overall performance of the composite index. At the end of 2008, IDX issued another policy that mandated the reporting of stock repo transactions and the closing of cash market transactions to reduce huge price disparities with the regular market. To restore investor confidence, IDX requested a number of issuers to publicly expose fair information regarding the conditions of the issuer.

The panoply of policies instituted were able to restore investor confidence in the stock market, which was indicated by an increase in the average daily value traded on the stock market; from Rp4.29 trillion per day in 2007 to Rp4.41 trillion per day in 2008. Improved investor confidence was also reflected by the activities of foreign investors who still recorded net buying of Rp18.65 trillion in 2008, which was far below net buying in 2007 of Rp32.92 trillion. However, foreign ownership in 2008 increased to 67.8%. Increased foreign activities in 2008 were in line with the selective buying of undervalued shares due to financial volatility in Quarter-IV 2008.

Chart 4.7. ICI and Net Foreign Buy Chart 4.8. ICI and Regional Stock Exchange


Chart 4.11. Volume and Frequency of Government Bonds Trading Activities

Chart 4.9. IPO, Right Issue, and Stock Issuance Accumulation Chart 4.10. The Price of Government Bonds

Share issuances in 2008 reached their target and surpassed that in 2007. Capital market volatility and tumbling share prices reduced the number of initial public offerings (IPO) and rights issues by the end of 2008. Annually, the value of share issuances increased compared to the year before. The value of share issuances through IPOs rose by 38.04% from Rp17.18 trillion to Rp23.71 trillion, meanwhile the value of rights issues increased by 86.21% from Rp29.8 trillion to Rp55.49 trillion. Therefore, total share issuances in 2008 were valued at Rp79.1 trillion (Chart 4.9). Most shares (58.3%) were issued in the first quarter of 2008, before the rapid decline of many share prices, totaling Rp46.1 trillion. The issuance of shares plummeted in the last quarter of 2008, with a total value of just Rp3.3 trillion (4.1%) because a number of issuers with principle permits chose to postpone their share issuances.

In general, the rise in IPOs and rights issues in 2008 was a reflection of stock market resilience against the ongoing global financial crisis. This also proved that the stock market continued to perform well in terms of financing development.

Bonds Market

In line with persistent global financial market volatility, the government bonds market was also beset with intense pressures. The target set for the issuance of government bonds was not achieved but due to lower government spending this condition did not affect the state budget. The government bonds market in 2008 performed in stark contrast to 2007. The slump in performance of the government bonds market troughed in October 2008 when the yield was close to 20.95% (Chart 4.10). However, yield rebounded corresponding to the reduction in

global financial market volatility and actions taken by the relevant authorities. The government bonds yield at the end of 2008 was recorded at 11.88%; a slight increase of 187 bps compared to the previous year.

Pressures that plagued the bonds market were triggered by external factors and occurred during a period of stable domestic conditions. Yield returned to a downward trend in line with well-maintained macroeconomic conditions. Stable domestic factors were reflected by robust economic growth, controlled inflation within its target corridor, as well as the easing of fiscal risk after adjustments to fuel prices. In line with volatility in the money market, the trade in government bonds also declined. The total volume of trade in government bonds in 2008 was Rp1,246.7 trillion compared to Rp1,564 trillion in 2007. Whereas, the accumulative frequency of government bonds trade increased to 76,533 in 2008 from 70,090 in 2007 (Chart 4.11).


Amid a pressurized government bonds market, the non-resident group increased their ownership position in the bonds market. Foreign activity as net buyers in the bonds market occurred mainly in the fourth quarter of 2008. This was related to the high government bonds yield during the period. Therefore, the foreign ownership of bonds increased by Rp9.4 trillion to Rp87.5 trillion. This increase was still lower in value than during 2006-2007, which foreign ownership of bonds increased by Rp23.2 trillion. The other largest net buyers were insurance companies and non-recap banks, which increased their position on government bonds by Rp10.3 trillion and Rp10.5 trillion respectively. The recap banks subsequently became net sellers of Rp18.1 trillion on the government bonds market (Chart 4.12).

Similar to government bonds in the secondary market, government bonds in the primary market also suffered from pressures, with only 72.9% of the issuance target being realized. To finance the 2008 State Budget deficit, the government issued Sovereign Bonds followed by a market survey and expansion, among others, through the development of several innovative products, for example Sovereign Sukuk. In addition, existing products like Retail Bonds (ORI) were intensified to garner public funds. On some occasions, the government implemented debt switching and buyback to stabilize the price of government bonds and manage the maturity profile. However, global financial market volatility in Quarter-IV 2008 disrupted government auctions. The high yield requested by auction participants on 26th August 2008 forced the government to proportionally restrict the number of sales at auction and on 9th and 16th September 2008 no acceptances took place. Understanding the prevailing conditions, on 7th October 2008, the government announced the termination of bond auctions until the end of 2008.

Consequently, the issuance of Commercial Papers reached Rp78.2 trillion; just 72.9% of the target.

In order to minimize the impact of the global financial crisis on the domestic financial market, the government promulgated a series of policies in the government bonds market. One policy gave banks the opportunity to change their value setting technique from mark to market to discounted cash flow for trading bonds and bonds available for sale, including the transfer of bonds portfolio from trading and available for sale to hold to maturity (HTM). The government also planned to buy back government bonds either regularly or through the Government Investment Center (GIC) or Asset Management Company (AMC). There were three government buybacks in 2008 totaling Rp2.375 trillion. On 4th April 2008 Rp16.4 trillion was offered with Rp2 trillion accepted; on 30th October 2008 Rp1.2 trillion was offered with Rp0.04 trillion accepted; and on 12th November 2008 Rp1.9 trillion was offered with Rp0.327 trillion accepted. The low acceptance rate was due to the high interest rate of the proposed offer. In an effort to assist the government in maintaining a stable government bonds price, Bank Indonesia also purchased a limited amount of government bonds in the secondary market. Bank Indonesia purchased Rp333 billion in the secondary market on 29th October 2008, Rp2.0 trillion on 3rd November 2008 and Rp14.0 billion on 10th November 2008 for FR, VR, ORI and Zero Coupon.

The corporate bonds market also faced pressures, especially in the third quarter of 2008, which reduced the new issuances of bonds. The performance of the corporate bonds market up to the second quarter of 2008 was relatively sound. This was evidenced by the clear intention of corporations to finance through corporate bonds. However, upon entering the second quarter all corporations ceased financing through corporate bonds. Some corporations postponed and even cancelled their plans to issue corporate bonds. Consequently, IDX revised its target for new issuances of corporate bonds from Rp45 trillion down to Rp15 trillion in 2008. The value of corporate bonds issued in 2008 was Rp11.9 trillion from 19 issuers; compared to Rp31.2 trillion and 39 issuers in 2007 (Chart 4.13).

The issuance of corporate bonds in 2008 was relatively high when compared to the past three years. Therefore it can be concluded that the corporate bonds market was sustainable and contributed to economic financing; although with a smaller portion compared to 2007, but still better than 2006 and 2005.

Chart 4.12. Government Bonds Holders


Chart 4.13. Corporate Bonds Issuance Chart 4.14. NAV of Mutual Funds

Unlike the conventional corporate bonds market, sharia based corporate bonds experienced strong growth. Accordingly, sukuk issuances in 2008 increased by 28.57% from 21 in 2007 to 27 in 2008. The nominal value of sukuk issuances increased by 52.32% from Rp3.23 trillion in 2007 to Rp4.92 in 2008.

Mutual Funds

Similar to the performance of underlying assets, mutual funds experienced relatively minimal pressure. Mutual funds, in fact, performed relatively well at the beginning of 2008, but reversed direction in the third quarter of 2008. The increase in Net Asset Value (NAV) at the beginning until the middle of the year was supported by the strong performance of the stock market and government bonds market, however, entering the third quarter of 2008 the NAV of mutual funds declined in accordance with the deteriorating stock market and government bonds market. As a result, NAV declined by 18.74% from Rp91.5 trillion to Rp74.35 trillion in 2008 (Chart 4.14). Such a decline was considered minimal, since the participating units in 2008 expanded from 53.39 billion to 61.51 billion; an increase of 14.78%. Additionally, the number of mutual fund products also increased from 473 in 2007 to 602 in 2008; up 27.27%.

The policies instituted were able to minimize the impacts of global financial market volatility on the mutual funds market. In this case, the policy of the Indonesian Capital Market and Financial Institution Supervisory Agency that issued protected mutual funds through a scheme of fair bonds value assessment using the amortized price method to control further declines in NAV and reduce excessive net redemptions. On one hand, infrastructure and consumer education regarding mutual funds have improved compared to 2005. On the other hand, however,

mutual fund products are becoming more diverse. The new products include sharia mutual funds, limited funds and exchange traded funds (ETF), both equity and fixed income. In terms of the number of products available, impressive progress was made on sharia mutual funds, with a 38.46% increase from 26 mutual funds to 36 since its launch in January 2008. Another product that experienced strong growth was mutual funds in the form of limited Collective Investment Contracts (CIC); used to collect funds from professional investors subsequently invested by an Investment Manager into a securities portfolio. Thirty-four limited mutual fund products have emerged since their inception in February 2008.

The resilience of the mutual funds market was also demonstrated by the limited decline in NAV compared to the crisis period in 2005. NAV in 2005 dropped to Rp29.4 trillion from of Rp91.5 trillion. Thus, the role of mutual funds in supporting development financing continued but with a lower share.

FinanceCompanies

Finance companies were not affected by the global crisis and continued to follow an improving trend in 2008. This was demonstrated by 32.4% growth in assets to Rp168.5 trillion (Table 4.10). Similar to the previous year, finance companies were dominated by consumer financing. Consumer financing totaled Rp83.2 trillion or 60.6% of the total value of the financing industry. However, growth in consumer financing was surpassed by leasing, which experienced rapid expansion. Leasing in the reporting year reached Rp50.7 trillion (36.9%), while the share of factoring was 1.6% and credit cards 0.8%. In terms of sources of funds, most funds were sourced from bank loans. In 2008 there was a jump of 43.14% in funding from bank loans (Rp66.4 trillion to Rp95.0 trillion). The share of


domestic bank loans was 54.7% with the remaining 45.3% sourced from foreign bank loans. Other sources of funding used by finance companies included loans from non-bank financial institutions, both domestic and foreign, totaling Rp13.9 trillion, issuances of securities Rp11.5 trillion and capital (including reserves, retained profit and operating profit) Rp32.4 trillion.

Amid financial market volatility in 2008, the role of finance companies in funding development increased significantly. This increase was nearly double compared to 2007. It should also be noted that the resilience of finance companies was relatively good.

InsuranceCompanies

Insurance companies performed relatively well until September 2008 and were not affected by the global crisis. The total assets of the insurance industry grew despite a decline in the number of companies by 144. The insurance premiums earned and income from investments increased, both for commercial insurance that includes life insurance, loss insurance and re-insurance; and for non-commercial insurance that includes social insurance, insurance for civil servants (PNS), as well as insurance for the armed forces and police officers. The total assets of this industry during the reporting period increased by 6.2% from Rp228.8 trillion to Rp234.7 trillion by September 2008 (Chart 4.15). In this case, commercial

insurance continued as the key stimulus of the insurance industry with assets reaching Rp136.1 trillion in September 2008, making up 58.0% of total assets in the insurance industry.

One of the insurance products to demonstrate impressive growth in 2008 was sharia insurance. Sharia insurance assets grew by 21.9% (up to September 2008) but with limited share at around just 1.27% of total insurance industry assets. This increase in sharia insurance was attributable to a growing number of insurance companies with Sharia Units. Up to September 2008, there were three sharia insurance companies with 38 sharia insurance units.

Chart 4.15. Insurance Industry

Table 4.10. Indicators of Finance Companies

NotesPosition (trillions of Rp) Growth(%)

2005 2006 2007 2008 2006 2007 2008

Number of Companies1) 236 214 205 194 -9.32 -4.21 -5.37

Total Assets 96.5 108.9 127.3 168.5 12.81 16.87 32.37

Business Value 67.6 93.1 107.7 137.2 37.67 15.64 27.44

Leasing 19.1 32.6 36.5 50.7 71.05 11.76 38.92

Factoring 1.4 1.3 2.2 2.2 -7.80 69.10 0.94

Credit Cards 1.8 1.5 1.4 1.1 -16.22 -2.37 -20.60

Consumer Finance 45.4 57.7 67.6 83.2 27.14 17.09 23.13

Source of Funds

Bank Loans 49.2 55.0 66.4 95.0 11.66 20.73 43.14

- Domestic 25.0 29.8 36.7 51.9 19.09 23.06 41.57

- Foreign 24.2 25.2 29.7 43.0 3.96 17.96 45.07

Other Loans 11.6 10.2 10.5 13.9 -12.01 3.05 32.80

- Domestic 4.5 3.4 3.8 3.4 -24.41 13.86 -10.51

- Foreign 7.1 6.8 6.7 10.5 -4.22 -2.32 57.83

Bond Issuance 10.2 10.1 12.8 11.5 -0.83 27.33 -10.53

Capital2) 15.2 19.0 24.5 32.4 25.22 28.90 32.09

Current Year (profit/loss) 3.5 3.1 4.4 6.4 -10.04 39.79 45.48 1) Number of companies submitting reports2) Consists of paid capital, premium, reserves, retained earnings and current year profit


Chart 4.18. Pension Funds Investment Portfolio

Chart 4.16. Insurance Company Investment Portfolio

Robust growth in the insurance industry was catalyzed by government efforts to stabilize the government bonds market. This policy was carried out through amortized evaluations. Accordingly, the balance sheet of the insurance industry will be secured from the impacts of volatility in the government bonds market. In addition, strong growth in the insurance industry was also supported by a variety of products related to unit links and bancassurance (the marketing of insurance products through collaboration with a bank). In 2008, 24 companies marketed unit links and 25 companies collaborated with banks to market their products.

Government bonds (SUN), BI Certificates (SBI) and deposits dominated the investments of insurance companies. Continuing the trend set in 2007, insurance company placements in SUN and SBI continued to increase, nominally and by share. Up to September 2008, investment in SUN reached Rp57.5 trillion, an increase of Rp2.9 trillion

(5.3%) from the previous year (Chart 4.16). Meanwhile, deposits rose by Rp0.8 trillion (1.7%). Such conditions expanded the investment share in SUN from 27.0% in 2007 to 27.7% in September 2008. The declining share of deposits in insurance was caused by the low interest rate offered on deposits compared to government bonds and SBI, particularly during the first semester of 2008. Placements by insurance companies in mutual funds also grew rapidly, reaching Rp34.2 trillion in September 2008; an increase of Rp3.6 trillion (11.8%) compared to 2007.

The burgeoning assets of insurance companies is evidence that the industry is relatively stable and is an indication of indirect economic financing by insurance companies, either through the purchase of shares, government bonds and/or corporate bonds.

PensionFunds

The performance of pension funds continued to impress despite the decline in the number of pension fund companies. The total number of active pension fund companies at the end of the reporting year was 281, down seven on the previous year (Chart 4.17). From the total, 255 companies (90.7%) were Employer Pension Funds (EPF) and 26 were Financial Institution Pension Funds (FIPF). However, the decline in institutions did not affect the improvement in company performance. Until the end of 2007, total net assets of pension funds reached Rp91.3 trillion with average growth of 17.3% since 2000. The net asset value of pension funds in 2008 continued to rise following its growth trend, and was not affected by the global financial crisis. The rise was due to government efforts to permit pension funds to be classified as hold-to-maturity government bonds for the 2008 fiscal year, which

Chart 4.17. Pension Funds


shielded the balance sheets of pension fund companies from volatility in the government bonds market.

The investment portfolio composition of pension fund companies improved with a decline in the share of deposits. In general, the investment behavior of pension fund companies was similar to insurance companies; relying heavily on deposits. However, with the growth in the bonds market, both government and corporate, the share of term deposits continued to contract, shrinking to 23.2% at the end of 2007 (Chart 4.18). In

terms of the share of bonds in the portfolio, corporate bonds in particular leapt to 26.3%, whereas the share of government bonds was 21.2%. Based on sub-registry SUN data, the ownership of SUN by the pension fund companies reached Rp32.2 trillion at the end of the reporting year, an increase of Rp6.7 trillion from the previous year. This is a welcome phenomenon since pension funds that manage long-term public funds are potential investors in the government and corporate bonds markets, and they are expected to become the main players in the bonds market.


PAYMENT SYSTEM

The increase in currency was stimulated by some factors, namely local elections, rising fuel prices, cash transfer, higher income from agriculture sector outside Java as well as preparations for the 2009 General Election. Those factors boosted demand for currency during 2008; exceeding demand in the previous year (Chart 4.19) and leading to the highest growth in the past decade. The average daily growth rate of currency in circulation picked up from 21.0% in 2007 to 26.3% in 2008 (Table 4.11). However, the demand for currency in the reporting year remained in line with its seasonal pattern. Rising demand

Despite being affected by the global financial crisis, payment system stability was maintained. In 2008, currency marked the highest growth in a decade due to a number of contributing factors including local elections (Pilkada), fuel price hikes, cash transfer (BLT), and increasing income from agriculture sector outside Java in the first half of 2008 as well as preparations for the 2009 General Election. Meanwhile, non-cash payment instruments continued to grow, in terms of transaction volume and value, although the impacts of the global crisis were substantially affected settlement value in the money market and capital market. Liquidity in the system was also affected, which forced banks to make some adjustments to their liquidity management.

CashPaymentInstruments

The growth rate of currency in 2008 was higher than in previous periods. This rise was influenced by internal factors, such as the political situation and price hikes anticipation. Meanwhile, banks continued to optimize their cash management, which resulted in a lower outflow of currency from Bank Indonesia compared to the inflow. This was also followed by a decrease in currency in circulation (UYD) from QI to QIII of 2008. However, the share of cash in vault rose in QIV, as a response to an anticipated surge in demand for currency.

4.2

Chart 4.19. Currency in Circulation in 2004-2008


for currency had began at the end of 2007 and continued in 2008.

The daily average growth rate of currency in circulation soared during the first three quarters but slowed in the final quarter. The daily average growth rate in QI 2008 was 26.9%, which surpassed growth in the same period of the previous year (21.2%). The trend then continued in QII and QIII 2008 at 28.5% and 30.2% respectively (Table 4.11). Nevertheless, in QIV 2008 the daily average growth rate was down to 20.8% due to seasonal factors after religious festivities.

Amid rising demand for currency, Bank Indonesia was able to meet the increasing demand for currency, both from the public and banks. During the reporting period, Bank Indonesia managed to maintain cash adequacy ratio at a safe level, namely 3-4 months of average outflow (Table 4.12). The share of cash in vault during the first three quarters of 2008 was lower than it was in the previous year, with the exception of the final quarter of 2008 (Table 4.13). This trend demonstrated the positive response taken by banks to anticipate the impacts of the global financial crisis on the demand for currency by customers.

In line with the growing demand for currency, Bank Indonesia’s cash distribution activities, including cash service and currency destruction, surged in 2008 along with the optimization of banks liquidity management. Total currency inflow to Bank Indonesia from banks and the public in 2008 went up from Rp154.3 trillion to Rp184.6 trillion. Currency outflow from Bank Indonesia to banks and the public also picked up from Rp195.9 trillion to Rp226.1 trillion (Table 4.14). In nominal term, however, currency outflow in 2008 exceeded its inflow, which created a net outflow of Rp41.4 trillion. The ascending inflow was mainly due to the implementation of discretionary banks deposit policy through a deposit mechanism for currency fit for circulation. This can be seen in increasing amount of currency destroyed in 2008, by around 6.7%. However, the destruction ratio against its inflow fell from 49.9% to 43.9%. The lower growth rate of currency outflow compared to its inflow indicated the ongoing optimization of banks liquidity management by also considering potential customer withdrawals against the cash available. This was further supported by the bank cash ratio, which decline from 15.7% to 15.4%.

Various cash payment instrument indicators tended to improve in 2008. This condition is expected to persist into 2009 considering some factors. The forthcoming General Election, ongoing cash transfer, and increase in currency transactions through banks; all of which are expected to raise demand for currency in 2009. Higher currency transactions through banks are estimated to occur due to the optimization of a no-fee, small-denomination cash service. Bank Indonesia projects that demand for currency in 2009 may increase by as much as 10.6% compared to 2008.

Table 4.11. Average of Currency in Circulation and Growth in 2005-2008

Notes 2005 2006 2007 2008

Nominal (trillions of Rp)Daily Average 126.09 144.50 174.80 220.82End of Year Position 144.87 178.57 220.79 264.39

Quarterly Average- Q1 117.84 132.71 160.80 204.03- Q2 117.99 135.95 160.75 206.50- Q3 127.40 147.26 176.76 230.18- Q4 140.84 161.72 200.42 242.05

Growth (%, yoy)Daily Average 13.49% 14.60% 20.97% 26.33%End of Year Position 14.16% 23.26% 23.64% 19.75%

Quarterly Average- Q1 15.09% 12.62% 21.17% 26.88%- Q2 12.06% 15.22% 18.24% 28.46%- Q3 13.29% 15.59% 20.03% 30.22%- Q4 13.57% 14.82% 23.93% 20.77%

Table 4.12. Cash Position and Ratio to Outflow

Keterangan 2005 2006 2007 2008

Nominal (trillions of Rp)Daily Average 52.3 73.4 68.1 73.3End of Year Position 43.1 48.3 58.4 53.7

Quarterly Average- Q1 50.8 64.4 65.7 77.6- Q2 58.4 79.6 72.4 82.6- Q3 57.7 82.0 68.4 68.5- Q4 42.3 67.3 65.7 64.8

Cash Position to Outflow Ratio (Months)- Q1 2.0 1.8 2.5 4.9- Q2 2.1 2.3 3.2 4.9- Q3 1.9 2.4 4.0 3.2- Q4 1.3 2.1 4.2 3.4

Table 4.13. Share of Currency in Circulation

Periods2006 2007 2008

Public Banks Public Banks Public Banks

- Q1 86.1 13.9 83.1 16.9 83.4 16.6

- Q2 86.6 13.4 84.9 15.1 86.3 13.7

- Q3 87.1 13.7 85.2 14.8 85.7 14.3

- Q4 85.7 14.3 83.9 16.1 82.8 17.2

Total 86.2 13.8 84.3 15.7 84.6 15.4

(percent)


Non-Cash Payment Instruments

In 2008 transactions using non-cash payment instruments surged both in volume and value in 2008. Total non-cash payment transactions reached Rp48,000 trillion; an increase of 4.23% over the previous year. Despite its expansion, non-cash payment rate of growth dropped when compared to annual growth over the past three years. The upsurge in transactions stemmed from the Real-Time Gross Settlement (RTGS) system that accounted for 92% of payment system transactions, followed by card-based payment instruments and electronic money (4.5%), as well as clearing (3.5%). Although total transaction value went up, several types of RTGS transactions fell sharply in the last quarter of 2008, namely Interbank Money Market (PUAB) transactions (down 28%), capital market settlements (down 23%), and foreign exchange (down 4%). The drop in PUAB transactions was due to segmentation. As a result, interbank transactions were only processed within their own bank groups. Increasing segmentation was also to blame for the decline in interbank foreign exchange trade. The lower value of capital market settlements was attributable to less trading activity on the capital market as an impact of the global financial fiasco.

The global financial crisis also affected liquidity management in the bank payment system, as reflected by the turnover ratio, which is a comparison between outgoing payments and the initial balance. The majority of banks reserved their liquidity for liability payments by maintaining their checking account balance, but in the fourth quarter of 2008, banks started to calculate their reserved liquidity based on incoming payments, which raised the turnover ratio. In anticipation of a rising default risk in the clearing system as an impact of the financial crisis, Bank Indonesia maintained adequate liquidity in the system by altering the mechanism and settlement of debit clearing.

Real-Time Gross Settlement (RTGS) Transactions

In 2008, RTGS transactions jumped, driven by consumer transactions, clearing settlement and monetary operation. Total payment transaction value through the BI-RTGS system in 2008 reached Rp44.1 trillion; an increase of 3.0% over the previous year of Rp42.4 trillion. Meanwhile, transaction volume also went up, reached 10.3 million, which was a 19.7% rise compared to the previous year with 8.6 million transactions. Daily average of RTGS transactions, by value and volume, was Rp184.2 trillion and 43.2 thousand transactions respectively (Chart 4.20).

The main player in payment transactions in the BI-RTGS system is banks with 52% of transaction value and 94% of transaction volume. The National Private Commercial Bank (BUSN) group was the largest and the most active participant due to their competitiveness in payment facilities offered and their ease of use. The contribution from the BUSN group was 40.3% from a value perspective and 48.3% in terms of volume (Chart 4.21). The BUSN was followed by the group of state-owned banks with a contribution of 21.1% and 29.7% in terms of value and

Chart 4.20. Transactions of BI-RTGS

Table 4.14. Inflow/Outflow and Netflow of Currency

Periods Inflow (trillionsofRp)

Outflow (trillionsofRp)

Netflow (trillionsofRp)

Growth(%)Inflow Outflow

2005 314.62 330.16 -15.54 14.5 14.7

2006 305.13 338.14 -33.00 -3.0 2.4

2007 154.30 195.88 -41.58 -49.4 -42.1

2008 184.61 226.05 -41.44 19.6 15.4


volume respectively. Based on the type of transaction, bank transactions directly correspond to the economic activity, namely the settlement of customer transfers, the capital market and foreign exchange. Customer transfers rose by 15% in terms of value and 26% in terms of volume, which indicates the public’s preference for a fast transfer facility, such as through RTGS. Unlike customer transfers, settlements value and volume from the capital market slid to 23% and 21% respectively, which moved in line with the lower trading activities in stock and bond market.

The global financial crisis also affected PUAB settlements and interbank foreign exchange transactions. Compared to the previous year, PUAB settlements fell sharply by 28% in terms of value and 24% for volume (Table 4.15). Meanwhile, interbank foreign exchange was down by 4% (value) and 13% (volume). More segmented interbank money market in the rupiah and foreign exchange markets contributed to the decline in PUAB settlements and forex transactions. In addition, the drop in PUAB transactions

was also influenced by reduced gapping activities since the implementation of O/N PUAB as a new operational target of monetary policy. Before that, Bank Indonesia used 1 month SBI rate as its operational target.

Unlike PUAB activity, monetary operations transactions to maintain monetary and financial system stability went up. Monetary operation transactions surged by 38%, which include Bank Indonesia Deposits Facility (FASBI), securities trading (SBI, SWBI and SUN) and fine-tune operations, recorded a 38% increase. Overall, the share of monetary operation transactions accounted for 50% of total BI-RTGS transactions. The transactions that experienced the highest growth were the FASBI. This increase was affected by the banks’ preference to place their liquidity in more liquid instruments, particularly in anticipation of unexpected liquidity demand and increasing counterparty risk. Government transactions were also recorded higher, went up by 29% (value) and 41% (volume). The increase occurred primarily in the fourth quarter of 2008 to finance a government expenditure that commonly occurs at year-end, such as spending for projects and subsidies.

BI-RTGS Liquidity Management

To ensure smooth payment transactions, Bank Indonesia monitors BI-RTGS liquidity management. The daily monitoring of BI-RTGS participants is principally conducted to identify, in advance, the ability of RTGS participants to meet their payment liabilities at the end of the day and avoid gridlock1. The throughput2 indicator during the reporting period demonstrated that settlement time was

1 Termination of settlement system due to bank’s inability tomeet its payment liability

2 Accumulation of transaction settlement value in the certain window time during BI-RTGS operation hour

Chart 4.21. Transactions Activities by Group of Banks

Table 4.15. BI-RTGS Transactions by Type of Transaction

TransactionsValue(trillionsofRp) Volume

2007 2008 Increase/Decrease(%) 2007 2008 Increase/Decrease(%)

Interbank Money Market 5,813 4,183 -28 146,417 111,388 -24

Consumers 7,401 8,481 15 6,776,777 8,506,043 26

Foreign Currency Transaction 3,825 3,798 -1 174,474 153,527 -12

Stock Exchange Settlement 2,530 1,955 -23 63,980 50,715 -21

Government 1,178 1,520 29 243,900 343,804 41

Monetary Management 15,620 17,350 11 46,497 69,764 50

Clearing Settlement 4,793 5,326 11 365,033 433,700 19

Others 1,226 1,586 29 666,938 676,790 1

Total 42,386 44,199 4 8,484,016 10,345,731 22


relatively well maintained, reached 68.4% at the first and second window time (Chart 4.22). This also showed that the liquidity requirement for the BI-RTGS operational system at the end of the day was not too tight and evenly spread.

There was a change in the pattern of reserved liquidity by BI-RTGS participants in the fourth quarter of 2008 in response to global financial woes. This change was reflected in the turnover ratio. Since BI-RTGS system implementation in 2000, the majority of big banks -except for foreign banks and joint venture banks- usually reserved their daily liquidity requirement by maintaining the balance of their checking account, which kept their turnover not more than 1. However, tighter liquidity at several banks raised the average turnover ratio of all banks to 2.36 because the calculation of reserved liquidity began to include incoming payments as a source of liquidity.

Clearing Transactions

In line with strong economic activity, total clearing transactions, which are a reflection of retail transactions, increased. The value of clearing transactions during the reporting period rose by 19.7% to Rp1,664 trillion with an average of Rp6.8 trillion per day. Transaction volume also went up, by 7.6% to Rp85.6 million transactions with an average of 349 thousand transactions per day (Chart 4.23). Of the total transaction, the proportion of credit transfers and debit clearing were relatively balanced. The volume of credit transfers totaled Rp42.9 million transactions, while debit clearing amounted to 42.7 million transactions. In addition, the value of credit transfer transactions was Rp431.1 trillion and debit clearing was Rp1,232 trillion. Clearing activities in Jakarta continued to dominate with 51.5% (Rp856.4 trillion) and 62.0% (53.1 million transactions) for value and volume respectively.

The decline in retail trade in the fourth quarter of 2008 slowed clearing activities. Although the clearing activities increased in total, however clearing activities in particular debit clearing declined in the fourth quarter in terms of both value (Chart 4.24) and volume (Chart 4.25). This condition was caused by reduced activities of retailers who used cheques and checking accounts as a result of slowdown in trade sector. The decline in transactions not only occurred in Jakarta, but also outside Jakarta.

In anticipation of crisis impacts that might intensify liquidity risk in the payment system, Bank Indonesia has changed the mechanism and settlement for debit clearing. The impacts of the financial crisis began to influence clearing system liquidity in the fourth quarter of 2008. Tight bank liquidity raised the exposure of default risk for clearing system participants, in particular for debit clearing. The debit clearing mechanism applied no-money-no-game principles, as was also applied by BI-RTGS and credit clearing settlement. Coupled with

Chart 4.22. Throughput BI-RTGS Chart 4.23. Clearing Activities

Chart 4.24. Nominal Debit Clearing


Chart 4.27. Credit Card Activities Chart 4.28. Growth of National Credit Card’s NPL

pre-fund provisions obligation, this mechanism will enable the clearing administrator to cancel all debit payment transactions by a bank if a pre-fund is not adequately available.

Card-Based Payment Instruments (APMK)

The APMK industry continued to expand in terms of the number of cards as well as transaction value and volume. During the reporting period, the number of cards in circulation reached 51.8 million; an increase of 16.1% from the previous year. In addition, transaction value jumped 27.2% to Rp2,163 trillion and transaction volume grew 25.0% to 1.5 billion transactions. Such expansion was predominantly supported by growth in account-based cards (ATM and ATM+Debit)3 with the share of cards

3 Since 2006, account-based cards was categorized based on its transaction function and no longer recorded based on the types of cards (ATM, Debit, ATM+Debit), Under current condition, account-based cards have so many variations and changing rapidly

issued reaching 77.7%. The transaction value of account-based cards during the reporting period increased by 22.4% to Rp2,056 trillion and transaction volume climbed 22.7% to Rp1.4 million transactions (Chart 4.26). Credit cards also experienced sizeable growth. The number of credit cards in circulation rose 25% to 11.5 million, while transaction value picked up 47.4% to Rp107.3 trillion, and transaction volume raised by 28.7% to 166.7 million (Chart 4.27).

In spite of the global financial crisis, the quality of credit cards remained maintained, as indicated by the declining NPL value. The NPL ratio of credit cards was down from 11.85% in 2007 to 10.92% (Chart 4.28). Efforts to improve the quality of credit cards were carried out more effectively through public education and the availability of a fast and accurate positive list facility among card issuers which is accessible online.

Chart 4.25. Volume Debit Clearing Chart 4.26. Based Account Card Activities


E-Money

E-money transactions, which represent a new payment system in Indonesia, grew very rapidly. Accordingly, the amount of e-money that was first introduced on April 2007, reached 430 thousand with a transaction value of Rp76.7 billion and volume of 2.5 million (Chart 4.29). The use of e-money was widespread; especially in high-frequency retail payments that need quick process and with the value not exceeding Rp1 million. Currently, there are nine e-money providers, comprise of 5 banks and 4 non banks financial institutions. To accommodate the rapid development of e-money, Bank Indonesia is preparing regulations to legislate e-money.

Chart 4.29. Electronic Money


Box: Knowing the Structured Products

conventional cash-flow instruments with additional options to double profit (or loss) according to conditions of agreement. If underlying assets reach certain conditions, structured product would produce larger return compared to conventional product.

Types of structured products offered became increasingly diverse in keeping with consumer’s requirements. As an illustration, it can be classified based on underlying assets used as basic contingent component. Types of underlying assets commonly used include, among others, exchange rate, commodity prices, interest rates and stock indices. Through its further development structured products are commonly used to obtain enhanced return. Although it contains major portion of speculative factor in nature, for it is not based on proper risk-management skills. Structured products can be used to complement standard financial instruments available in the market, particularly hedging instruments for exporters and importers, which can further support domestic financial market deepening. On the other hand, however, due to their diverse characteristics and uniqueness, the inherent risk attached to such products can be complex and involve complicated pay-off calculation for investors and general public alike. In addition, possibility of loss is difficult to gauge early on when the variables used as contingent component face high level of uncertainty and are

Rapid growth in international trade, increasing access to foreign financing and innovation in financial instruments have provided a number of benefits, while at the same time give rise to associated risks. Such development has open up possibilities to accelerate economic growth and improve people’s welfare. On the contrary, , despite specific risks inherent with any business, such as default risk and price risk, cross-border trade has also precipitated the emergence of exchange rate risk.

To minimize exchange rate risk, the use of hedging instruments with various derivative transactions has become popular. Derivative transaction is transaction based on contract or payment agreement, for which its value is derived from the value of associated instrument (such as interest rates, exchange rate, commodity, equity etc). The use of hedging instruments has expand considerably to meet various demand of consumers. Furthermore, effort to meet specific needs of consumer has instigate the rise of structured products; a product that is a combination of various features of derivative instruments generated specifically to meet specific needs of consumer.

TypesofStructuredProducts

Structured products were created to offer larger benefits than other investment or hedging instruments available in the market. This was possible by modifying

Table 1. Structured Products

Products Components Additional Profit/Loss Option

Deposits

FX-linked Deposits Exchange Rate (+/-) percentage of exchange rate changes

Equity-linked Deposits Stock Index (+/-) percentage of stock index changes

Interest rate-linked Deposits Interest Rate Differential (+/-) percentage of interest rate differential

Commodity-linked Deposits Commodity Price (+/-) percentage of commodity price changes

Non Deposito

Structured Notes

FX-linked Note Exchange Rate (+/-) percentage of exchange rate changes

Equity-linked Note Stock Index (+/-) percentage of stock index changes

Interest rate-linked Note Interest Rate Differential (+/-) percentage of interest rate differential

Commodity-linked Note Commodity Price (+/-) percentage of commodity price changes

Structured Forward

Callable/Cancellable Forward Exchange Rate (+/-) percentage of exchange rate changes

Target Redemption Forward Exchange Rate (+/-) percentage of exchange rate changes


prone to dramatic swings. Consequently, when actual development of contingent component diverge from expected outcomes, consumers suffer losses from their structured products.

Cost and Benefit of Structured Product: An Illustration

The costs and benefits of structured products are illustrated in the example given below:

PT. PSB is a food exporter company. In the year ahead, its sales are forecasted to increase, supported by strong demand and high export prices. The rupiah is expected to appreciate. Considering that cash flow of PT. PSB is dominated by transactions denominated in US dollars from their exports, at the beginning of August 2008 the company bought a “Callable Forward” product or “Cancellable Forward” offered by Bank B. With this contract, PT. PSB projected that it would sell USD/Rupiah at more attractive prices and subsequently accumulate more rupiah. The term “callable” refers to transaction cancellation right of the Bank within the callable period. Beyond that period, the Bank must abide by the terms of contract.

Details of contract are as follows:- Period : 52 weeks, with weekly fixing period - Strike price : Week 1 – 8 at Rp9,900,- / USD, subsequently: Rp9,400,- / USD- Status : Guaranteed until week 6, can be cancelled thereafter.

- Notional amount: - If market rate is less than strike price : USD1 million . - If market rate is higher than strike price : USD2 million (return enhancement)

In reality, until the sixth week Rupiah was far below the strike price. Therefore, the exporter accumulated large profit (Figure 1). However, in the following week price of export commodities had fall significantly, while demand for export decline considerably. Exchange rate depreciated, as a result of deteriorating global condition. Rupiah depreciation eventually exceeded the agreed strike price, instigated substantial loss for the consumer, stemming both from difference in exchange rate and doubled notional amount. To offset the loss, the consumer closes the contract (unwinding) or even purchases foreign currency in the market, which further intensifies depreciative pressures on the rupiah.

Lessonslearned

The use of derivative transactions, including structured products -although designed for hedging- can also be utilized for speculative purposes. In terms of maintaining economic stability, the idea of consumers receiving return enhancement can stimulate purchase of foreign currency for speculative reasons. This can exacerbate rupiah instability. For that reason, Bank Indonesia has prohibited banks from foreign exchange transactions against the rupiah related to structured products, as stipulated in BI Regulation No. 10/38/PBI2008, which is an amendment to PBI No. 7/31/PBI/2005 concerning derivative transactions. With PBI 10/38/PBI/2008, development of structured products at domestic banks was much reduced since the end of 2008, attributable to early termination of contracts, numbers of mature contracts, unwinds, as well as restructured contracts.

Efforts to minimize risk in banks, including potential risk emanating from transactions in foreign currency, need to be emphasized. Bank Indonesia had give mandate for banks to apply prudential risk-management principles in their operations, as stated in BI Regulation regarding implementation of risk management at commercial banks. In addition, banks Chart 1. Pay Off Chart


are obliged to provide comprehensive information to consumers on derivatives transaction, including information on various risks attached to derivative products such as credit risk, settlement risk and market risk, among others. Consumer’s comprehensive understanding regarding characteristics of derivative products will help mitigate substantial losses down

the road. It is imperative that consumers understand not only the benefits or potential enhanced returns, but also the speculative characteristics. This will make consumers more aware and take necessary action to lessen the potential loss.


POLICY RESPONSE OFBANK INDONESIAMonetary Policy | Banking Policy | Payment System Policy | Coordination of Monetary, Fiscal and Real Sector Policies

V.

Greater integration between the domestic and global economies has intensified the risk of instability in the Indonesian economy. In 2008, Indonesia’s economic development has gone through dynamics and challenge that mainly caused by global economic crisis. However, the Indonesian economy continued to show better resiliency, especially when compared to other countries in the region. In response to mounting external pressures, Bank Indonesia continued to pursuit cautious and consistent policy responses by maintaining economic and financial system stability and at the same achieving low and stable medium-term inflation target conducive for sustainable economic growth.

During 2008, the Indonesian economy dynamics can be separated into two significantly different periods. In the first semester of 2008, international commodity prices soared, which generated strong inflationary pressures; meanwhile the rupiah exchange rate and financial market remained relatively stable. However, in the third quarter of 2008, developed countries began to experience a contraction in their growth and the global economy started to slow down. As a result, international commodity prices tumbled. In line with the sluggish global economy, export performance also declined. Up to the third quarter of 2008, imports remained buoyant due to relatively strong domestic demand. Meanwhile, expansive growth persisted in the domestic economy until the third quarter,

POLICY RESPONSE OFBANK INDONESIA

again induced by relatively high domestic demand. Nonetheless, strong demand into the third quarter also sparked additional inflationary pressures.

In the fourth quarter of 2008, the Indonesian economy began to experience intense pressures. Indonesian exports continued to decline followed by vast outflow of foreign capital attributed to the deleveraging process and repricing of risk on assets in developed countries, which both spurred pressures on the balance of payments. Subsequently, this also triggered exchange rate pressures congruous to the huge outflow of foreign capital from emerging market countries, including Indonesia. Meanwhile, tumbling global commodity prices eased domestic inflationary pressures. The other key issue faced by the Indonesian economy was less access on foreign financing for the corporate sector and banks. Despite a slight ebb in the exodus of funds from developing countries, signs of resurgent inflows are not forthcoming.

In response to the unfavorable conditions outlined, Bank Indonesia instituted the full range of monetary, banking, and payment system policies aimed at mitigating the impacts of the global crisis on the domestic economy. Monetary policy in 2008 was directed towards alleviating inflationary pressures, primarily stemming from high aggregate demand in the first semester of 2008. In line with falling global commodity

V.

138 Chapter 5 Policy Response of Bank Indonesia

prices and weaker aggregate demand, entering the fourth quarter of 2008 Bank Indonesia projected less inflationary pressure in 2009. Bank Indonesia began to cut its BI Rate in December 2008.

The monetary policy stance taken by Bank Indonesia can be categorized into three periods, namely the period of flat movement in BI Rate (January-April), the period of increase in the rate (May-October), and the period of decline in the rate (November – December). BI Rate hikes from May to October were closely linked to high inflation risk due to projected soaring commodity prices as well as strong domestic demand. Meanwhile, the BI Rate was reduced in November-December after assurance that inflationary pressures would ease due to falling international commodity prices and a deeper global economic downturn. The global financial crisis tightened the interbank money market and precipitated rupiah depreciation. During the second semester of 2008, Bank Indonesia implemented policy aimed at loosening the money market. Meanwhile, efforts to minimize rupiah volatility were taken through measurable intervention as well as policies to manage foreign currency demand and supply. In addition to that, some enhancements have been done to strengthen financial market infrastructures as part of the effort to increase efficacy of

the monetary policy transmission mechanism process.

In banking industry, Bank Indonesia policy was to strengthen banking system resilience in order to reduce the impact of the global crisis on domestic banks. This was accomplished through amendments of the short-term funding facility regulation in order to improve access of commercial banks and rural banks to funding facilities. Meanwhile, Bank Indonesia continued to strengthen bank resilience, under the frameworks of both Basel II and the Indonesian Banking Architecture. Such steps were followed by in-depth regulatory measures to enhance bank transparency, to boost the effectiveness of liquidity risk management and to improve rules on derivative products.

In payment system, Bank Indonesia has instituted various policies. The currency circulation policies focused on efforts to optimize the effectiveness of cash services and management in accordance with Bank Indonesia’s mission. With reference to non-cash payments, policy was continuously directed towards endeavors to improve the security, efficiency and reliability of the payment system by mitigating payment system risk and improving payment system efficiency and instruments.

139Chapter 5Policy Response of Bank Indonesia

Monetary Policy Strategy

Monetary policy strategy, transmitted through the BI Rate, was directed towards achieving the medium-term inflation target set by the Government. This strategy was executed in measurable pace,in accordance with inflation projections, dynamics of the current economy and financial system stability. In its implementation, monetary policy stance during 2008 can be grouped into three different periods, namely the period of flat movement in BI Rate (January-April), the period of increase in BI Rate (May-October) and the period of decline in BI Rate (November-December). Differences in policy stance during each respective period reflected changes in the projection of inflation, economic growth and financial system stability. Changes in projection were highly correlated with the risk of deepening global economic crisis during the second semester of 2008 as well as potential slowdown in the domestic economy.

PeriodofUnchangedBIRate(January–April)

Global financial market turbulance which began in mid 2007 had continued to affect the Indonesian economy. Concerns surrounding a deepening of the subprime

mortgage debacle and recession in the U.S. triggered negative sentiment in the global financial market. US dollar depreciation followed by pressures in the global financial market prompted an investment switching from the financial market to the commodities’ market, which drove up international commodity prices. Soaring international commodity prices spurred global inflationary pressures. Some foreign investors who were more risk averse decided to adjust their portfolio holdings in a flight to quality. However, during the first quarter of 2008, foreign investment still experienced net inflows due to the attractive return on rupiah assets. On the stock market, foreign capital outflows undermined stock market performance. Meanwhile, yield of Government bonds (SUN) increased due to concerns of fiscal sustainability and inflation risk. On average, the foreign investment outflows weakened the exchange rate as compared to the previous quarter. Coupled with foreign capital outflows earlier in the year, the surplus in the balance of payments decreased slightly. Nonetheless, economic growth was strong, as indicated by robust economic expansion in the first quarter of 2008 due to good performance of exports.

During the first quarter of 2008, inflationary pressures stemmed primarily from foreign-based cost factors (cost-push). Price hikes of international energy and food

5.1MONETARY

POLICY


commodity prices induced intense inflationary pressures from imported goods. High inflation expectations by the public, as recorded by the consumer and retail survey, also contributed to inflationary pressures. High inflation expectations were principally due to soaring international commodity prices and kerosene shortages. However, inflationary pressures from rupiah depreciation were minimal. In addition to that, pressure from output gap was negligible as supply-side could respond to increase in demand-side.

After considering the economic outlook, inflation projection --which was still within the target-band-- and financial market uncertainty, Bank Indonesia decided to maintain its BI Rate at 8% from January to April 2008. Inflation was projected to be within the band based on consideration that high international commodity prices would only be temporary because the world was experiencing lower demand as a result of global economic slowdown. Besides, uncertainty surrounding global financial market performance also had the potential to affect capital flows to and from emerging market countries as well as to disrupt macroeconomic stability. Efforts to raise the BI Rate might hastened the decline in SUN price (increase in SUN yield), which would undermine the ability of the government to seek fiscal financing through SUN issuances.

Period of Increase in BI Rate (May–October)

Entering the second quarter of 2008, global economic performance was plagued by the global economic slowdown and high inflation. The persistent trend of soaring energy and global food prices induced higher inflation rates, both in developing and developed countries. Pressures stemming from a higher global oil price subsequently forced the government to raise its subsidized fuel prices, by an average of 28.7%, in May 2008. On one hand, this succeeded in maintaining the confidence of market players in fiscal sustainability. But on the other hand, it prompted a sharp increase in inflation. Headline inflation, measured by the consumer price index (CPI), reached 10.4% (y-o-y) in May 2008. Entering the third quarter of 2008, global pressures lingered and consequently tempered global expansion. In addition, the prices of international commodities declined and continued to experience high uncertainty. Negative sentiment, which was triggered by deep fluctuations in the U.S. financial market, triggered foreign capital outflows from countries in the region, including Indonesia. Pressure on the rupiah intensified despite the intervention policy taken by Bank Indonesia.

In the second and third quarters of 2008, cost push inflation were relatively high caused by soaring international energy and food commodity prices. The oil price peaked more than $140/barrel in the fourth week of June 2008, but then tended to decline since August. Despite increase pressures related to negative sentiment surrounding the global financial crisis, rupiah remained relatively stable during this period, thus its impact on inflation was insignificant. Nevertheless, domestic demand pressures began to exacerbate. Strong domestic demand was reflected by high imports and was induced by expansive credit growth. Along with the soaring international commodity prices and hikes in subsidized fuel prices, public expectations of inflation also increased, which in turn intensified inflationary pressures due to the second-round effects of the fuel price hikes.

In an effort to anchor future inflation expectations and control relatively strong domestic demand, Bank Indonesia raised its BI Rate from 8% in May to 9.5% in October 2008. The decision to gradually raise the BI Rate was taken with consideration of the following: (1) inflationary pressures were not only from the demand side; and (2) a drastic rise in the interest rate would undermine the performance and stability of the financial system, including banks. Relatively tight monetary policy stance was also taken in several other Asian emerging market countries, such as Thailand, Malaysia and the Philippines up to October 2008 (Chart 5.1).

PeriodofDeclineinBIRate(November–December)

This period was marked by an easing of inflationary pressures compared to the previous period as a consequence of increasing global financial crisis intensity,

Chart 5.1. Developing Countries Policy Rate


which was followed by a deeper global economic downturn. The global economic slowdown precipitated a sharp drop in international energy and food commodity prices, which subsequently alleviated inflationary pressures stemming from imported inflation. In addition, extensive foreign capital outflows due to dwindling investor confidence in emerging markets, including Indonesia, and fewer exports due to a deterioration in global economic conditions caused economic growth to decelerate, the performance of the balance of payments to decrease and the rupiah to depreciate. However, the negative impacts of the weaker rupiah were partially offset by the drop in international commodity prices, which reduced pressure from imported inflation. Domestically, slower economic growth and relatively stable inflation expectations from the public eased the inflationary pressures. Along with slow demand and increasing credit risk, credit growth also witnessed a decline (Chart 5.2).

In 2009, the domestic economy is projected to grow much slower than the previous year due to waning export growth in line with the global economic downturn. This condition is predicted to have insignificant impact to inflation prospects. Inflationary pressures, which primarily stem from a weaker exchange rate, would be offset by declines in international commodity prices as a result of the global economic slowdown. Domestically, diminishing domestic demand supports lower inflation. Therefore, inflation projected to remain within its target band. Based on these economic outlook, there is a room to reduce the BI Rate. Nonetheless the BI Rate remained unchanged in November, due to various risk factors regarding economic prospects. Such risks included the risk of continued capital outflows and increasing exchange rate volatility as well as pressure on macro stability generated from

the loose liquidity condition and the banks’ preference to place excess liquidity in short-term instruments. After considering these issues, Bank Indonesia decided against a change in policy stance and the BI Rate remained at 9.5% in November.

Bank Indonesia’s decision to maintain its policy rate was in contrast to the global monetary policy stance. In general, central banks, mainly in developed countries, took measures to loosen monetary policy in order to mitigate the economic downturn. In addition, there were strong indications that future inflationary pressures in developed countries would ease significantly. In Indonesia’s case, up until third quarter of 2008 the impact of external fluctuations had not triggered any significant economic downturn. The Indonesian economy continued to expand at 6.1% (y-o-y) during the third quarter of 2008. Robust growth was associated with strong domestic demand, particularly private consumption. Furthermore, relatively high pressure on macro stability, also attributable to the loose liquidity condition which encouraged Bank Indonesia to maintain its BI Rate.

Along with the projected lower inflation rate and to mitigate a slowdown in the domestic economy, Bank Indonesia cut its BI Rate by 25 bps to 9.25% in December. Confidence that inflation would decline in the future was supported by: (1) stronger indications of lower domestic demand, further confirmed by the sharp decline in bank credit in October and November 2008; (2) a maintained stock of basic necessities and energy supplies; and (3) minimal intention to raise administered goods prices, particularly domestic fuel prices, due to the slump in oil price. Additionally, the reduction in the BI Rate was also based on the relatively attractive rupiah yield and was also part of the efforts to alleviate pressures on financial system stability.

Monetary Policy Implementation

Liquidity Management in the Rupiah Money Market

Tight global liquidity due to the financial crisis in developed countries also affected the domestic money market, particularly in the second half of 2008. The credit crisis in the global market encouraged foreign investors to redeem their assets in emerging markets including Indonesia. This was followed by more risk averse behavior from foreign investors, which subsequently placed more pressure on the financial market. Moreover, there was a possibility to further enhanced monetary policy

Chart 5.2. Credit Monthly Increase


transmission mechanism by synchronizing policy stance (BI Rate) with overnight rupiah interbank money market rate. In response, Bank Indonesia instituted various policies to improve liquidity management in the rupiah money market through monetary instrument enrichment.

At the beginning of 2008, there tended to be excess liquidity in the rupiah money market, which was partially invested in Bank Indonesia in the form of Bank Indonesia Certificates. At that time, the impact of the global financial crisis, expansive growth in bank credit and the contractive monetary impact from the net financial operations by the Government did not significantly affect liquidity until the first half of 2008. However, overnight interbank rate varied considerably as compared to BI Rate and moved with relatively high volatility, especially in the first quarter of 2008.

Against this backdrop, the interest rate structure of the overnight to one month maturity was very steep and vulnerable to liquidity risk and could distort the monetary policy transmission mechanism process. Therefore, Bank

Indonesia implemented efforts to improve monetary policy operation in the rupiah money market in order to maintain stability of the overnight interbank rate, as a transmission tool of monetary policy which was also a mechanism for a more normal short-term yield curve structure.1 The improvements were expected to increase monetary policy effectiveness as well as improve financial market infrastructure, which in turn can expedite a sound, robust and efficient money market, reduce liquidity risk on mid and long-term investments and deepen the domestic financial market. Therefore, since January 2008, the phased process of monetary policy operational framework improvement has continued and since 9th June 2008 the overnight interbank rate has officially replaced the 1-month SBI as the monetary policy operational target (Table 5.1).

Beginning in the second half of 2008, particularly in the third quarter of 2008, liquidity became tight. This was mainly due to strong growth in bank credit amid far lower growth in deposits. Furthermore, stronger impacts from

1 Minutes of meeting from the Banker’s Dinner, 2008

Table 5.1. Series of Measures on Improvement of Monetary Policy Operation

Items Previous New Implementation

SBI

Auction Method1 month :FRT (Fixed Rate Tender)

VRT for all time periods 6 February 20083 months : VRT (Variable Rate Tender)

Time Periods 1 and 3 months 1, 3 , and 6 months 6 February 2008Frequency

1 month weekly weekly 6 February 20083 months quarterly weekly 6 February 20086 months - monthly 23 April 2008

Fine Tune Operation (Fine Tune Contraction & Fine Tune Expansion)- Auction Method FRT VRT 21 January 2008- Operational Frequency Non-Active Active: up to twice a day, morning & afternoon 21 January 2008- Price Reference BI Rate 21 January 2008- Time Periods up to 14 days 3 months 23 September 2008

Standing Facilities

Window TimeFASBI : 08.00 – 16.00 WIB FASBI : 16.00 – 17.00 WIB

1 February 2008Repo : 15.00 – 17.00 WIB Repo : 16.00 – 17.00 WIB

CorridorsFASBI : BI Rate -500 bps BI Rate +/- 300 bps 3 April 2008Repo : BI Rate +300 bps FASBI : BI Rate-200 bps, Repo : BI Rate+300 bps 4 September 2008

BI Rate +/- 100 bps 16 September 2008BI Rate +/- 50 bps 4 December 2008

Repo2-14daysMaturity 2 -14 days 9 December 2008Methods FRTPricing Repo Rate standing facility + 25 bpsWindow time 10.00 - 12.00 WIBEligibleAssetTransactions- Repo SBI, maximum ceiling 50% SBI and SUN, 100% ceiling 1 February 2008- FTE SBI, maximum ceiling 100% SBI and SUN, 100% ceiling 1 February 2008- Repo 2-14 days - SBI and SUN, 100% ceiling 9 December 2008


the global financial crisis encouraged foreign investors to cash in their assets including those invested in emerging market countries like Indonesia. This condition increased the bank’s demand for liquidity, particularly joint-venture banks and branches of foreign banks. The global financial crisis, which affected the rupiah exchange rate and domestic financial market, also had implications on higher liquidity risk and market risk. Participants of the interbank money market responded to this by tightening their credit lines and credit limits, particularly to foreign banks and small-scale banks. The subsequent shortfall in liquidity excluded one bank from participating in the clearing process at Bank Indonesia. This issue then increased counterparty risk and affected confidence in transactions, as such aggravating segmentation in the interbank money market.

In response, Bank Indonesia intensified the implementation of readily available instruments and released new instruments to reduce excessive pressure in the interbank money market. In the second half of 2008, Bank Indonesia narrowed the interest rate corridor (standing facilities)2 three times until it reached BI Rate +/- 50bps. Moreover, to facilitate the longer-term bank liquidity requirement, the tenure of fine tune instruments was extended to a maximum of 3 months, from previously 14 days. Furthermore, Bank Indonesia opened a window repo of 2-14 day tenure. Bank Indonesia also loosened the minimum Reserve Requirement in the form of statutory reserves to 5%3 of deposits in October. The policies instituted were effective in providing sufficient liquidity for bank transactions and to maintain the stability of the interbank money market rate.

Liquidity Management in the Foreign Exchange Market

The global financial crisis, commodity price volatility and the expectations of a deepening economic recession in various regions significantly affected the supply of and demand for foreign currency. In the second half of 2008, surging outflows of foreign capital and decreasing foreign exchange from exports due to tumbling international commodity prices and a global economic recession significantly contracted the supply of foreign currency. As a result, the rupiah was confronted by relatively strong depreciative pressure. In response, Bank Indonesia implemented cautious intervention policy and took a

2 Standing facilities are formed by a standing deposit facility or facility to save at the central bank and standing lending facility or credit facility from the central bank. The presence of standing facilities forms the corridor for a shifting interest rate, which becomes the operational target of a central bank.

3 And in the form of secondary reserve amounted 2.5% of deposits, effective from October 24th 2009

series of other policy measures to manage the supply of and demand for foreign currency in an effort to maintain macroeconomic stability.

During the first half of 2008, foreign exchange market conditions experienced excess demand. Strong foreign exchange demand was principally associated with increasing imports, particularly oil, along with the soaring global oil price. Meanwhile, limited foreign exchange supply mainly came from foreign capital inflows to domestic financial instruments. Limited foreign exchange supply in the market was a result of the global liquidity crisis and less investment from foreign investors originating from the second-round impacts of the subprime mortgage crisis. In addition to persistent increases in the oil price, limited supply was also due to negative sentiment regarding fiscal sustainability and increasingly higher expectations of inflation. Owing to the surplus current account in the first half of 2008 and relatively prudential macroeconomic policy response, Bank Indonesia policy to maintain exchange rate stability through intervention in the foreign exchange market was successful in suppressing exchange rate depreciation pressure.

Entering the second half of 2008, excess demand in the forex market increased further. High imports, particularly non-oil/gas imports, associated with strong domestic demand contributed to the persistent demand for foreign exchange. Meanwhile, foreign exchange supply contracted significantly. Smaller foreign reserves from exports coupled with the lower prices of international commodities and the sluggish global economy resulted in less foreign exchange supply from domestic players. Foreign players experienced excess demand along with the vast outflows of foreign capital, caused by deeper global financial crisis. The condition of excess demand in the foreign exchange market along with current account deficit induced stronger depreciation pressure. The rupiah was subsequently traded at Rp12,000/US$.

In response, Bank Indonesia actively monitored various developments in the foreign exchange market, conducted foreign exchange interventions on a limited scale, as well as launching a series of policies both in terms of managing foreign exchange demand and supply (Table 5.2). In addition, on 28th October 2008 the Government in coordination with Bank Indonesia issued Economic Stabilization Policy Package to minimize the impact of global financial market turbulence. The series of policy actions were complemented by intense communication with market players and were well responded to by market players and the public alike.


Monetary Policy Transmission

Changes in the BI Rate have not fully responded by banks yet. At year end, the time deposit rates continued to increase right after the decline in BI Rate. Such conditions were considered as lag effect and continuing impact of tightening bank liquidity since mid 2008. In the period of increase in BI Rate (May to October 2008), banks just only started to slow credit growth by November 2008. This partly because the strong domestic economic activities up to the third quarter of 2008 which encouraged banks to continue extending credit. On the stock and SUN markets, response to the BI Rate was not quite evident. Other factors such as market sentiments contributed more in pricing of the stock index and SUN’s yield. Meanwhile in the goods market, the commitment to maintain macro stability through BI Rate setting was perceived positively

by consumers and contributed to maintaining the inflation expectations of economic players.

BI Rate was followed closely by interbank money market rate, particularly since the overnight interbank rate was used as the monetary policy operational target (Chart 5.3). A gradual rise in the BI Rate during June-October 2008 was followed by an increasing overnighr interbank rate. Correlation was also found during periods of a steady or declining BI Rate. In addition to the overnight interbank rate, the changes in the BI Rate was also transmitted to interbank rate with a tenure of more than 1 day (Chart 5.4).

Along with the rising BI Rate from May-October 2008, the average weighted interest rate for 1-12 month time deposits increased and it continued to happen even during the period of declining BI Rate at the end of 2008

Chart 5.3. Interest Rate and Volume of O/N PUAB Chart 5.4. PUAB Rates

No Policies Function Effective Date

1 Slashing RR Ratio in foreign currency for conventional commercial and Islamic bank from 3.0% to 1.0%.

To increase banks USD liquidity. October 13, 2008

2 Promulgation of article 4 of PBI No. 7/1/PBI/2005 concerning daily balance position of short term foreign loan by abolishing the limit of daily balance position.

To minimize pressure on USD purchase due to the shift of rupiah deposits to foreign currency deposits.

October 13, 2008

3 The extension of FX swap tenor from 7 days to maximum of 1 month. To meet the temporary demand for foreign currency. October 15, 2008

4 Foreign currency provision through bank for domestic companies. To ensure adequate foreign currency supply for business activities.

October 15, 2008

5 Governing the purchase of foreign currency through bank. The purchase of foreign currency against rupiah by customer or foreign investor exceeding equivalent USD100.000 (one hundred thousands $) per month per customer/foreign investor should be based on underlying transaction.

To minimize speculative foreign currency transaction. November 13, 2008

6 The purchase of Banker’s Acceptances (WEB) by Bank Indonesia. To improve foreign currency liquidity for exporters. December 5, 2008

7 Governing the transaction of foreign currency against rupiah including prohibition of structured product transaction.

To minimize speculative foreign currency transaction. December 16, 2008

Table 5.2. Rupiah Exchange Rate Stabilization Policy


Chart 5.7. Credits Growth

Chart 5.5. Deposits Interest Rate Chart 5.6. Credits Interest Rate

Chart 5.8. BI Rate and ICI

(Chart 5.5). The later was as a result of the ongoing impact of tighter bank liquidity since mid 2008. Tight liquidity forced banks to accumulate more funds from the public. This was clearly demonstrated by the significant rise in the time deposit rate offered to prime customers, particularly on short-term tenures of 1 and 3 months. The kind of rate was applied by foreign and joint venture banks as well as state-owned banks. Meanwhile, rural banks responded more moderately since they have more permanent funding sources from the local Government.

Lending rates increased in response to the rising BI Rate. On average, the weighted interest rate for all types of credit began to increase in June 2008 (Chart 5.6). In the subsequent period, lending rates increased more aggressively in line with the rising BI Rate and interest rate of time deposits. The highest increase in lending rates occurred in October 2008. At the end of 2008, despite the drop in the BI Rate, lending rates continued to climb in line with the rising time deposit rates. In 2008, the

average weighted interest rate of working capital credit experienced the highest increase compared to investment credit and consumption credit (Chart 5.6). The rise in the interest rates of working capital credit and investment credit were mainly due to the foreign and joint venture bank groups, whereas rural banks cut their interest rate on investment credit. Only small increase was recorded on the interest rate of consumption credit, as several banks went on reducing their consumption credit rates.

The impact of BI Rate hikes to slow down the growth of new credit began to show in November 2008. This indicates that the gradual increase in the BI Rate was not promptly responded to by banks in terms of curbing credit growth (Chart 5.7). However, in accordance with the growing impact of the global economic crisis and the deteriorating domestic economy, credit growth slowed significantly during the last two months of 2008. Under such circumstances, credit growth reached 26.1% in December 2008; a slight increase from 25.5% at the end of 2007.


On the stock market, response to the BI Rate was not quite evident (Chart 5.8). During 2008, the index moved in various directions, with a bullish trend during the first half of the year but becoming increasingly bearish during the second half. This swing was influenced by a number of factors such as fundamentals (including the change in monetary policy stance), sentiment, capital flows, as well as the spreading impact of regional and global stock market dynamics that were more pressurized, particularly during the second half of 2008. Intense pressures mounted in Q4-2008, when the stock price index closed at its yearlong of 1.113. The index subsequently improved and by the end of 2008 it closed at 1.355; a correction of more than 50% compared to the previous year. The slide in index performance also affected stock market liquidity. Average market liquidity in Q4 2008 was merely Rp2.6 trillion per day; a significant decline when compared to average Rp5.6 trillion-a-day in Semester-I 2008.

Movements in SUN yield were not fully driven by changes in the BI Rate (Chart 5.9). SUN yield in 2008 varied with an increasing trend after the change in foreign investor behavior due to the growing global financial crisis and negative sentiment regarding fiscal sustainability. On its worst condition, the benchmark SUN yield reached the lowest point of 21% by the end of October 2008. It was subsequently mitigated by various related inter-authority coordinated policies supported by well-maintained domestic macroeconomic conditions. Consequently, SUN yield improved in the range of 11.0-11.8% by the end of 2008. Meanwhile, SUN trade activity tended to wane, as reflected by the decline in average SUN daily trade

volume. In 2008, average SUN trade peaked at just Rp4.5 trillion per day, compared to Rp5.8 trillion per day in the previous year.

Commitment to maintain macro stability through the BI Rate was positively perceived by consumers and helped maintain the inflation expectations of economic players. Consumer survey results indicated an improvement in the consumer economic expectation index, particularly in the second half of 2008 (Chart 5.10). Meanwhile, the monetary policy stance taken also maintained the inflation expectations of economic players. In 2008, monetary policy commitment and consistency to maintaining macroeconomic stability was considered effective in influencing the inflation expectations of business players in the real sector (Chart 5.11).

Chart 5.9. BI Rate and Government Bonds Yield Chart 5.10. BI Rate and Consumer Confidence

Chart 5.11. BI Rate and Retailer Price Expectation


BANKING POLICY

article 11 of Act No. 3, 2004 regarding Bank Indonesia. The House of Representatives subsequently approved the Perpu.

Under the new regulation, banks had greater access to short-term fund sources from Bank Indonesia (Short Term Funding Facility). To qualify for the funding facility, banks were permitted to use liquid credit as collateral. On top of the various banking policies taken to mitigate the global crisis, Bank Indonesia also continued a number of policies to underpin bank resilience under the frameworks of Basel II and Indonesian Banking Architecture. Those policies gave emphasis to short to medium term and long-term programmes.

Short to Medium Term Programme Implementation

Short-mid-term policies introduced by Bank Indonesia in 2008 were primarily aimed at preparatory measures for the implementation of Basel II, which is planned for 1st January 2009. A number of related programs associated with Basel II implementation were rolled out during the reporting period as follows:

a. Pillar 1 (minimum capital requirement)

At the end of Quarter III-2008, BI promulgated PBI No. 10/15/PBI/2008 regarding calculation of the Capital Adequacy Ratio by banks effective as of 1st January

In the second half of 2008, general banking policy comprised of efforts to reinforce banking system resilience in the face of the global crisis. One such effort included an adjustment to the regulation governing the short-term funding facility aimed at broadening the access of commercial and rural banks to funding facilities. Meanwhile, sharia banking policy focused on various efforts to expedite the development of a national sharia banking industry in line with the Indonesian sharia banking blueprint. In terms of banking policy associated with the ongoing global crisis, Bank Indonesia continued various policies to buttress bank resilience under the frameworks of Basel II and Indonesian Banking Architecture.

Conventional Banking Policy

Banking policy during the reporting period aimed to strengthen banking system resilience in an attempt to mitigate impacts of the global economic crisis on domestic banks. In the second half of 2008, the global financial market deteriorated and began to place pressure on the national banking system. In anticipation of the persistent pressure, which could eventually endanger financial system stability and the national economy as a whole, the Government and Bank Indonesia proposed a government regulation in lieu of a law (PERPPU) as an amendment to

5.2


2009. To improve understanding on the substance of this regulation, bank employees and bank supervisors attended socialization activities.

b. Pillar 2 (supervisory review process)

Consultative paper (CP) on “Implementation of Pillar 2 according to Basel II in Indonesia” was published. The substance of this CP includes descriptions of four principles in Pillar 2, i.e. internal capital adequacy assessment process (ICAAP), supervisory review process and evaluation (SREP), CAR above minimum and early intervention. Moreover, other implemented working programs include analysis and recommendations associated with interest rate risk in the banking book (IRRBB), risk concentration and liquidity risk.

c. Pilar 3 (market discipline)

Working programs in this pillar are more directed towards improvements to the bank report publication framework in accordance with international standards, which have been adopted in Indonesian Financial Accounting Standards (IFAS) 55 and 50. For guidelines of these IFAS, Bank Indonesia collaborated with the Indonesian Accountant Association (IAA). Banks have completed the revision of Chapter 1 of the Indonesian Banking Accounting Guidelines.

In accordance with the Basel II implementation plan, a working group for the Bank Information System has been formed at Bank Indonesia in order to improve the Commercial Bank Monthly Report (Laporan Bulanan Bank Umum or LBU).

Long-Term Programme Implementation

Long-term programs in the banking sector are detailed in the Indonesian Banking Architecture. In this context, Bank Indonesia continues to review improvements to policy direction by considering future challenges that have to be overcome in order to form a sound, robust and efficient banking system in support of national economic growth and preparations for the ASEAN Economic Community in 2015.

Implementation of Pillar I of the Indonesian Banking Architecture in 2008 included: (i) reviewing several bank consolidation strategies; and (ii) launching several proposals of the Regional Credit Guarantee Corporation (Lembaga Penjaminan Kredit Daerah or LPKD) in order to optimize the role of LPKD and credit guarantee schemes in rural areas.

Following a program of the Regional Banking Research Institution (Lembaga Riset Perbankan Daerah or LRPD) to improve the quality of bank supervision (Pillar II), Bank Indonesia assigned three LRPDs (CBR Unand, Puslitbank FE USU and East Java LRP Unibraw) the task of conducting five research topics including: MSMEs, microbanking, food security, consumer education and ASEAN trade facilitation.

Certification of risk management and good corporate governance (GCG) was continued in order to improve the quality of bank management and operation (Pillar IV). Bank Indonesia is currently refining PBI No. 7/25/PBI/2005 regarding Risk Management Certification, which is expected to be finalized in early 2009, to accomplish the target of risk management certification by 2010. In addition to that, analytical tools had been developed to evaluate the completeness and quality of reports and GCG’s self-assessment.

The development of banking infrastructure (Pillar V) is directed towards data quality improvement and reinforcing the operational system of the Credit Information Bureau. In addition, Bank Indonesia will also publish an external circular concerning the Commercial Bank Data Information System in the very near future. Meanwhile, an internal circular referring to the Commercial Bank Data Information System is in its finalization process with the associated working group.

As part of the efforts to improve customer protection (Pillar VI), banking mediation and public education are an ongoing concern. In terms of mediation, Bank Indonesia regularly conducts dissemination and socialization programs. Meanwhile, in conjunction with inaugural Year of Public Banking Education, a conceptual public education program has been compiled. The strategy looks to encourage the banking industry to conduct the education. In the future, public education will be performed by the banking industry with Bank Indonesia providing the necessary support and supervision.

MSME Credit Policy

In 2008, various forms of technical assistance were provided to develop MSMEs. Technical assistance was provided through the supply of information and training. Information concerning MSME access to bank financing was provided through: (i) research on lending models to 15 business commodities/types4; (ii) research on leading

4 10 of the 15 enterprises were businesses in the fisheries sector, both fresh water and salt water, conducted in cooperation with the Oceanic and Fisheries Department. Information coverage of


MSME commodities, products and services (KPJU), known previously as the Baseline Economic Survey (BLS) 5; (iii) database development of MSME profile information as a MSME promotional tool and to bridge the information gap that banks have concerning MSMEs. The advantage of the database is the availability of financial aspects that can be utilized by banks in their credit assessment process6; and (iv) MSME development through a cluster approach at the branch offices and head office of Bank Indonesia. Technical assistance was offered in the form of training provided to banks and their affiliated financial consultants. To improve training coverage and quality, multi-topic workshops such as credit scoring, selected sector lending and making microfinance work were held jointly with international agencies such as InWent, GT Profi and ILO.

Meanwhile, in relation to the Small Business Loan (KUR), Bank Indonesia as partner of the government is currently assessing the possibility of lowering the risk weighting in the calculation of Risk-Weighted Assets for guaranteed bank loans that meet specific requirements. In terms of MSM credit data, up to the year of reporting, Bank Indonesia continued to define MSM credit based on a ceiling. In accordance with Act No. 20 year 2008 regarding MSMEs, issued on 4th July 2008, MSM credit is no longer based on ceiling but refers to business criteria based on net assets or annual revenue. Therefore Bank Indonesia still reviewing possible adjustment in regulations referring to MSME Credit to comply with Act No. 20 year 2008.

To hasten the development of micro finance, Bank Indonesia in a joint action to develop Indonesian Micro Finance, organized the Asia-Pacific Regional Microcredit Summit 2008 held on 28th-30th July 2008 in Nusa Dua, Bali. The summit was part of the activity series of the 12th Microcredit Summit Campaign. One of the summit’s resolutions was the commitment of various micro-finance institutions, with customers totaling more than 74 million, to the microfinance transparency program. The summit was attended by 917 participants form 50 countries and represents one commitment to fulfill the Millennium Development Goals of poverty eradication. One distinguished speaker at the summit was Prof. Muhammad Yunus, a 2006 Nobel Peace Prize Laureate.

the financing pattern included aspects of marketing, production techniques, finance, economic and environmental impacts.

5 The survey will yield ± 10 primary commodities for each sector at the sub-district, regency and provincial levels. Up to 2008, 10 BI offices have undertaken the research.

6 The database can be accessed through www.bi.go.id. The advantage of this database is that it provides financial aspects in credit valuation process.

Rural Bank Policy

Supplementing the regulation legislating the liquidity facility offered to banks to mitigate the growing liquidity risk due to the global financial crisis, and also in an effort to maintain public confidence in banks, particularly rural banks, on 5th December 2008, BI issued Regulation No.10/35/PBI/2008 regarding the Short-Term Funding Facility (FPJP) for Rural Banks. External Circular No.10/45/DKBU followed the promulgation of this regulation on 12th December 2008 as a guideline to the implementation of FPJP for rural banks. The provision of this facility to rural banks aims to offer equal treatment when seeking BI funding in the case of a short-term liquidity problem.

To focus on their operational activities, particularly in terms of handling liquidity issues, rural banks were offered a facility to postpone the requirement for loan loss provisions. This includes a time extension for the 100% fulfillment of loan loss provisions to six months for interbank asset placements with collectability classified as loss and if the beneficiary is under special surveillance status. With reference to the future development of rural banks, particularly in terms of strengthening the rural bank industry, Bank Indonesia has taken measures to optimize the role and contribution of rural banks as community banks in order to support community development and confront crises by enhancing the Rural Bank Blueprint. To this end, Rural Bank Profile Mapping Research was conducted to stratify the rural bank industry in an effort to set policy and supervision in accordance with the capacity and inherent risk of rural banks.

Policy for Sharia Banks

Following on from the sharia bank development program in 2007, in 2008 several activities, including research, regulation and development as well as sharia permits and supervision, were introduced. Such activities are expected to support the development of sharia banking, which will catalyze real sector growth and promote development.

Research activities in 2008 focused on improving risk management quality and stimulating growth in the real sector and sharia financial market. The quality of risk management was augmented through the implementation of risk management for sharia banks and the development of sharia-based value protected instruments. Meanwhile, activities to support real sector growth included sharia financing model analysis for micro, small and medium


enterprises (MSME) in the agricultural sector as well as Sharia Financial Market development analysis.

The focus of sharia bank development activity during the reporting period was primarily directed towards quantitative target achievement through various policy packages and initiative programs that drove industry growth. Based on the various socialization programs implemented, Bank Indonesia determined that education schemes to introduce sharia banking to the public require real proof of service that meets the values offered. In addition, effective and efficient public education programs depend on mass media support, which can deliver information regarding the advantages of sharia services, including product variety and the outreach services on offer.

In this respect, at the Sharia Economic Festival held on 16th-20th January 2008, the Board of Governors of Bank Indonesia officially launched the 2008 IB Marketing Campaign and inaugurated the Grand Strategy on sharia market development. The programs included a series of activities, including communication and socialization to boost public awareness, with the involvement of Bank Indonesia and players from the sharia banking industry. As a result, it is expected that the harmonization and synergy of Bank Indonesia’s policy and programs with the industry can be achieved in order to improve public awareness of sharia banking.

The Grand Strategy of sharia market development is to position sharia banks in line with conventional banks in supporting sustainable economic development. To realize this grand strategy Bank Indonesia has set a new vision for sharia banks in Indonesia as the sharia leaders of ASEAN by 2010. Implementation of the grand strategy is a gradual process consisting of three phases, i.e.:

• Phase I (2008): "To build understanding of sharia banks as Beyond Banking"

• Phase II (2009): "To establish the Indonesian sharia banking industry as the most attractive in ASEAN"

• Phase III (2010): "To establish the Indonesian sharia banking industry as the leader in ASEAN"

Through this applied grand strategy program, the communication theme has shifted from asset share to industrial growth supported by more efficient and competitive operational quality both in the domestic and global markets. To this end, several activities must be conducted, including: (1) developing a new image for sharia banking; (2) developing a market segmentation program for sharia banking; (3) a product development program; (4) a service improvement program; and (5) a socialization and communication program of market development to direct and indirect stakeholders.

Regulation policy in 2008 was directed at efforts to anticipate developments in taxation and regulation associated with sharia banking, i.e. Act No. 21 Year 2008 regarding sharia banking and Act No. 19 Year 2008 on State Sharia Securities. As a follow up to this legislation, Bank Indonesia issued new regulations and improved upon existing regulations. The global crisis was also taken into account. Therefore, sharia banks, as part of the Indonesian banking system, may also anticipate and mitigate the potential impacts that may occur. Several regulations on sharia banking in the reporting period include fund accumulation and distribution activities, as well as service delivery, new product release mechanisms, financing restructuring, improved regulations on asset quality evaluation for Sharia Commercial Banks and Sharia Business Units, and the foreign exchange minimum Reserve Requirement.

The supervisory activities undertaken by Bank Indonesia in 2008 were directed towards strengthening the sharia banking system through risk-based supervision, good corporate governance (GCG) evaluation, Know Your Customer (KYC) principles and the Money Laundering Criminal Act, as well as improving the competence of supervisors and upgrading the information system to support supervision.


PAYMENT SYSTEM POLICY

In general, payment system policy in 2008 was directed towards improving payment system efficiency and effectiveness as one supporting component of overall financial system stability. Regarding currency distribution, Bank Indonesia focused on optimizing and improving the effectiveness of cash services and management in adherence to Bank Indonesia’s mission, which is to fulfill the demand for currency in appropriate denominations, on time, and in good condition. With reference to non-cash payments, policy was directed towards improving the security, efficiency and reliability of the payment system by mitigating risk in the payment system and improving the efficiency of the payment system and its instruments.

CashPaymentInstruments

In 2008, currency circulation policy consistently considered the economic dynamics. As a result of such dynamics, the policy response by Bank Indonesia concerning currency in circulation focused on optimizing and improving the effectiveness of cash services and management in compliance with Bank Indonesia’s mission, which is to fulfill the demand for currency in appropriate denominations, on time, and in good condition. Subsequently, to anticipate the increase in counterfeit

money in circulation, efforts to control the distribution of counterfeit money remained a policy priority.

Externally, currency circulation policy affects bank liquidity management optimization, whereas internally, it affects cost efficiency and resource optimization that, in turn, contributes to economic stability in the face of the global financial crisis. The series of policies instituted in 2008 include: (i) improvement of cash services without fees; (ii) full implementation of cash deposits and withdrawals at Bank Indonesia; (iii) implementation of cash centre function; (iv) and preparation of the currency circulation draft blueprint as the strategy and direction of medium to long-term currency circulation policy. Meanwhile, to anticipate counterfeit money distribution and fraudulent criminal acts, Bank Indonesia intensified policy coordination, extended the coverage of genuine rupiah identification, and ensured the withdrawal and destruction of money from circulation.

The strategy of Bank Indonesia in improving its non fee-based cash services was initiated by terminating Bank Indonesia collaboration with third parties in small money exchanges and currency circulation in remote and border areas. Notwithstanding, to avoid any disruptions

5.3


in the money exchange process, Bank Indonesia actively conducted strategic actions by improving mobile cash services at its Head Office and Branch Offices. Furthermore, the role of banks was optimized in cooperation with rural banks through the Rural Bank Association in terms of exchanging small denominations with the public and corporate consumers. In 2008, cooperation was secured with four commercial banks, six rural banks and one sharia rural bank in Greater Jakarta.

The trial scheme for bank payment deposits that has been in place since 2005 was fully implemented in 2008 in accordance with the issuance of Circular No. 9/37/DPU dated 27th December 2007 regarding Rupiah Deposits and Withdrawals by Commercial Banks at Bank Indonesia. In line with routine monitoring, the promulgation of the regulation generated a 31.5% increase in interbank transactions of banknotes to Rp1.72 trillion. Furthermore, Bank Indonesia implemented a trial cash center in Quarter III-2008 focused on supporting the role of BI in circulating currency, namely banknote management through cash pooling, cash processing and cash distribution. In its early stages, cash centers have been established at two banks in the head office’s region. Meanwhile, in association with the medium to long-term currency circulation policy, in 2008, a preliminary draft of the currency circulation management blueprint was prepared. It includes the grand design of: (i) rupiah money; (ii) money requirement planning; (iii) money creation and money material procurement; (iv) control of counterfeit money and currency criminals; (v) circulating money; (vi) money processing; and (vii) cash services management.

In 2008 counterfeit money increased by 16.6%, with a growing tendency of larger denomination counterfeit bills (Rp100,000). Meanwhile, the ratio of counterfeit money to total currency in circulation was stable as compared to the previous year, namely 8 counterfeit bills per 1,000,000 genuine banknotes. In response, Bank Indonesia, the Indonesian Police (POLRI) and the Coordinating Body for the Eradication of Counterfeit Money (BOTASUPAL) improved coordination by forming a working group to control counterfeit money. Preventatively, control was conducted by means of socialization activities and public education on genuine rupiah banknote identification through talk shows and visits to public organizations, political organizations and religious leaders. Moreover, Bank Indonesia withdrew banknotes of Rp10,000 and Rp20,000 denominations circulated in 1998, as well as banknotes of Rp50,000 and Rp100,000 denominations circulated in 1999, in an effort to control counterfeit banknotes that has been circulated for long periods of time.

Non-cashPaymentSystems

Payment system policy in 2008 was directed towards improving the security, efficiency and reliability of the payment system through efforts to mitigate payment system risk, improve the efficiency of payment system management and its non-cash instruments as well as consumer protection. From the aspect of payment system risk mitigation, efforts focused on the corridor of improving security and maintaining operational reliability and efficiency, both on the payment systems administrated by Bank Indonesia and other administrators. The systems at Bank Indonesia, which include the Real-Time Gross Settlement (RTGS) and Clearing, are routinely tested for primary system and back-up preparedness to anticipate certain conditions that could unhinge the operations of both systems. In addition to routine testing, Bank Indonesia also introduced several anticipative policies to maintain payment system operational efficiency, mainly to overcome potential disruptions stemming from the global financial crisis.

To complement Bank Indonesia’s National Clearing System with failure-to-settle mechanism (which is currently implemented in all clearing regions), the principle of ‘no money no game’ was also implemented on debit clearing as it has been on credit clearing and RTGS. This policy measure was taken in anticipation of increasing liquidity risk exposure on debit clearing participants that could disrupt the National Clearing System of Bank Indonesia. The new debit clearing mechanism is also in line with payment system implementation principles, where failure to pay is the full responsibility of the participating bank. In the future, risk mitigation in debit clearing will be implemented by providing full authority to the local clearing administrator to cancel the clearing transactions of a bank in its region. Clearing transactions should only be cancelled in a region if at the end of the day the participating bank does not have adequate funds to cover its liabilities.

To prevent systemic risk from exposure to payment default risk by a participant, which tends to increase during a crisis, and to maintain an efficient payment system, Bank Indonesia applied scheduled changes to payment system settlements on certain days. Settlements are processed after calculating the required Short-Term Funding Facility when a bank with systemic effect applies for the facility on the same day. However, settlements are still processed on the same day. This should provide more flexibility for systemic banks with short-term funding problems to settle their liabilities at the end of the day.


Meanwhile, in relation to efforts to improve credit card quality and implement prudential principles in the credit card industry, Bank Indonesia in association with the Indonesian Credit Card Association (AKKI) prepared an analysis on the impact of changing the Minimum Payment on Non Performing Loans (NPLs). The minimum payment policy was implemented in 2005. The analysis concluded that several factors affect NPL, including fuel price hikes, taxation and the one-obligor concept. The analysis also recommended that credit card quality improvements could be more effective if supplemented with public education and the availability of a fast and accurate online positive list among providers.

To improve the efficiency of the national payment system, several developments have taken place as follows:

1. Infrastructure development for Domestic Inter-bank Forex Settlement - Payment Versus Payment (PVP)

To improve payment system service, particularly for transactions using different currencies, Bank Indonesia is currently developing PVP infrastructure. With this infrastructure, interbank transaction settlement efficiency is expected to improve. In addition, settlement failure risk due to differing time zones between the domestic bank and its correspondent abroad can be mitigated. PVP infrastructure was developed through cooperation between Bank Indonesia and the Hong Kong Monetary Authority (HKMA), as well as the signing of a Memorandum of Understanding on PVP development

between the BI-Rupiah RTGS system in Indonesia and the US Dollar RTGS system in Hong Kong (US Dollar Clearing House Automated Transfer System/USD CHATS).

2. BI-RTGS Generation II Development

Generation II RTGS infrastructure services began in 2008. System initiatives are designed to improve the efficiency and reliability of the RTGS system to enable financial transaction development. Furthermore, Generation II development will anticipate the trend of a more integrated global economy, thus, a high liquidity requirement can be accommodated by RTGS system. The upgraded system will utilize real-time information to support Bank Indonesia in the aspects of monetary control, financial system stability as well as payment system supervision and operation.

3. Development of Government Electronic Banking at Bank Indonesia (BIG-eB)

BIG-eB was implemented in 2007, developed by integrating the information module for the government’s foreign currency account at Bank Indonesia. With the module, Bank Indonesia and Government can strengthen fiscal and monetary coordination. For Bank Indonesia, the government’s account balance available online and in real-time is a significant source of information to assist in liquidity surveillance as a vital part of monetary policy implementation. For the Ministry of Finance, this can help in terms of cash management, forecasting and state financial management that is more accurate and efficient.


COORDINATION OF MONETARY, FISCAL AND

REAL SECTOR POLICIES

banks to have more flexibility in accessing short-term funding sources from the central bank as well as raising the amount of deposits guaranteed by Deposits Insurance Corporation (LPS).

NineStepstoSecurethe2008StateBudget

High uncertainty in the global financial market that affected domestic markets forced Bank Indonesia, the Government and the related agencies to institute a series of policies. Oil price hikes since the beginning of 2008 was seen to put pressure on fiscal sustainability primarily due to escalating fuel and electricity subsidies. To confront this challenge, in February 2008 the Government expedited the process of State Budget adjustments and issued the “Nine Steps to Secure the 2008 State Budget” in order to reduce the public burden and maintain growth momentum. The nine steps included optimizing revenue, spending cuts, loosening the deficit, financing optimization and stabilizing prices. These policies allowed the government to maintain fiscal sustainability and at the same time also contributing to the real sector. In 2008, not all safety measures could be implemented comprehensively. Most of the measures related to revenue optimization and price stability,

Coherent macroeconomic and real sector policies are required to mitigate the impacts of the global economic crisis on the domestic economy. Policy coherency was reflected through closer coordination between the government and Bank Indonesia when issuing policy packages in 2008. This policy packages covered several sectors including monetary, banking, fiscal and real sector. In addition, coordination between monetary, fiscal and real sector policies was accomplished by, among other, regular meetings among Bank Indonesia, the Government and related institutions/agencies at coordination forums and through the Inflation Control Team.

Several policy packages were rolled out in 2008, including ‘Nine Steps to Secure the 2008 State Budget’, policy coordination among Indonesia Accounting Association, Bank Indonesia and The Indonesia Capital Market and Financial Institution Supervisory Agency (BAPEPAM-LK), as well as a government regulation in lieu of a law (PERPPU) regarding the mitigation of the impact of global financial woes on the domestic financial sector. In line with that, banks are allowed to switch their government bond portfolio from traded category to hold to maturity category. The above PERPPU on crisis mitigation allowing

5.4


however, have been applied. Meanwhile, in line with the low realization of the State Budget deficit compared to its target, safety measures to optimize financing were not actually required.

Coordination of Inflation Target Setting, Surveillance andControl

In order to achieve a low and stable inflation rate in support of sustainable economic growth with the ultimate objective of enhanced social welfare, the Government and Bank Indonesia conducts routine coordination in the form of a coordination team for inflation target setting, surveillance and control. According to the decree, the Inflation Control Team in 2008, whose members include relevant government institutions (MoF, National Planning and Development Agency, Ministry of Transport, Coordinating Ministry of the Economy, Ministry of Agriculture, Ministry of Trade, and Ministry of Workers and Transmigration) and Bank Indonesia. The team has a core duty to: (1) exchange information; (2) set the inflation target; and (3) control inflation. The close coordination among those institutions is needed since a low and stable inflation rate can not be achieved solely through the monetary policy of Bank Indonesia, but also determined by the fiscal policy and other economic policies taken by the Government.

In 2008, the team conducted routine meetings to maintain a good rapport between the Government and Bank Indonesia. The meetings principally dealt with responses to minimize impact of soaring inflationary pressures from external shocks. The team has conducted monthly regular meetings that include updating policies to maintain inflation in each institution. From the meetings, Bank Indonesia as the monetary authority can then utilize the information required related to the fiscal and real sectors, so that the monetary policy adopted by Bank Indonesia is in line with government policy and vice versa.

During the regular meetings, a proposed inflation target is discussed. Some factors are considered including conditions in the monetary, fiscal and real sectors. The proposed target is then submitted to the government. According to MoF Decree No. 1, year 2008, the Government has set the inflation targets for 2008-2010 at 5.0%, 4.5%, and 4.0% respectively with ±1% deviation.

In 2008, accomplishing the inflation target faced heavy challenges, mainly related to external factors beyond the control of the Government and Bank Indonesia. Extreme external pressures forced the Government to raise

domestic fuel prices, which led to headline inflation in 2008 far exceeding its target and left a target set by the Government became unrealistic. Against this backdrop, the Government and Bank Indonesia continued to control inflation through various policy mix. Bank Indonesia issued measured and prudential policies focusing on the BI Rate. Meanwhile, government policies included: (1) A government-borne VAT policy (PPN-DTP) for domestic bulk and packaged cooking oil, as well as imported wheat and domestic sales of wheat flour; (2) Cooking oil market operations; (3) Free import duties for soybean products; (4) Lower income tax on imports of soybean, wheat and wheat flour commodities; and (5) Subsidized soybean sold to tofu and soybean cake (tempeh) makers. Such policies are expected to minimize the impacts of external shocks and the second-round effects of fuel price hikes, as well as maintaining the public’s inflation expectations.

The public’s inflation expectations were also maintained through socialization activities by each institution. Bank Indonesia conducted socialization activities each quarter in many regions attended by academics, bankers and business players. Meanwhile, through its regional branch offices, Bank Indonesia regularly hosted socialization activities on the importance of controlling regional inflation. Regional inflation contributes 78% of national inflation and is affected by the specific characteristics of the respective region. Therefore, in 2008 Bank Indonesia cooperated with local governments and signed a memorandum of understanding to form a Regional Inflation Control Team in 11 regions, namely Semarang, Surabaya, Yogyakarta, Banjarmasin, Bandung, Batam, Pekanbaru, Kendari, Kediri, Denpasar and Medan. Furthermore, several regions also established regular meeting forums for focus group discussions to synchronize measures to control inflation. The regions include Palembang, Manado, Bandar Lampung, Makassar, Padang, Palangkaraya, Tasikmalaya, Bengkulu, Palu, Jakarta and Ambon.

Policy Coordination among Bank Indonesia, Indonesian Accountants Institute, as well as the Capital Market and Financial Institution Supervisory Agency

Due to the significant decline in government bond (SUN) price in QIII-2008, Financial Accounting Standard Board – Indonesian Accounting Association, in its press release in early October 2008, issued guidelines on recording securities payable. The guidelines refer to the US SEC Office of the Chief Accountant and FASB Staff Clarification on Fair Value Accounting issued on 30th September 2008.


The guidelines basically allow an alternative valuation of securities by applying a common appraisal technique, such as discounted cash flow, in addition to quoted market price which is already available. This is applied when the quoted market price is unavailable or its value is doubtful. Prior to the issuance of FASB-Indonesian Accounting Association’s guidelines, the regulations of the US SEC Office of The Chief Accountant and FASB Staff Clarification were applicable.

In accordance with the guidelines issued by FASB-Indonesian Accounting Association, Bank Indonesia applied the following policies: (i) Banks are allowed to use alternative valuation techniques to set a fair value, i.e. by applying the discounted cash flow for trading SUN and SUN available for sale; (ii) Banks are allowed to shift SUN portfolio from trading and available for sale to hold to maturity until the promulgation of FASP No. 55 (2006 Revision) on Financial Instrument Accounting: recognition and measurement. (iii) This policy is also valid for other long-term domestic debt securities. By the time FASP No. 55 (2006 Revision) is signed into law on 1st January 2009, banks will be given the opportunity to resettle their financial instrument portfolio based on their intention and capacity.

In line with that, BAPEPAM-LK introduced Protected Mutual Funds under a new scheme, which includes long-term debt securities held to maturity. Considering the guidelines of the FASB-Indonesian Accounting Association, the Protected Mutual Funds book the securities under an amortized purchase price and do not apply a fair market value. With this scheme, investors of Mutual Funds cannot redeem their investment before maturity. BAPEPAM-LK will further regulate the implementation of this regulation. In addition, BAPEPAM-LK will facilitate easier buybacks for stock issuers, including: (i) Raising the quantity of stock that can be bought back from 10% to 20%; (ii) Eliminating the 25% stock purchase limit from daily trading volume on the respective stock; (iii) Allowing purchases without approval from the Stockholders Meeting, however, information transparency is a prerequisite; (iv) Buying back stock without approval from the Stockholders Meeting is only permitted if the Composite Stock Price Index suffers a significant decline and stock trading is terminated by the Stock Exchange Authority.

BAPEPAM-LK also introduced a Pension Fund to classify government bonds and securities into the “hold to maturity” category for 2008. From the aspect of legal enforcement, BAPEPAM-LK and Self-Regulatory Organization are currently inspecting suspicious stock transactions, particularly for transactions in the past three months.

Government regulation in lieu of a law (PERPPU) to Mitigate Impacts of the Global Crisis on the Financial Sector

On 14th October 2008, the Government issued three drafts of government regulations in lieu of a law (PERPPU), to mitigate the pressure of global financial woes on domestic financial sector. The issuance of those PERPPU was able to contain liquidity pressures in the banking system and maintain public’s confidence on the banking system. The first PERPPU was an amendment to Article 11 of Act No. 3 year 2004 regarding Bank Indonesia. This regulation allows banks to apply for a short-term funding facility (FPFJP) from the central bank using liquid credit assets as collateral. As a result, banks have more flexibility in accessing short-term funding sources from the central bank. However, to avoid moral hazard and to maintain public confidence in the banking industry, banks that receive the short-term funding facility will be placed under special surveillance by Bank Indonesia.

The second PERPPU was an amendment to Article 11 of Act No. 25 year 2004 regarding the Deposit Insurance Corporation (LPS). This amendment provided the basis to increase the coverage of guaranteed deposits from Rp100 million per customer per bank to Rp2 billion. With this increase, the nominal value guaranteed by the Government reached 59.9% of total bank deposits, comprising 99.9% of customer accounts throughout Indonesia (as of September 2008). The policy is expected to underpin security and garner public confidence in the national banking system, particularly during the period of increasing pressure on the financial market. Other countries in the region, such as Malaysia and Singapore, also adopted similar policies and even guarantee the entire deposits in the banking system.

The third PERPPU was regarding the financial safety net (JPSK). Based on this PERPPU, JPSK is a mechanism to safeguard the financial system from the crisis that includes prevention and management of the crisis. These prevention and management of the crisis include managing banks and non-banks financial institutions with liquidity and solvability problem which cause systemic impact. To achieve the goals of JPSK, monetary and financial stability committee (KSSK) was formed which comprise of Minister of Finance (as the team leader) and Governor of Bank Indonesia. KSSK is authorized to set policies and measures to prevent and deal with the crisis in financial sector and coordinating with various authorities in its implementation.


The issuance of all three PERPPU were able to reduce banking liquidity pressures, although one bank had to be handed over to LPS. PERPPU regarding an increasing coverage of deposits guaranteed by LPS and the amendment to article 11 of Act No.3, 2004 regarding Bank Indonesia has obtain an approval from the House of Representatives. Meanwhile, PERPPU concerning JPSK was not approved by the House of Representatives.

Ten Steps to Economic Stabilization

In late October 2008, the Government again announced policies to mitigate the impacts of the global financial crisis on the domestic economy and national financial market, known as the government’s ten steps to economic stabilization. The objective of the ten steps is two-fold. On one hand it is aimed to maintain undisrupted economic activities and preserve economic recovery and sustainability. On the other hand, the objective is to respond to the constraints encountered by economic agents. The ten steps are as follows:

1. Maintaining Balance of Payment and international reserve sustainability by make it mandatory for all state-owned enterprises to deposit their foreign currencies at a domestic bank in clearinghouse. State-owned enterprises are required to report their foreign exchange revenues and expenses to the Ministry of State-Owned Enterprises and process the transactions through a state-owned banks on a weekly basis and updated daily.

2. Maintaining Balance of Payment and international reserve sustainability by expediting the infrastructure projects that have obtained financing commitment, both bilateral and multilateral.

3. Maintaining liquidity stability and prevent a price war by prohibiting state-owned enterprises to shift funds from one bank to another.

4. Maintaining market player confidence in government bond by stabilizing government bond market. For that purpose, the Government and Bank Indonesia can make gradual and measured purchases of government bonds in the secondary market.

5. Utilizing bilateral swap arrangements from the Bank of Japan, Bank of Korea and Bank of China, when

required, to maintain sustainability of the balance of payments.

6. Maintaining exports sustainability by providing a guarantee against payment risk (post shipment financing). With this regard, Bank Indonesia has provided facility for the exporters to sell their export draft with recourse at a discounted rate, started from 1st November 2008.

7. Revoking CPO export duty to maintain economic sustainability started from 1st November 2008.

8. Maintaining the sustainability of the 2009 State Budget. The measures will be announced soon upon receiving approval from the House of Representatives.

9. Preventing illegal imports. Government has issued regulations on imports of certain commodities, garments, electronics, food, beverages, toys and shoes. Only registered importers can import such commodities and they are subject to verification procedures at the loading port. The Government has also designated certain ports which open to specific commodities, such as the ports of Tanjung Priok, Tanjung Mas, Tanjung Perak, Belawan and Makassar; as well as the airports of Soekarno Hatta and Juanda Surabaya. This regulation is valid from the first week of November 2008 .

10. Establishing an integrated taskforce among the relevant institutions to improve surveillance on circulation of goods started from 1st November 2008.

The Government and Bank Indonesia instituted policy number 4 by purchasing government bonds in the secondary market. After adopting the policy, Bank Indonesia held two auctions and three bilateral purchases with banks. Total purchases totaled Rp2.4 trillion. Meanwhile, in the same period, two buybacks by the Government was able to absorb liquidity amounted to Rp368 billion. Purchases in the secondary market were effective in influencing the price of government bonds, particularly during the purchased period. In general, those various joint policies have provided sufficiently positive outcomes in the short run. This was reflected by a number of indicators such as a rise in the Stock Price Composite Index and stabilization of the rupiah.


APPENDICES

No No.PBI Date Description

1 10/01/PBI/2008 29/01/2008 Amendment to Bank Indonesia Regulation Number 8/5/PBI/2006 Concerning Banking Mediation

2 10/02/PBI/2008 04/02/2008 Bank Indonesia – Scriptless Securities Settlement System

3 10/03/PBI/2008 04/02/2008 Commercial Bank Head Office Report

4 10/04/PBI/2008 04/02/2008The Report of Card Based Payment System Implementation in Rural Bank and Non-Bank Institution

5 10/05/PBI/2008 15/02/2008Amendment to Bank Indonesia Regulation Number 5/6/PBI/2003 Concerning Domestic Letter of Credits

6 10/06/PBI/2008 18/02/2008 Bank Indonesia Real Time Gross Settlement System

7 10/07/PBI/2008 19/02/2008 Foreign Debt by Non-Bank Corporation

8 10/08/PBI/2008 20/02/2008Amendment to Bank Indonesia Regulation Number 7/52/PBI/2005 Concerning The Implementation of Card Based Payment System Activities

9 10/09/PBI/2008 22/02/2008 Changes in Business License from Commercial Bank to Rural Bank for Consolidation Purpose

10 10/10/PBI/2008 28/02/2008Amendment to Bank Indonesia Regulation Number 7/7/PBI/2005 Concerning Settlement of Customers Complaints

11 10/11/PBI/2008 31/03/2008 Sharia Bank Indonesia Certificate

12 10/12/PBI/2008 19/08/2008Revocation of Bank Indonesia Board of Governor Decree Number 31/71/KEP/DIR dated 29th July 1998 and Bank Indonesia Board of Governor Decree Number 31/109/Kep/Dir dated 30th September 1998

13 10/13/PBI/2008 21/08/2008 Government Securities Auction and Administration

14 10/14/PBI/2008 23/09/2008Fourth Amendment to Bank Indonesia Regulation Number 4/9/PBI/2002 Concerning Open Market Operation

15 10/15/PBI/2008 24/09/2008 Capital Adequacy Requirement for Commercial Banks

16 10/16/PBI/2008 25/09/2008Amendment to Bank Indonesia Regulation Number 9/19/PBI/2007 Concerning Implementation of Sharia Principle in Funding and Credits Activities as well as Banking Services

List of Bank Indonesia Regulations in 2008

160 Appendices

17 10/17/PBI/2008 25/09/2008 Sharia Bank Products and Sharia Business Unit

18 10/18/PBI/2008 25/09/2008 Financing Restructuring for Sharia Commercial Bank and Sharia Business Unit

19 10/19/PBI/2008 14/10/2008 Commercial Banks Reserve Requirement in Rupiah and Foreign Currency

20 10/20/PBI/2008 14/10/2008Amendment to Bank Indonesia Regulation Number 7/1/PBI/2005 Concerning Banks’ Foreign Debt

21 10/21/PBI/2008 15/10/2008Fifth Amendment to Bank Indonesia Regulation Number 4/9/PBI/2002 Concerning Open Market Operation

22 10/22/PBI/2008 15/10/2008 Foreign Exchange Provision for Domestic Corporation through Banks

23 10/23/PBI/2008 16/10/2008Second Amendment to Bank Indonesia Regulation Number 6/21/PBI/2004 Concerning Reserve Requirement in Rupiah and Foreign Currency for Sharia Commercial Banks

24 10/24/PBI/2008 16/10/2008Second Amendment to Bank Indonesia Regulation Number 8/21/PBI/2006 Concerning Asset Quality of Sharia Commercial Banks

25 10/25/PBI/2008 23/10/2008Amendment to Bank Indonesia Regulation Number 10/19/PBI/2008 Concerning Commercial Banks Reserve Requirement in Rupiah and Foreign Currency

26 10/26/PBI/2008 30/10/2008 Short Term Funding Facility for Commercial Banks

27 10/27/PBI/2008 30/10/2008Second Amendment to Bank Indonesia Regulation Number 6/9/PBI/2004 Concerning Supervision and Status of the Bank

28 10/28/PBI/2008 12/11/2008 Foreign Exchange Purchase by Bank

29 10/29/PBI/2008 14/11/2008 Intraday Liquidity Facility for Commercial Banks

30 10/30/PBI/2008 14/11/2008Amendment to Bank Indonesia Regulation Number 10/26/PBI/2008 Concerning Short Term Funding Facility for Commercial Banks

31 10/31/PBI/2008 18/11/2008 Emergency Funding Facility for Commercial Banks

32 10/32/PBI/2008 20/11/2008 Sharia Banking Committee

33 10/33/PBI/2008 25/11/2008Revocation and Withdrawal of Bank Notes of 10,000 Rupiah Denomination of 1998, of 20,000 Rupiah of 1998, of 50,000 Rupiah of 1999, and of 100.000 Rupiah of 1999.

34 10/34/PBI/2008 05/12/2008 Purchase of Banker Acceptance by Bank Indonesia


161Appendices


35 10/35/PBI/2008 05/12/2008 Short Term Funding Facility for Rural Bank

36 10/36/PBI/2008 10/12/2008 Sharia Monetary Operation

37 10/37/PBI/2008 16/12/2008 Foreign Exchange Transactions

38 10/38/PBI/2008 16/12/2008Amendment to Bank Indonesia Regulation Number 7/31/PBI/2005 Concerning Derivatives Transaction

39 10/39/PBI/2008 24/12/2008Regulation on Special Treatment of Banking Problem after National Disaster in Nanggroe Aceh Darusalam, Nias and North Sumatra Province

40 10/40/PBI/2008 24/12/2008 Monthly Report of Commercial Bank

162 Appendices

Date Regulation/Policy Description

January

2 Primary Steps for State Ministry/Institution Budget Efficiency Letter of the Minister of Finance No.S-1/MK.02/2008

3 Inflation Target for 2008, 2009, and 2010 Minister of Finance Decree No.1/KMK.011/2008

18 Imports Duty on Soybean Minister of Finance Regulation No.01/PMK.011/2008

21 Imports Regulation on Liquefied Petroleum Gas (LPG) and 3 Kilogram LPG Minister of Trade Regulation No.01/M-DAG/PER/1/2008

25 Exports Price Reference (HPE) for Particular GoodsMinister of Trade Regulation No.02/M-DAG/PER/1/2008

26 Deposits Insurance Presidential Regulation No. 02 of 2008

28 Imports Duty on Wheat Flour Minister of Finance Regulation No.05/PMK.011/2008

31Guidence on Minimum Solvability Level for Insurance and Re-Insurance Company

Chairman of the Capital Market and Financial Institution Supervisory Board Regulation No.PER-02/BL/2008

February

4 Government Investment Government Regulation No.1 of 2008

5Oil and Gas Domestic Market Obligation for Contractor from Joint Operation Contract

Minister of Energy and Mineral Resources Regulation No.2 of 2008

6Amendment to Minister of Trade Regulation No.02/M-DAG/PER/1/2008 Concerning Exports Price Reference (HPE) of Particular Goods

Minister of Trade Regulation No.03/M-DAG/PER/2/2008

6Amendment to Minister of Industry Regulation No. 28/M-IND/PER/3/2007 Concerning Official Price of 3 kgs LPG and Gas Stove related to LPG Conversion Program for Poor Family

Minister of Industry Regulation No.04/M-IND/PER/2/2008

14Mutual fund in the Form of Limited Participation in Collective Investment Contract.

Chairman of the Capital Market and Financial Institution Supervisory Board Regulation No.KEP-43/BL/2008

21 Regional Medium Term Development Plan for 2007-2012Regulation of The Province of Jakarta Capital Special Region No.1 of 2008

25 Exports Price Reference (HPE) of Particular GoodsMinister of Trade Regulation No.05/M-DAG/PER/2/2008

26Allocation of Profit Sharing Funds for Acquisition Right on Land and Building for Region in 2008

Minister of Finance Regulation No.38/PMK.07/2008

26Allocation of Profit Sharing Funds for Land and Building Tax for Regional in 2008


Various Important Regulations and Policies in Economic and Finance Areas in 2008

163Appendices


March

3 Imports Duty Associated with Asean -Korea Free Trade Area (AK-AFTA) Minister of Finance Regulation No.41/PMK.011/2008

4 Procedures of Subsidized Cooking Oil Distribution to the PublicMinister of Trade Regulation No.06/M-DAG/PER/3/2008

5Technical Guidelines on Subsidized Cooking Oil Distribution to Low Income Society

Directorate General of Domestic Trade Decree No.16/PDN/KEP/3/2008

14Terms and Conditions of Government Assurance for the Acceleration of Coal-Fired Powerplant Construction.


18 Regional Budget for 2008 The Province of Jakarta Capital Special Region Regulation No.2 of 2008

31Closed Distribution System for Particular Type of Fuel, Kerosene, for Household and Small Business.


April

11 Government Bonds Auction in Primary Market Minister of Finance Regulation No.50/PMK.08/2008

11 Regulation on Import and Export of RiceMinister of Trade Regulation No.12/M-DAG/PER/4/2008

22 Rice Policy Presidential Instruction No.1 of 2008

25 Export Reference Price (HPE) of Particular Exported GoodsMinister of Trade Regulation No.13/M-DAG/PER/4/2008

28 Procedure of Collection of Income Tax on The Treasury Bill Minister of Finance Regulation No.63/PMK.03/2008

29 Buying Price Reference for Unhusked Rice and Rice by the GovernmentMinister of Agriculture Regulation No.24/Permentan/PP/330/4/2008

May

2 Price Reference of 3kgs LPG in 2008Minister of Energy and Mineral Resources Decree No.1661 K/12/MEM/2008

7 Sharia Government Securities Law No.19 of 2008

7 National Industry Policy Presidential Regulation No.28 of 2008

8 Import Duty on Particular Imported goods Minister of Finance Regulation No.70/PMK.011/2008

9 Selling Price Reference for Electricity from Geothermal Power PlantMinister of Energy and Mineral Resources Regulation No.14 of 2008

16 Guidelines on Cash Transfer Disbursement for Targeted Household in 2008Directorate General of Treasury Regulation No.PER-16/PB/2008

19 Credit Guarantee Corporation of Indonesia Government Regulation No.41 of 2008

21Criteria of Micro Small Medium Enterprises and Cooperative Eligible for Guaranteed Credit/Financing

Regulation of the Minister of Forestry No.P.16/Menhut-II/2008

22 Economic Program Focus for 2008-2009 Presidential Instruction No.5 of 2008

23Retail Price of Kerosene, Premium Gasoline, and Automotive Diesel for Household, Small Business, Fishery, Transportation, and Public Services.


164 Appendices


26 Allocation and General Guidelines for Utilizing Funds on Infrastructure in 2008 Minister of Finance Regulation No.81/PMK.07/2008

28 Government Work Plan in 2009 Presidential Regulation No.38 of 2008

29 Price Reference for Particular Fuel in 2008Minister of Energy and Mineral Resources Decree No.1764 K/12/MEM/2008

June

4 Government Debt Accounting System Minister of Finance Regulation No.86/PMK.05/2008

6 Transportation Fare for Public Bus Governor of Jakarta Capital Special Region Regulation No.50 Year 2008

6

Second Amendment to Ministry of Industry Regulation No 28/M-IND/PER/3/2007 concerning Official Price of 3 kgs LPG and LPG Stove with One Fireplace Including Its Accessories Related to LPG Conversion Program for Poor Families as Amended by Ministry of Industry Regulation No 04/M-IND/PER/2/2008


6Guidance for Implementation on Organization of One Stop Integrated Services of Investment.

Governor of Jakarta Capital Special Region Regulation no.53 Year 2008

13 Standard for Special Expense in 2009 Minister of Finance Regulation No.88/PMK.02/2008

16 Rural Government’s Food Stocks Minister of Internal Affairs Regulation No.30 of 2008

16 Guidelines for Regional Budget in 2009 Minister of Internal Affairs Regulation No.32 of 2008

17Subsidy for Rice Treatment Cost and Food Subsidy for Poor Families Rice Program (RASKIN) in 2008


24 Guidelines for Incentive on the Regional Investment Government Regulation No.45 of 2008

30Modality to Lower the Import Duty concerning Economic Cooperation Agreement between Indonesia and Japan


30Import Duty under User Specific Duty Free Scheme (USDFS) Concerning Economic Cooperation Agreement between Indonesia and Japan.


30Stock Transaction Financing by Stock Exchange Company for Its Customer and Short Selling Transaction by Stock Exchange Company

Chairman of the Capital Market and Financial Institution Supervisory Board Decree No.KEP-258/BL/2008

July

7 Guidelines to Manage the Rolling on Funds at the State Ministry/Institution Minister of Finance Regulation No.99/PMK.05/2008

8Standard Operating Procedure for the Joint Team on Handling the Settlement of Shareholders’ Obligations

Minister of Finance Decree No.184/KMK.06/2008

14Optimizing Electricity Load through Working Time shifting at Manufacturing Sector in Java-Bali.

Joint Regulation of Minister of Industry Regulation No.47/M-IND/PER/7/2008; Minister of Energy and Mineral Resources Regulation No.23 of 2008; Minister of Manpower and Transmigration Regulation No.Per 13/MEN/VII/2008; Minister of Internal Affairs Regulation No.35 Year 2008; and Minister of State Owned Enterprise Regulation No.PER-03/MBU/08

165Appendices


16Guidelines for Distribution and Disbursement of Loan Number JBICIP-453 (Regional Infrastructure for Social and Economic Development)

Directorate General of Treasury Regulation No.PER-30/PB/2008

16 Sharia Banking Law No.21 of 2008

18 Export Price Reference for Particular Exported GoodsMinister of Trade Regulation No.26/M-DAG/PER/7/2008

22Guidelines for Distribution and Disbursement of Funds for Rural Infrastructure Development

Director of Directorate General of Treasury Regulation No.PER-34/PB/2008

23Credit for Entrepreneurs Empowerment in Nanggroe Aceh Darussalam and Nias


August

6The Report of Securities Administration Bureau and Listed Companies which Conduct the Securities Administration

Decision of the Chairman of the Capital Market and Financial Institution Supervisory Board No.KEP-317/BL/2008

11 Procedure for Issuance and Chanelling of Government Domestic Debt Government Regulation No.54 of 2008

11 Bond Issuer Company of Sharia-Compliant Government Bond Government Regulation No.56 of 2008

11 Establishment of the Company that Issues Indonesia State Sharia Securities Government Regulation no.57 Year 2008

15 Repayment of an Excise Duty Minister of Finance Regulation No.108/PMK.04/2008

15Issuance and Sale of Sharia Compliant Government Securities through Bookbuilding in Domestic Primary Market


22 Retail Price of 3 kg LPG for Household and Micro Enterprises.Minister of Energy and Mineral Resources Regulation No.28 of 2008

22Procedure for Budget Provision, Disbursement and Accountability of Direct Aid for Fertilizer in 2008


September

3 Import Duty on Imported Tobacco ProductsMinister of Finance Regulation No.128/PMK.011/2008

3Amendment of the Ministry of Finance Regulation Number 129/PMK011/207 concerning Import Duty on Imported Goods under Common Effective Preferential Tariff (CEPT) Scheme.


22 Export Price Reference for Particular Exported GoodsMinister of Trade Regulation No.36/M-DAG/PER/9/2008

23Retail Ceiling Price and Demand for Subsidized Fertilizer for Agriculture Sector in 2009.

Minister of Agriculture Regulation No.42/Permentan/OT.140/09/2008

26 Provision, Usage and Trading Regulation on Biofuel as an Alternative FuelMinister of Energy and Mineral Resources Regulation No.32 of 2008

October

15 Financial System Safety Net Government Regulation in Lieu of Law No.4 of 2008

21Issuance of Sharia Compliant Government Securities in Foreign Currency in International Primary Market.


166 Appendices


22Maintaining National Economic Growth Momentum to Anticipate Global Economic Development

Joint Regulation between Minister of Manpower and Transmigration No.PER.16/MEN/X/2008, Minister of Internal Affairs No.49/2008, Minister of Industry No.922.1/M-IND/10/2008, and Minister of Trade No.39/M-DAG/PER/10/2008

22Settlement of State Arrears from Extension of External Debt, Investment Funds Account, and Regional Development Account of the Local Government.


30 Export Price Reference for Particular Exported GoodsMinister of Trade Regulation No.40/M-DAG/PER.10/2008

31 Regulation on Particular Imported GoodsMinister of Trade Regulation No.44/M-DAG/PER/10/2008

November

4 Supervision on Financing CompanyMinister of Finance Regulation No.166/PMK.010/2008

7 Direct Transaction on Government Bonds. Minister of Finance Regulation No.170/PMK.08/2008

14Changes to Enclosure of Minister of Agriculture Regulation Number 76/Permentan/OT.140/12/2007 Concerning Retail Ceiling Price and Demand for Subsidized Fertilizer for Agriculture Sector in 2008

Minister of Agriculture Regulation No.56/Permentan/OT.140.11/2008

14Mandatory Implementation of the Indonesian National Standard (SNI) on 5 (Five) Industrial Products.


18Procedure of Issuing Government Warranties on Emergency Financing Facility provided by Bank Indonesia


19Procedure for Budget Provision, Disbursement and Accountability of Procurement of Government Rice Stock in 2008


December

14Guidelines to Ease Licensing and to Give incentives to Build Urban Unpretentious Apartment.

Regulation of the Minister of Internal Affairs no.74 Year 2008

16Amendment to Minister of Finance Regulation No 124/PMK.04/2007 concerning Importer Registration


24 Regulation on Particular Imported GoodsMinister of Trade Regulation No.56/M-DAG/PER/12/2008

167Appendices

168 Appendices

Statistics Table

Table 1. Gross Domestic Product by Expenditures 170

Table 2. Gross Domestic Product by Sectors (Constant Prices) 171

Table 3. Gross Domestic Product by Sectors (Current Prices) 172

Table 4. Regional Monthly Minimum Wage by Province 173

Table 5. Consumer Price Index 174

Table 6. Wholesale Price Index 175

Table 7. Inflation Rates in 66 Cities 176

Table 8. Balance of Payment 177

Table 9. Values of Non-Oil/Gas Exports by Commodities 178

Table 10. Volume of Non-Oil/Gas Exports by Commodities 179

Table 11. Value of Non-Oil/Gas Exports by Destination Country 180

Table 12. Value of Non-Oil/Gas Imports by Group of Commodities 181

Table 13. Value of Non-Oil/Gas Imports by Group of Commodities 182

Table 14. Value of Non-Oil/Gas Imports by Country of Origin (C&F) 183

Table 15. Exports of Oil/Gas 184

Table 16. Money Supply 185

Table 17. Changes in Money Supply and its Affecting Factors 186

Table 18. Interest Rates on Time Deposits in Rupiah and Foreign Currency by Group of Banks 187

Table 19. Interbank Money Market in Jakarta (Average Transaction Volume Morning & Evening Session -

Various Maturity) 188

Table 20. Issuance, Repayment, and Outstanding of Bank Indonesia Certificates (SBIs) 189

Table 21. State Budget 190

Table 22. Budget Deficit Financing 191

Table 23. Funds Mobilization by Commercial Banks 192

Table 24. Interest Rates on Rupiah Credits by Group of Banks 193

Table 25. Commercial Bank’s Credits in Rupiah and Foreign Currency by Economic Sector 194

Table 26. Commercial Bank’s Credits in Rupiah and Foreign Currency by Type of Credit and Economic Sector 195

Table 27. Flow of Banknotes in Bank Indonesia Head Office and Regional Offices 196

Table 28. Flow of Coins in Bank Indonesia Head Office and Regional Offices 196

Table 29. World Economic Growth 197

Table 30. World Inflation Rate 198

Table 31. Interest Rate and Exchange Rate 198

169Appendices

Table 1. Gross Domestic Product by Expenditures

(billions of rupiah)

Source: BPS-Statistics Indonesia *) Provisional figures**) Incomplete figures***) Very very provisional figures

TypeofExpenditure 2003 2004 2005 2006* 2007** 2008***

ConstantPrices

Consumption 1,077,997.5 1,130,357.7 1,178,430.7 1,224,491.8 1,284,156.7 1,360,487.9

Private 956,593.4 1,004,109.0 1,043,805.1 1,076,928.1 1,130,847.1 1,191,190.7

Government 121,404.1 126,248.7 134,625.6 147,563.7 153,309.6 169,297.2

Gross fixed capital formation 309,431.1 354,865.7 393,500.5 403,719.2 441,614.0 493,222.5

Change in stock 45,996.7 25,099.1 33,508.3 29,026.7 -243.1 3,865.0

Statistical discrepancy -26,895.8 8,757.2 -8,535.4 16,237.9 52,027.9 25,482.6

Exports of goods and sevices 599,516.4 680,621.0 793,613.0 868,256.5 942,431.4 1,031,866.1

less Import of goods and services 428,874.6 543,183.8 639,701.9 694,605.3 756,895.1 832,820.3

Gross Domestic Product 1,577,171.3 1,656,516.8 1,750,815.2 1,847,126.7 1,963,091.8 2,082,103.7

Net factor income from abroad -81,230.8 -80,468.1 -107,381.7 -113,857.5 -120,408.5 -97,021.8

Gross National Product 1,495,940.5 1,576,048.7 1,643,433.5 1,733,269.2 1,842,683.3 1,985,106.9

less Net indirect tax 65,876.5 46,040.6 34,698.9 55,424.5 56,399.8 31,236.9

less Depreciation 78,858.6 82,825.8 87,540.8 92,356.3 98,154.6 104,106.4

National Income 1,351,205.4 1,447,182.2 1,521,193.8 1,585,488.4 1,688,128.9 1,849,763.5

CurrentPrice

Consumption 1,535,779.4 1,723,943.9 2,010,576.9 2,380,735.5 2,840,264.0 3,436,326.1

Private 1,372,078.0 1,532,888.3 1,785,596.4 2,092,655.7 2,510,503.9 3,019,459.4

Government 163,701.4 191,055.6 224,980.5 288,079.9 329,760.1 416,866.7

Gross domestic fixed capital formation 392,788.6 515,381.2 655,854.3 805,786.1 986,214.7 1,369,583.1

Change in stock 122,681.9 36,911.1 39,974.6 42,382.2 -1,053.3 7,663.7

Statistical discrepancy -165,677.9 -87,673.3 -47,163.0 -70,415.7 -35,806.4 84,053.6

Exports of goods and services 613,720.8 739,639.3 945,121.8 1,036,316.5 1,162,973.8 1,474,507.9

less Import of goods and services 462,940.9 632,376.1 830,083.4 855,587.8 1,003,271.3 1,418,105.5

Gross Domestic Product 2,036,351.9 2,295,826.2 2,774,281.1 3,339,216.8 3,949,321.4 4,954,028.9

Net factor income from abroad -77,413.9 -105,350.1 -135,000.5 -142,268.9 -162,484.7 -175,865.2

Gross National Product 1,958,938.0 2,190,476.1 2,639,280.6 3,196,947.9 3,786,836.7 4,778,163.7

less Net indirect tax 85,272.2 62,534.0 53,719.3 98,142.7 112,188.8 69,645.9

less Depreciation 101,817.6 114,791.3 138,714.1 166,960.8 197,466.1 247,701.4

National Income 1,771,848.2 2,013,150.8 2,446,847.2 2,931,844.3 3,477,181.8 4,460,816.4

Memorandum item:

Per Capita Gross Domestic Product

in thousands of rupiah 9,535.7 10,610.1 12,675.5 15,028.5 17,545.4 21,678.5

in US dollar 1,111.4 1,186.2 1,317.6 1,662.5 1,942.1 2,271.2

Per Capita Gross National Product


in US dollar 1,069.1 1,131.8 1,256.6 1,591.7 1,862.2 2,190.5

Per Capita National Income


in US dollar 967.0 1,040.2 1,165.1 1,459.7 1,710.0 2,045.1

170 Appendices

Table 2. Gross Domestic Product by Sectors (Constant Prices)

SectorsConstantPrices2000

2003 2004 2005 2006* 2007** 2008***

Agriculture,livestock,forestry240,387.3 247,163.6 253,881.7 262,402.8 271,401.2 284,337.8

Food crops 119,164.8 122,611.7 125,801.8 129,548.6 133,888.5 141,800.2

Non-food crops 38,693.9 38,849.3 39,810.9 41,318.0 43,135.6 44,792.6

Livestock and products 30,647.0 31,672.5 32,346.5 33,430.2 34,220.7 35,552.8

Forestry 17,213.7 17,433.8 17,176.9 16,686.9 16,503.6 16,439.6

Fishery 34,667.9 36,596.3 38,745.6 41,419.1 43,652.8 45,752.6

Mining and quarrying 167,603.8 160,100.5 165,222.6 168,031.7 171,422.1 172,300.0

Crude petroleum and natural gas 103,087.2 98,636.3 96,894.6 95,853.1 94,757.0 95,189.9

Mining (excluding oil and gas) 51,007.3 46,947.1 52,694.2 55,242.4 58,272.2 57,379.8

Quarrying 13,509.3 14,517.1 15,633.8 16,936.2 18,392.9 19,730.3

Manufacturing 441,754.9 469,952.4 491,561.4 514,100.3 538,084.6 557,765.6

Oil and Gas 52,609.3 51,583.9 48,658.8 47,851.2 47,823.0 47,663.9

Petroleum and refinery 22,374.1 22,322.3 21,207.2 20,806.9 20,780.6 20,973.2

LNG 30,235.2 29,261.6 27,451.6 27,044.3 27,042.4 26,690.7

Non-oil and Gas 389,145.6 418,368.5 442,902.6 466,249.1 490,261.6 510,101.7

Food, beverage and tobacco 116,528.6 118,149.3 121,395.6 130,148.9 136,722.4 139,921.9

Textile, leather product and footwear 51,483.6 53,576.3 54,277.1 54,944.2 52,922.5 50,994.0

Wood and wood product 20,754.3 20,325.5 20,138.5 20,006.2 19,657.6 20,335.8

Paper and printing 21,731.0 23,384.2 23,944.2 24,444.8 25,861.0 25,477.2

Chemical and rubber product 50,008.7 54,513.6 59,293.1 61,947.9 65,470.0 68,389.6

Cement and non-metal quarrying goods 13,735.9 15,045.2 15,618.1 15,700.1 16,233.3 15,990.7

Basic metal, iron and steel 8,222.9 8,008.0 7,712.0 8,076.8 8,213.3 8,044.7

Transportation, machine and equipment 103,414.7 121,683.3 136,744.6 147,063.8 161,375.6 177,178.3

Others 3,265.9 3,683.1 3,779.4 3,916.4 3,805.9 3,769.5

Electricity,gasandwatersuply 10,349.2 10,897.6 11,584.1 12,251.0 13,517.1 14,993.7

Construction 89,621.8 96,334.4 103,598.4 112,233.6 121,901.0 130,815.7

Trade,hotelsandrestaurants 256,516.6 271,142.2 293,654.0 312,518.7 338,807.2 363,314.0

Wholesale and retail trade 210,653.3 222,290.0 241,887.1 257,845.0 280,485.9 301,497.7

Hotels and restaurants 45,863.3 48,852.2 51,766.9 54,673.7 58,321.3 61,816.3

Transportation and communication 85,458.4 96,896.7 109,261.5 124,808.9 142,327.2 166,076.8

Transportation 57,463.0 62,495.7 66,404.7 70,796.0 72,791.6 74,764.7

Communication 27,995.4 34,401.0 42,856.8 54,012.9 69,535.6 91,312.1

Finance,rentalandbusinessservices 140,374.4 232,543.4 161,252.2 170,074.3 183,659.3 198,799.6

Banks 1) 76,434.0 81,420.1 85,570.1 87,697.1 94,721.8 101,933.9

Rental and business services 63,940.4 69,703.2 75,682.1 82,377.2 88,937.5 96,865.7

Services 145,104.9 152,906.1 160,799.3 170,705.4 181,972.1 193,700.5

Public administration 71,147.7 72,323.6 73,700.1 76,618.4 80,778.2 84,377.9

Private 73,957.2 80,582.5 87,099.2 94,087.0 101,193.9 109,322.6

GROSS DOMESTIC PRODUCT 1,577,171.3 1,656,516.8 1,750,815.2 1,847,126.7 1,963,091.8 2,082,103.7

Non-oil/Gas 1,421,474.8 1,506,296.6 1,605,261.8 1,703,422.4 1,820,511.8 1,939,249.9

Oil/Gas 155,696.5 150,220.2 145,553.4 143,704.3 142,580.0 142,853.8

Source: BPS-Statistics Indonesia 1) Including non-bank financial institutions and financial supporting services*) Provisional figures**) Incomplete figures***) Very very provisional figures


171Appendices

Table 3. Gross Domestic Product by Sectors (Current Prices)


SectorsCurrentPrices

2003 2004 2005 2006* 2007** 2008***

Agriculture,livestock,forestry305,783.5 329,124.6 364,169.3 433,223.4 541,592.6 713,291.4

Food crops 157,648.8 165,558.2 181,331.6 214,346.3 265,090.9 347,841.7

Non-food crops 46,753.8 49,630.9 56,433.7 63,401.4 81,595.5 106,186.4

Livestock and products 37,354.2 40,634.7 44,202.9 51,074.7 61,325.2 82,835.4

Forestry 18,414.6 20,290.0 22,561.8 30,065.7 35,883.7 39,992.1

Fishery 45,612.1 53,010.8 59,639.3 74,335.3 97,697.3 136,435.8

Mining and quarrying 167,572.3 205,252.0 309,014.1 366,520.8 441,006.6 543,363.8

Crude petroleum and natural gas 95,152.1 118,484.9 177,605.9 200,081.6 234,189.4 285,582.8

Mining (excluding oil and gas) 53,313.2 65,122.4 104,599.1 130,716.0 160,607.4 195,184.9

Quarrying 19,107.0 21,644.7 26,809.1 35,723.2 46,209.8 62,596.1

Manufacturing 591,597.6 644,342.6 760,361.3 919,539.3 1,068,653.9 1,380,731.5

Oil and Gas 100,344.9 94,263.4 138,440.9 172,094.9 182,324.3 242,061.4

Petroleum and refinery 50,989.5 59,062.0 89,629.6 117,952.2 122,118.3 148,582.6

LNG 49,355.4 35,201.4 48,811.3 54,142.7 60,206.0 93,478.8

Non-oil and Gas 491,252.7 550,079.2 621,920.4 747,444.4 886,329.6 1,138,670.1

Food, beverage and tobacco 154,154.8 163,553.7 177,753.1 212,738.0 264,100.5 346,185.6

Textile, leather product and footwear 67,575.1 71,474.1 77,087.2 90,116.5 93,598.4 104,829.7

Wood and wood product 29,898.4 31,225.9 35,247.5 44,602.6 54,880.9 73,196.2

Paper and printing 27,792.4 31,036.3 33,898.8 39,637.0 45,403.1 51,912.3

Chemical and rubber product 56,760.5 64,012.6 76,213.6 94,078.8 110,769.6 154,117.2

Cement and non-metal quarrying goods 19,215.6 21,588.3 24,589.1 29,013.3 32,814.3 40,178.7

Basic metal, iron and steel 13,421.3 16,154.6 18,382.7 20,687.0 22,907.7 29,213.1

Transportation, machine and equipment 118,171.9 145,971.3 172,957.1 209,460.1 254,278.4 329,911.7

Others 4,262.7 5,062.4 5,791.3 7,111.1 7,576.7 9,125.6

Electricity,gasandwatersuply 19,144.2 23,730.3 26,693.8 30,354.8 34,724.6 40,846.7

Construction 125,337.1 151,247.6 195,110.6 251,132.3 305,215.6 419,321.6

Trade,hotelsandrestaurants 335,100.4 368,555.9 431,620.2 501,542.4 589,351.8 692,118.8

Wholesale and retail trade 260,578.4 287,553.5 338,667.2 393,047.4 465,782.0 552,054.8

Hotels and restaurants 74,522.0 81,002.4 92,953.0 108,495.0 123,569.8 140,064.0

Transportation and communication 118,916.4 142,292.0 180,584.9 231,523.5 264,264.2 312,454.1

Transportation 79,535.5 88,310.3 110,157.3 142,770.0 149,974.4 171,203.0

Communication 39,380.9 53,981.7 70,427.6 88,753.5 114,289.8 141,251.1

Finance,rentalandbusinessservices 174,074.5 194,410.9 230,522.7 269,121.4 305,213.5 368,129.7

Banks 1) 89,795.4 96,466.9 110,677.4 124,498.4 140,608.4 170,075.7

Rental and business services 84,279.1 97,944.0 119,845.3 144,623.0 164,605.1 198,054.0

Services 198,825.9 236,870.3 276,204.2 336,258.9 399,298.6 483,771.3

Public administration 101,605.6 121,129.4 135,132.8 167,799.7 205,343.9 257,547.7

Private 97,220.3 115,740.9 141,071.4 168,459.2 193,954.7 226,223.6

GROSS DOMESTIC PRODUCT 2,036,351.9 2,295,826.2 2,774,281.1 3,339,216.8 3,949,321.4 4,954,028.9

Non-oil/Gas 1,840,854.9 2,083,077.9 2,458,234.3 2,967,040.3 3,532,807.7 4,426,384.7

Oil/Gas 195,497.0 212,748.3 316,046.8 372,176.5 416,513.7 527,644.2

Source: BPS-Statistics Indonesia 1) Including non-bank financial institutions and financial supporting services*) Provisional figures**) Incomplete figures***) Very very provisional figures

172 Appendices

Province 2003 2004 2005 2006 2007 2008

Nanggroe Aceh Darussalam 425,000 550,000 620,000 820,000 850,000 1,000,000North Sumatera 505,000 537,000 600,000 737,794 761,000 822,205West Sumatera 435,000 480,000 540,000 650,000 650,000 800,000Riau 437,500 476,875 551,500 637,000 710,000 800,000Kepulauan Riau 557,000 760,000 805,000 833,000Jambi 390,000 425,000 485,000 563,000 658,000 724,000South Sumatera 403,500 460,000 503,700 604,000 753,000 743,000Bangka Belitung 560,000 640,000 830,000 813,000Bengkulu 330,000 363,000 430,000 516,000 644,838 683,528Lampung 350,000 377,500 405,000 505,000 555,000 617,000Banten 475,000 515,000 585,000 661,613 661,613 837,000DKI Jakarta 631,554 671,550 711,843 819,100 816,100 972,604West Java 320,000 366,500 408,260 447,654 447,654 568,193Central Java 340,400 365,000 390,000 450,000 500,000 547,000D.I. Yogyakarta 360,000 365,000 400,000 460,000 460,000 586,000East Java 281,750 310,000 340,000 390,000 448,500 500,000Bali 341,000 425,000 447,500 510,000 622,000 682,650East Nusa Tenggara 350,000 400,000 450,000 550,000 600,000 650,000West Kalimantan 400,000 420,000 445,200 512,000 560,000 645,000Central Kalimantan 425,000 482,250 523,698 634,260 665,973 765,868South Kalimantan 425,000 482,212 536,300 629,000 745,000 825,000East Kalimantan 540,000 572,652 600,000 684,000 766,500 815,000North Sulawesi 495,000 545,000 600,000 713,500 750,000 845,000Central Sulawesi 410,000 450,000 490,000 575,000 615,000 670,000South Sulawesi 415,000 455,000 510,000 612,000 673,200 740,520Southeast Sulawesi 390,000 470,000 498,600 573,400 640,000 700,000West Sulawesi 612,000 691,464 760,500Maluku 370,000 450,000 500,000 575,000 635,000 700,000North Maluku 322,000 400,000 440,000 528,000 660,000 700,000Gorontalo 410,000 430,000 435,000 527,000 560,000 600,000Papua 600,000 650,000 700,000 822,500 987,000 1,105,500West Papua 987,000 1,105,500

Source : Ministry of Manpower and Transmigration (processed)

Table 4. Regional Monthly Minimum Wage by Province

(rupiah)

173Appendices

EndofPeriod1) Food Stuffs

PreparedFoods,

Beverages,Cigarettes

andTobacco

Housing Clothing Medical CareEducation, Recreation andSport

Transportation and

CommnicationGeneral

ChangeinGeneral

Index(%)

2003 5.06January 312.41 310.30 240.51 288.11 280.70 248.48 258.74 276.33 0.80February 310.48 312.68 242.04 289.94 281.82 248.47 258.95 276.87 0.20March 303.47 313.93 244.64 289.80 284.18 248.14 259.09 276.23 -0.23April 299.97 318.35 245.03 287.94 285.09 248.80 262.48 276.65 0.15May 299.12 318.39 246.90 288.95 287.40 248.81 262.56 277.23 0.21June 296.66 318.95 249.14 289.78 287.94 249.18 262.90 277.49 0.09July 294.53 318.25 250.08 290.43 288.68 252.94 263.04 277.58 0.03August 294.97 317.89 251.60 291.25 289.35 272.71 263.27 279.92 0.84September 293.43 318.96 254.20 293.10 291.17 277.14 263.40 280.93 0.36October 298.64 319.06 254.96 293.84 292.03 277.50 263.48 282.48 0.55November 305.34 320.07 256.02 300.57 292.51 277.42 266.27 285.32 1.01December 311.84 323.35 256.74 305.60 293.54 277.52 266.34 287.99 0.94

20042) 6.40January 105.92 110.75 116.11 108.61 108.38 114.48 107.99 110.45 0.57February 104.39 111.52 116.85 108.64 108.42 114.46 108.12 110.43 -0.02March 104.54 111.94 117.63 108.84 109.61 114.63 108.31 110.83 0.36April 106.40 112.30 119.08 109.10 110.47 114.76 108.79 111.91 0.97May 106.98 112.54 119.82 109.12 110.95 114.89 113.01 112.90 0.88June 108.02 112.71 120.48 109.81 111.25 114.98 113.09 113.44 0.48July 108.48 112.97 121.09 110.04 111.58 116.13 113.12 113.88 0.39August 106.17 113.36 121.88 110.30 111.69 122.05 113.57 113.98 0.09September 104.73 113.56 122.43 110.63 111.87 124.52 113.61 114.00 0.02October 106.10 113.89 122.78 111.28 112.02 126.10 113.66 114.64 0.56November 108.53 114.65 123.09 112.71 112.24 126.15 114.20 115.66 0.89December 111.10 115.70 124.19 113.36 113.06 126.20 114.25 116.86 1.04

20052) 17.11January 114.55 116.63 126.03 113.39 113.31 126.29 114.70 118.53 1.43February 112.88 117.26 126.51 113.44 113.51 126.26 114.81 118.33 -0.17March 113.01 119.16 127.22 114.17 114.18 126.63 126.32 120.59 1.91April 112.77 119.84 127.99 114.55 114.52 126.78 126.88 121.00 0.34May 112.92 120.11 128.45 114.73 115.20 126.83 126.93 121.25 0.21June 113.74 121.52 128.77 115.19 115.57 127.03 127.23 121.86 0.50July 116.09 122.06 129.17 115.82 115.93 128.24 127.28 122.81 0.78August 116.25 122.68 129.83 116.32 116.47 132.46 127.39 123.48 0.55September 116.73 124.10 130.45 117.69 117.47 134.35 127.91 124.33 0.69October 125.18 128.08 140.10 119.86 118.59 136.23 164.45 135.15 8.70November 128.27 130.72 141.00 120.25 119.29 136.63 165.32 136.92 1.31December 126.55 131.56 141.50 121.21 119.99 136.60 165.38 136.86 -0.04

20062) 6.60January 131.98 132.80 142.49 122.09 121.26 136.87 165.29 138.72 1.36February 133.54 133.66 143.28 122.97 121.74 136.48 165.55 139.53 0.58March 132.37 134.44 143.79 123.16 122.22 136.64 165.77 139.57 0.03April 131.24 135.02 144.40 124.02 122.93 136.76 165.89 139.64 0.05May 131.61 135.43 144.83 126.54 123.63 136.86 166.18 140.16 0.37June 133.08 135.78 145.30 126.44 123.96 137.20 166.35 140.79 0.45July 134.40 136.20 145.60 126.89 124.04 138.15 166.48 141.42 0.45August 133.94 136.68 146.03 127.33 124.45 144.74 166.50 141.88 0.33September 134.77 136.86 146.44 127.16 124.83 147.41 166.48 142.42 0.38October 137.70 137.74 146.82 128.43 125.19 147.56 167.24 143.65 0.86November 138.60 138.39 147.25 129.33 125.71 147.60 166.89 144.14 0.34December 142.92 139.93 148.34 129.50 127.03 147.70 167.06 145.89 1.21

20072) 6.59January 146.75 141.15 149.40 129.18 127.71 147.85 167.22 147.41 1.04February 147.99 142.07 150.60 129.90 128.53 148.19 167.27 148.32 0.62March 148.22 142.58 151.03 130.43 128.79 148.23 167.42 148.67 0.24April 146.30 143.12 151.43 131.23 129.20 148.18 167.79 148.43 -0.16May 145.73 143.79 151.96 131.51 129.43 148.19 168.00 148.58 0.10June 146.42 144.27 152.16 130.94 129.71 148.24 168.19 148.92 0.23July 148.39 144.84 152.64 131.74 130.16 152.52 168.27 149.99 0.72August 149.56 145.53 153.82 132.39 130.47 157.37 168.33 151.11 0.75September 152.27 146.19 154.09 134.01 131.04 160.05 168.44 152.32 0.80October 155.11 146.93 154.42 136.76 131.63 160.38 169.23 153.53 0.79November 155.17 147.56 154.60 139.03 131.97 160.55 168.78 153.81 0.18December 159.01 148.90 155.58 140.41 132.51 160.74 169.15 155.50 1.10

2008 11.06January 163.41 151.91 158.38 143.66 133.47 160.75 169.55 158.26 1.77February 166.01 153.24 158.36 144.75 135.55 160.82 169.59 159.29 0.65March 168.40 154.89 159.92 146.45 136.49 160.97 169.77 160.81 0.95April 169.32 156.22 162.51 146.05 139.06 161.18 167.77 161.73 0.57May 172.23 157.57 165.07 145.82 140.02 161.78 171.51 164.01 1.41June3) 116.44 109.38 108.03 108.61 106.20 104.99 109.50 110.08 2.46July 118.59 110.55 109.97 109.49 106.95 106.82 110.28 111.59 1.37August 119.70 111.20 110.55 108.91 107.55 108.27 110.27 112.16 0.51September 121.97 112.25 111.90 109.45 107.94 108.95 110.51 113.25 0.97October 122.83 113.11 112.17 110.23 108.50 109.38 110.62 113.76 0.45November 122.01 114.39 112.43 111.02 108.90 109.66 110.28 113.90 0.12December 122.70 114.98 113.02 112.27 109.13 109.84 107.26 113.86 -0.04

Source : BPS-Stat�st�cs Indones�a 1) F�gures at the end of per�od (year/quarter)2) Calculated from 45 C�t�es based on 2002=1003) Calculated from 66 c�t�es based on 2007=100

Table 5. Consumer Price Index

174 Appendices

Group 20032) 2004 2005 2006 2007 2008 Change2008to2007(%)

Agriculture 130 137 148 172 214 275 28.50

Mining and Quarrying 123 135 147 169 187 223 19.43

Manufacturing 130 136 158 195 218 273 25.23

Import 114 127 149 162 186 235 26.25

Export 109 121 145 154 167 209 25.35

Oil and Gas 115 149 210 229 241 345 43.02

Non-Oil and Gas 107 112 125 130 143 166 16.03

GeneralIndex 122 131 151 172 195 246 25.94

Table 6. Wholesale Price Index 1)

Source : BPS-Statistics Indonesia (BPS) 1) Annual figure is the average of monthly index over the year2) Calculated based on 2000=100

175Appendices

Kota 2003 20041) 2005 2006 2007 20082)

Lhokseumawe 4.53 7.36 17.57 11.47 4.18 13.78Banda Aceh 3.50 6.97 41.11 9.54 11.00 10.27Padang Sidempuan 4.07 8.99 18.47 10.02 5.87 12.34Sibolga 3.94 6.64 22.39 5.03 7.13 12.36Pematang Siantar 2.51 7.31 19.67 6.07 8.37 10.16Medan 4.46 6.64 22.91 5.96 6.42 10.63Padang 5.55 6.98 20.47 8.05 6.90 12.68Pekanbaru 6.65 8.92 17.10 6.31 7.53 9.02Batam 4.27 4.22 14.79 4.59 4.84 8.39Jambi 3.79 7.25 16.50 10.66 7.42 11.57Palembang 5.03 8.94 19.92 8.44 8.21 11.15Bengkulu 4.14 4.67 22.22 6.52 5.00 13.44Bandar Lampung 5.44 5.22 21.17 6.03 6.58 14.82Pangkal Pinang - 9.00 17.44 6.42 2.64 18.40Jakarta 5.78 5.87 16.06 6.03 6.04 11.11Tasikmalaya 3.88 5.92 20.83 8.44 7.72 12.07Serang/Cilegon 5.21 6.40 16.11 5.33 6.31 13.91Bandung 5.69 7.56 19.56 6.30 5.25 10.23Cirebon 3.35 3.27 16.82 8.45 7.87 14.14Purwokerto 2.89 6.32 14.54 6.18 6.15 12.06Surakarta 1.73 5.15 13.88 6.07 3.28 6.96Semarang 6.07 5.98 16.46 7.73 6.75 10.34Tegal 1.86 5.25 18.39 10.40 8.89 8.52Yogyakarta 5.73 6.95 14.98 6.84 7.99 9.88Jember 5.20 6.24 16.86 7.78 7.25 10.63Kediri 1.13 6.38 16.84 5.91 6.85 9.52Malang 3.23 6.28 15.74 6.70 5.93 10.49Surabaya 4.79 6.06 14.12 7.67 6.27 8.73Denpasar 4.56 5.97 11.31 4.30 5.91 9.62Mataram 1.82 6.61 17.72 4.17 8.76 13.01Kupang 5.45 8.28 15.16 9.72 8.44 10.90Pontianak 5.48 6.06 14.43 6.31 8.56 11.19Sampit 3.06 6.67 11.90 7.75 7.57 8.89Palangkaraya 5.68 7.25 12.12 7.72 7.96 11.65Banjarmasin 6.77 7.52 12.94 11.04 7.78 11.62Balikpapan 5.92 7.60 17.28 5.52 7.27 11.30Samarinda 7.99 5.65 16.64 6.50 9.18 12.69Manado 0.69 4.69 18.73 5.09 10.13 9.71Palu 5.84 7.01 16.33 8.69 8.13 10.40Makassar 3.01 6.47 15.20 7.21 5.71 11.79Kendari 2.41 7.72 21.45 10.57 7.53 15.28Gorontalo - 8.64 18.56 7.54 7.02 9.20Ternate 6.27 4.82 19.42 4.80 10.43 11.25Ambon 2.51 3.44 16.67 5.12 5.85 9.34Jayapura 8.39 9.45 14.15 9.52 10.35 12.55Dumai - - - - - 14.30Tanjung Pinang - - - - - 11.90Bogor - - - - - 14.20Sukabumi - - - - - 11.39Bekasi - - - - - 10.10Depok - - - - - 11.70Sumenep - - - - - 10.20Probolinggo - - - - - 10.89Madiun - - - - - 13.27Tangerang - - - - - 10.75Cilegon - - - - - 12.96Bima - - - - - 14.36Maumere - - - - - 16.17Singkawang - - - - - 12.66Tarakan - - - - - 19.85Watampone - - - - - 14.22Pare-Pare - - - - - 13.34Palopo - - - - - 17.58Mamuju - - - - - 11.66Manokwari - - - - - 20.52Sorong - - - - - 19.56 Inflasi Nasional 5.06 6.40 17.11 6.60 6.59 11.06

Table 7. Inflation Rates in 66 Cities

Source : BPS-Statistics Indonesia (BPS)1) Since 2004 calculated baseed on survey in 45 cities and classified into 7 categories, 2002=100 , survey in 66 cities2) Since June 2008, CPI is calculated from 66 cities based on 2007=100

(percent)

176 Appendices

Rincian1) 2003 2004 2005 2006 2007 2008*

I. CurrentAccount 8,106 1,564 278 10,859 10,492 606

A.Tradebalance 24,563 20,152 17,534 29,660 32,754 23,309

1. Export f.o.b 64,109 70,767 86,995 103,528 118,014 139,291

2. Import f.o.b -39,546 -50,615 -69,462 -73,868 -85,260 -115,981

B.Services,net -11,728 -8,811 -9,122 -9,874 -11,841 -13,011

C.Income,net -6,217 -10,917 -12,927 -13,790 -15,525 -15,334

D.Currenttransfer,net 1,489 1,139 4,793 4,863 5,104 5,643

II. Capital and Financial Transaction -949 1,852 345 3,025 3,591 -1,706

A Capital transaction -833 … 333 350 546 353

B Financial transaction -116 1,852 12 2,675 3,045 -2,059

1 Direct investment -597 -1,512 5,271 2,188 2,253 2,479

2 Portfolio investment 2,251 4,409 4,190 4,277 5,566 1,753

3 Other Investment -1,770 -1,045 -9,449 -3,790 -4,775 -6,291

III.Total(I+II) 7,157 3,415 623 13,885 14,083 -1,100

IV.Errorsandomissions(net) -3,502 -3,106 -179 625 -1,368 -846

V.OverallBalance(III+IV) 3,655 309 444 14,510 12,715 -1,945

VI. Monetary Movement2) -3,655 -309 -444 -14,510 -12,715 1,945

a. Change in International Reserves a.l. Transaction -4,257 674 663 -6,902 -12,715 1,945

b. IMF 603 -983 -1,107 -7,608 0 0

Notes:

1. Foreign Assets (IRFCL) 3) 36,296 36,320 34,724 42,586 56,920 51,639

Equivalent to imports and payments on government foreign debt (no. of months) 7.1 5.7 4.0 4.6 5.8 4.0

2. Current Account/GDP (%) 3.4 0.6 0.1 2.9 2.4 0.1

Table 8. Balance of Payment

1) Since 2004, using a new format of BOP.2) Minus (-) : ssurplus; Positive (+) : deficit. Since Q1-2004, charge in international reserve for realization data only contain transaction.3) Since 2000, monetary movement based on International Reserve and Foreign Currency Liquidity (IRFCL) international reserve, replacing Gross Foreign Assets (GFA).* Provisional figures

(millions of $)

177Appendices

Items2003 2004 2005 2006 2007 2008*

ValueShare

(%)Value

Share(%)

ValueShare

(%)Value

Share(%)

ValueShare

(%)Value

Share(%)

TotalExport 48,876 100 54,482 100 66,752 100.0 80,578 100.0 93,142 100.0 107,607 100.0

Agriculture 2,750 5.6 2,430 4.5 2,870 4.3 3,458 4.3 3,726 4.0 4,950 4.6Coffee 273 0.6 274 0.5 522 0.8 590 0.7 679 0.7 1,076 1.0Tea 100 0.2 63 0.1 118 0.2 52 0.1 127 0.1 159 0.1Spice 203 0.4 150 0.3 158 0.2 191 0.2 269 0.3 297 0.3Tobacco 48 0.1 44 0.1 290 0.4 58 0.1 410 0.4 500 0.5Cocoa 410 0.8 360 0.7 645 1.0 627 0.8 619 0.7 844 0.8Shrimps 928 1.9 802 1.5 833 1.2 992 1.2 788 0.8 803 0.7Others 787 1.6 736 1.4 305 0.5 948 1.2 834 0.9 1,270 1.2

Mining 4,145 8.5 4,636 8.5 8,010 12.0 11,346 14.1 12,015 12.9 14,742 13.7

Copper 1,924 3.9 1,755 3.2 3,488 5.2 4,700 5.8 4,428 4.8 2,313 2.1Nickel 62 0.1 106 0.2 139 0.2 220 0.3 403 0.4 329 0.3Coal 2,054 4.2 2,677 4.9 4,343 6.5 6,156 7.6 6,980 7.5 10,265 9.5Bauxite 20 0.0 17 0.0 24 0.0 59 0.1 107 0.1 202 0.2Others 85 0.2 82 0.2 17 0.0 212 0.3 97 0.1 1,634 1.5

Manufacturing 41,981 85.9 47,416 87.0 55,872 83.7 65,774 81.6 77,401 83.1 87,915 81.7Textile and Textile Product 7,294 14.9 7,507 13.8 8,554 12.8 9,626 11.9 10,004 10.7 10,399 9.7- Garments 4,147 8.5 4,364 8.0 4,959 7.4 5,714 7.1 5,830 6.3 6,268 5.8Wood Products 3,247 6.6 3,164 5.8 2,940 4.4 3,363 4.2 3,219 3.5 2,962 2.8- Plywoods 1,708 3.5 1,501 2.8 1,798 2.7 895 1.1 1,725 1.9 1,601 1.5Palm Oil 2,521 5.2 3,353 6.2 3,708 5.6 4,873 6.0 7,571 8.1 11,822 11.0Chemical Product 1,576 3.2 1,896 3.5 4,450 6.7 2,729 3.4 6,498 7.0 6,978 6.5Metal Product 887 1.8 1,787 3.3 561 0.8 3,091 3.8 9,742 10.5 10,092 9.4Electrical Appliances 3,205 6.6 3,396 6.2 9,774 14.6 4,500 5.6 8,704 9.3 9,433 8.8Cement 92 0.2 100 0.2 184 0.3 222 0.3 280 0.3 220 0.2Paper 2,061 4.2 2,171 4.0 3,238 4.9 2,892 3.6 14,893 16.0 13,109 12.2Rubber Products 2,146 4.4 2,878 5.3 793 1.2 5,528 6.9 4,369 4.7 5,231 4.9Others 18,952 38.8 21,166 38.8 21,668 32.5 28,949 35.9 12,122 13.0 17,669 16.4

Table 9. Values of Non-Oil/Gas Exports by Commodities

(millions of USD)

Source : BPS-Statistics Indonesia (BPS)* Share of sectoral is calculated based on foreign exports trade realization (BPS), Jan-Dec 2007 and Jan-Dec 2008

178 Appendices

Description2003 2004 2005 2006 2007 2008*

Volume Share(%) Volume Share(%) Volume Share(%) Volume Share(%) Volume Share(%) Volume Share(%)

TotalExport 165,171 100.0 196,938 100 206,652 100.0 288,215 100.0 307,846 100.0 301,198 100.0

Agriculture 2,075 1.3 2,351 1.2 2,273 1.1 4,900 1.7 4,310 1.4 5,422 1.8

Coffee 335 0.2 383 0.2 440 0.2 401 0.1 333 0.1 490 0.2

Tea 89 0.1 63 0.0 101 0.0 37 0.0 85 0.0 97 0.0

Spice 126 0.1 130 0.1 132 0.1 114 0.0 119 0.0 125 0.0

Tobacco 29 0.0 31 0.0 84 0.0 17 0.0 93 0.0 109 0.0

Cocoa 278 0.2 313 0.2 440 0.2 383 0.1 484 0.2 492 0.2

Shrimps 140 0.1 144 0.1 125 0.1 140 0.0 111 0.0 164 0.1

Others 1,077 0.7 1,288 0.7 951 0.5 3,807 1.3 3,085 1.0 3,944 1.3

Mining 116,212 70.4 142,853 72.5 153,129 74.1 221,637 76.9 235,194 76.4 230,416 76.5

Copper 2,489 1.5 2,043 1.0 2,527 1.2 2,313 0.8 2,126 0.7 1,325 0.4

Nickel 2,640 1.6 3,686 1.9 3,447 1.7 83 0.0 43 0.0 50 0.0

Coal 93,058 56.3 119,239 60.5 129,596 62.7 189,356 65.7 206,011 66.9 195,601 64.9

Bauxite 1,053 0.6 1,257 0.6 2,462 1.2 7,353 2.6 11,563 3.8 15,511 5.1

Others 16,971 10.3 16,628 8.4 15,098 7.3 22,531 7.8 15,451 5.0 17,929 6.0

Manufacturing 46,884 28.4 51,734 26.3 51,250 24.8 61,678 21.4 68,342 22.2 65,360 21.7Textile and Textile Product

1,722 1.0 1,837 0.9 1,786 0.9 1,935 0.7 1,898 0.6 1,832 0.6

- Garments 355 0.2 360 0.2 400 0.2 446 0.2 450 0.1 481 0.2

Wood Products 6,123 3.7 5,892 3.0 3,915 1.9 4,329 1.5 2,611 0.8 2,284 0.8

- Plywoods 3,456 2.1 2,622 1.3 2,916 1.4 2,392 0.8 464 0.2 345 0.1

Palm Oil 6,676 4.0 9,778 5.0 10,269 5.0 12,204 4.2 11,610 3.8 13,686 4.5

Chemical Product 4,743 2.9 4,439 2.3 7,055 3.4 4,727 1.6 13,073 4.2 10,389 3.4

Metal Product 318 0.2 502 0.3 399 0.2 3,490 1.2 10,238 3.3 11,203 3.7

Electrical Appliances 444 0.3 517 0.3 730 0.4 369 0.1 674 0.2 664 0.2

Cement 4,398 2.7 5,148 2.6 5,438 2.6 6,418 2.2 6,839 2.2 4,392 1.5

Paper 3,205 1.9 3,513 1.8 5,819 2.8 14,306 5.0 6,479 2.1 6,647 2.2

Rubber Products 2,031 1.2 2,535 1.3 335 0.2 6,883 2.4 409 0.1 383 0.1

Others 17,224 10.4 17,574 8.9 15,503 7.5 7,018 2.4 13,597 4.4 13,055 4.3

Table 10. Volume of Non-Oil/Gas Exports by Commodities

(thousands of ton)

*) Provisional figures

179Appendices

Countries2003 2004 2005 2006 2007 2008

ValueShare(%)

ValueShare(%)

ValueShare(%)

ValueShare(%)

ValueShare(%)

Value Share(%)

Africa 1,255 2.6 1,301 2.4 1,669 2.5 1,996 2.48 2,466 2.6 3,259 3.0

America 8,374 17.1 9,109 16.7 11,117 16.7 12,895 16.0 13,685 14.7 15,625 14.5

United States 7,140 14.6 7,664 14.1 9,342 14.0 10,629 13.2 11,176 12.0 12,459 11.6

Latin America 525 1.1 655 1.2 935 1.4 1,316 1.6 1,513 1.6 1,927 1.8

Canada 390 0.8 460 0.8 468 0.7 543 0.7 552 0.6 649 0.6

Others 320 0.7 331 0.6 372 0.6 407 0.5 443 0.5 590 0.5

Asia 28,937 59.2 33,751 61.9 41,605 62.3 50,697 62.9 59,847 64.3 69,253 64.4

Asean 10,239 20.9 12,251 22.5 14,610 21.9 16,679 20.7 20,032 21.5 24,074 22.4

Brunei Darussalam 31 0.1 28 0.1 36 0.1 39 0.0 42 0.0 59 0.1

Malaysia 2,346 4.8 2,727 5.0 3,284 4.9 3,901 4.8 4,702 5.0 6,195 5.8

Philipine 965 2.0 1,411 2.6 1,414 2.1 1,416 1.8 1,862 2.0 1,915 1.8

Singapore 5,111 10.5 5,918 10.9 7,080 10.6 7,912 9.8 8,912 9.6 10,516 9.8

Thailand 1,108 2.3 1,485 2.7 1,980 3.0 2,126 2.6 2,763 3.0 3,269 3.0

Myanmar 68 0.1 568 0.1 652 1.0 1,027 1.3 1,355 1.5 1,701 1.6

Vietnam 558 1.1 56 1.0 73 0.1 148 0.2 271 0.3 237 0.2

Cambodia 51 0.1 56 0.1 89 0.1 107 0.1 121 0.1 178 0.2

Laos 0 0.0 1 0.0 2 0.0 4 0.0 4 0.0 4 0.0

Hong Kong 1,286 2.6 1,296 2.4 1,456 2.2 1,721 2.1 1,749 1.9 1,823 1.7

India 1,726 3.5 2,147 3.9 2,898 4.3 3,517 4.4 4,898 5.3 6,793 6.3

Iraq 17 0.0 50 0.1 86 0.1 72 0.1 12 0.0 262 0.2

Japan 7,055 14.4 8,266 15.2 9,853 14.8 12,253 15.2 13,365 14.3 13,419 12.5

South Korea 1,827 3.7 1,783 3.3 2,689 4.0 3,408 4.2 3,814 4.1 4,217 3.9

Pakistan 306 0.6 405 0.7 629 0.9 777 1.0 889 1.0 1,393 1.3

China 2,756 5.6 3,317 6.1 4,015 6.0 5,624 6.98 6,808 7.3 7,344 6.8

Saudi Arabia 409 0.8 375 0.7 526 0.8 641 0.8 947 1.0 1,422 1.3

Taiwan 1,220 2.5 1,473 2.7 1,814 2.7 2,306 2.9 2,389 2.6 2,857 2.7

Others 2,096 4.3 2,388 4.4 3,016 4.5 3,692 4.6 4,943 5.3 5,648 5.2

Australia/Oceania 1,360 2.8 1,325 2.4 1,525 2.3 2,008 2.5 2,489 2.7 2,702 2.5

Europe 8,950 18.3 8,996 16.5 10,836 16.2 12,983 16.1 14,656 15.7 16,768 15.6

- European Community (EU) 8,424 17.2 8,320 15.3 10,131 15.2 12,159 15.1 13,548 14.5 15,252 14.2

Netherlands 1,425 2.9 838 3.2 2,148 3.2 2,633 3.3 2,831 3.0 3,851 3.6

Belgium & Luxemburg 889 1.8 623 1.5 988 1.5 1,144 1.4 1,315 1.4 1,374 1.3

United Kingdom 1,140 2.3 1,546 2.2 1,282 1.9 1,446 1.8 1,465 1.6 1,569 1.5

Italy 766 1.6 837 1.5 958 1.4 1,213 1.5 1,401 1.5 1,899 1.8

Germany 1,461 3.0 1,739 2.8 1,782 2.7 2,042 2.5 2,324 2.5 2,486 2.3

France 696 1.4 1,210 1.1 614 0.9 721 0.9 803 0.9 950 0.9

Others 2,048 4.2 1,527 2.8 2,360 3.5 2,959 3.7 3,409 3.7 3,124 2.9

- Former Soviet Union 108 0.2 138 0.3 204 0.3 269 0.3 317 0.3 345 0.3

- Other Eastern Europe 305 0.6 236 0.4 - - - - - - - -

- Others 113 0.2 302 0.6 501 0.8 555 0.7 790 0.8 1,171 1.1

TOTAL 48,876 100.0 54,482 100 66,752 100.0 80,578 100.0 93,142 100.0 107,607 100.0

Table 11. Value of Non-Oil/Gas Exports by Destination Country

(million of USD)

180 Appendices

Item2003 2004 2005 2006 2007 2008

ValueShare

(%)Value

Share(%)

ValueShare

(%)Value

Share(%)

ValueShare

(%)Value

Share(%)

TotalImports 33,740 100.0 42,738 100 58,108 100 62,775 100 71,871 100 100,170 100

I. Consumption Goods 2,321 6.9 3,327 7.8 4,165 7.2 4,932 7.9 7,241 10.1 9,033 9.0

1. Food & beverages (primary), mainly or household

324 1.0 476 1.1 407 0.7 583 0.9 797 1.1 850 0.8

2. Food & beverages (processed), mainly or household

807 2.4 866 2.0 1,162 2.0 1,305 2.1 2,070 2.9 1,936 1.9

3. Passenger cars 146 0.4 304 0.7 480 0.8 436 0.7 337 0.5 476 0.5

4. Transport equipment, non industrial 13 0.0 35 0.1 237 0.4 220 0.3 241 0.3 411 0.4

5. Durable consumption goods 175 0.5 322 0.8 484 0.8 574 0.9 1,048 1.5 1,119 1.1

6. Semi-durable consumption goods 294 0.9 378 0.9 620 1.1 754 1.2 1,496 2.1 2,744 2.7

7. Non-durable consumption goods 472 1.4 649 1.5 747 1.3 1,014 1.6 1,104 1.5 1,397 1.4

8. Others 92 0.3 95 0.2 26 0.0 46 0.1 148 0.2 100 0.1

II. Raw Materials 25,665 76.1 31,058 72.7 42,533 73.2 45,697 72.8 51,132 71.1 70,513 70.4

1. Food & beverages (primary), mainly for industry

1,644 4.9 1,871 4.4 1,347 2.3 1,355 2.2 2,010 2.8 3,259 3.3

2. Food & beverages (processed), mainly for industry

724 2.1 715 1.7 811 1.4 916 1.5 991 1.4 1,045 1.0

3. Raw materials (primary), for industry 2,201 6.5 2,623 6.1 2,554 4.4 2,737 4.4 3,155 4.4 4,848 4.8

4. Raw materials (processed), for industry 14,911 44.2 18,892 44.2 22,992 39.6 26,150 41.7 29,223 40.7 41,093 41.0

5. Fuel & lubricants (primary) 4 0.0 16 0.0 14 0.0 31 0.0 10 0.0 35 0.0

6. Fuel & lubricants (processed) 157 0.5 202 0.5 278 0.5 154 0.2 172 0.2 217 0.2

7. Parts & accessories for capital goods 3,105 9.2 3,746 8.8 10,238 17.6 10,630 16.9 11,334 15.8 13,578 13.68. Parts & accessories for transport

equipment 2,918 8.6 3,195 7.5 4,299 7.4 3,724 5.9 4,237 5.9 6,439 6.4

III.CapitalGoods 5,753 17.1 8,354 19.5 11,411 19.6 12,147 19.3 13,498 18.8 20,623 20.6

1. Capital goods (except transport equipment) 5,217 15.5 6,807 15.9 9,033 15.5 9,292 14.8 10,672 14.8 15,571 15.5

2. Passenger car 202 0.6 368 0.9 480 0.8 436 0.7 337 0.5 476 0.5

3. Transport equipment for industry 334 1.0 1,178 2.8 1,897 3.3 2,419 3.9 2,489 3.5 4,576 4.6

Table 12. Value of Non-Oil/Gas Imports by Group of Commodities

(million US$)

181Appendices

Description2003 2004 2005 2006 2007 2008

VolumeShare

(%)Volume

Share(%)

VolumeShare

(%)Volume

Share(%)

VolumeShare

(%)Volume

Share(%)

TotalImports 41,217 100 44,940 100 53,097 100 55,810 100.0 59,390 100 66,896 100

I. Consumption Goods 3,377 8.2 2,958 7.8 3,502 6.6 3,496 6.3 5,254 8.8 3,955 5.9

1. Food & beverages (primary) mainly or household 593 1.4 889 1.1 882 1.7 980 1.8 1,174 2.0 1,280 1.9

2. Food & beverages (processed), mainly or household

2,353 5.7 1,381 2.0 1,785 3.4 1,680 3.0 3,134 5.3 1,648 2.5

3. Passenger cars 20 0.0 36 0.7 57 0.1 49 0.1 42 0.1 48 0.1

4. Transport equipment, non industrial 11 0.0 25 0.1 45 0.1 49 0.1 53 0.1 73 0.1

5. Durable consumption goods 72 0.2 133 0.8 165 0.3 169 0.3 233 0.4 229 0.3

6. Semi-durable consumption goods 189 0.5 304 0.9 313 0.6 306 0.5 355 0.6 400 0.6

7. Non-durable consumption goods 136 0.3 189 1.5 253 0.5 261 0.5 258 0.4 269 0.4

8. Others 5 0.0 1 0.2 1 0.0 2 0.0 4 0.0 7 0.0

Military Equipment 0.0 0.0 0.0 0.0

Others 0.0 0.0 0.0 0.0

II. Raw Material 36,895 89.5 40,787 72.7 47,504 89.5 50,284 90.1 52,198 87.9 60,301 90.1

1. Food & beverages (primary), mainly for industry 5,341 13.0 5,967 4.4 5,807 10.9 6,024 10.8 6,261 10.5 7,681 11.5

2. Food & beverages (processed), mainly for industry

1,719 4.2 1,272 1.7 1,992 3.8 1,937 3.5 1,600 2.7 1,319 2.0

3. Raw materials (primary), for industry 11,614 28.2 11,242 6.1 12,158 22.9 13,250 23.7 12,873 21.7 14,129 21.1

4. Raw materials (processed), for industry 17,193 41.7 20,923 44.2 25,626 48.3 27,309 48.9 29,313 49.4 34,563 51.7

5. Fuel & lubricants (primary) 29 0.1 85 0.0 97 0.2 127 0.2 72 0.1 137 0.2

6. Fuel & lubricants (processed) 184 0.4 265 0.5 295 0.6 147 0.3 167 0.3 158 0.2

7. Parts & accessories for capital goods 378 0.9 521 8.8 903 1.7 867 1.6 1,189 2.0 1,410 2.1

8. Parts & accessories for transport equipment 438 1.1 513 7.5 626 1.2 623 1.1 723 1.2 905 1.4

9. Others 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0 0 0.0

III.CapitalGoods 945 2.3 1,194 19.5 2,091 3.9 2,030 3.6 1,939 3.3 2,640 3.9

1. Capital goods (except transport equipment) 854 2.1 879 15.9 1,268 2.4 1,322 2.4 1,562 2.6 1,909 2.9

2. Passenger car 20 0.0 36 0.9 57 0.1 49 0.1 42 0.1 48 0.1

3. Transport equipment for industry 71 0.2 279 2.8 765 1.4 659 1.2 334 0.6 682 1.0

Table 13. Value of Non-Oil/Gas Imports by Group of Commodities

(thousands of ton)

182 Appendices

Countries2003 2004 2005 2006 2007 2008

ValueShare

(%)Value

Share(%)

ValueShare

(%)Value

Share(%)

ValueShare

(%)Value

Share(%)

Africa 418 1,2 565 1,3 614 1,1 597 1,0 661 0,9 1.543 1,5

America 4.699 13,9 5.898 13,8 6.278 10,8 6.606 10,5 8.141 11,3 12.858 12,8United States 3.503 10,4 4.055 9,5 4.290 7,4 4.576 7,3 5.467 7,6 8.798 8,8Latin America 710 2,1 989 2,3 1.175 2,0 1.221 1,9 1.529 2,1 2.170 2,2Canada 442 1,3 818 1,9 749 1,3 713 1,1 1.071 1,5 1.652 1,6Others 45 0,1 35 0,1 64 0,1 96 0,2 75 0,1 237 0,2

Asia 20.745 61,5 25.593 59,9 40.543 69,8 43.134 68,7 48.480 67,5 67.132 67,0

ASEAN 6.031 17,9 7.709 18,0 16.386 28,2 17.907 28,5 19.131 26,6 23.153 23,1

Brunei Darussalam 4 0,0 5 0,0 8 0,0 4 0,0 4 0,0 23 0,0

Malaysia 1.107 3,3 1.394 3,3 1.934 3,3 2.271 3,6 2.902 4,0 4.431 4,4Philipine 245 0,7 279 0,7 458 0,8 445 0,7 532 0,7 978 1,0Singapore 2.241 6,6 3.039 7,1 9.874 16,99 11.119 17,71 10.506 14,6 11.282 11,3Thailand 2.178 6,5 2.866 6,7 3.961 6,82 3.787 6,03 4.481 6,2 5.512 5,5Myanmar 21 0,1 104 0,2 123 0,2 258 0,4 657 0,9 770 0,8Vietnam 234 0,7 20 0,0 26 0,0 21 0,0 32 0,0 72 0,1Cambodia 2 0,0 1 0,0 2 0,0 2 0,0 2 0,0 44 0,0Laos 0 0,0 0 0,0 0 0,0 0 0,0 3 0,0 0 0,0

Hong Kong 303 0,9 323 0,8 1.281 2,2 1.633 2,6 1.916 2,7 2.296 2,3India 869 2,6 1.227 2,9 1.075 1,9 1.429 2,3 1.744 2,4 3.831 3,8Iraq 0 0,0 0 0,0 0 0,0 0 0,0 0 0,0 78 0,1Japan 6.432 19,1 7.385 17,3 10.303 17,7 9.275 14,8 9.371 13,0 13.804 13,8South Korea 2.071 6,1 2.321 5,4 3.272 5,6 3.425 5,5 3.760 5,2 4.429 4,4Pakistan 63 0,2 61 0,1 76 0,1 66 0,1 66 0,1 607 0,6China 3.110 9,2 4.370 10,2 5.439 9,4 6.701 10,7 9.341 13,0 12.660 12,6Saudi Arabia 224 0,7 236 0,6 213 0,4 248 0,4 352 0,5 947 0,9Taiwan 1.130 3,3 1.420 3,3 1.847 3,2 1.879 3,0 2.169 3,0 2.864 2,9Others 511 1,5 540 1,3 650 1,1 570 0,9 628 0,9 2.464 2,5

Australia/Oceania 2.016 6,0 2.735 6,4 2.720 4,7 3.322 5,3 3.589 5,0 4.437 4,4

5.863 Europe 5.863 17,4 7.948 18,6 7.953 13,7 9.117 14,5 11.000 15,3 14.200 14,2- European Community (EU) 5.002 14,8 6.598 14,7 6.632 11,4 7.724 12,3 9.340 13,0 11.545 11,5

Netherlands 508 1,5 314 1,6 356 0,6 618 1,0 618 0,9 1.571 1,6Belgium & Luxemburg 250 0,7 704 1,2 716 1,2 349 0,6 383 0,5 778 0,8United Kingdom 630 1,9 2.174 1,7 2.160 3,7 714 1,1 786 1,1 1.099 1,1Italy 474 1,4 604 2,0 622 1,1 616 1,0 756 1,1 1.235 1,2Germany 1.615 4,8 545 0,8 458 0,8 2.149 3,4 2.627 3,7 3.035 3,0France 638 1,9 853 4,8 738 1,3 1.184 1,9 1.632 2,3 1.136 1,1Others 889 2,6 1.403 3,1 1.584 2,7 2.094 3,3 2.538 3,5 2.691 2,7

- Former Soviet Union 161 0,5 280 0,7 442 0,8 469 0,7 443 0,6 976 1,0- Other Eastern Europe 79 0,2 103 1,2 - - - -- Others 620 1,8 967 2,3 879 1,5 924 1,5 1.217 1,7 1.678 1,7

TOTAL 33.740 100,0 42.738 100,0 58.108 100,0 62.775 100,0 71.871 100,0 100.170 100,0

Table 14. Value of Non-Oil/Gas Imports by Country of Origin (C&F)

(millions of USD)

183Appendices

Country 2003 2004 2005 2006 2007 2008

Exports value2)

Oil and Oil Products 7,469 7,605 9,523 10,911 12,496 15,350

Gas

-LNG 6,744 7,304 8,734 9,953 9,723 12,785

-LPG 326 366 477 175 210 79

-Natural Gas 695 1,010 1,509 1,910 2,443 3,469

Total 15,234 16,285 20,243 22,949 24,872 31,683

Exports volume

Oil & Oil Products (millions of barrel) 261 212 186 177 178 162

Gas

-LNG (millions of MMBTU)3) 1,387 1,323 1,215 1,172 1,080 1,068

-LPG (thousands of metric ton) 1,170 1,101 1,076 364 337 101

-Natural Gas (millions of MMBTU)3) 170 223 250 265 293 303

Table 15. Exports of Oil/Gas 1)

1) Free on board value2) Consist of crude oil and oil products in million of USD3) MMBTU : Million British Thermal Unit

184 Appendices

EndofPeriod

Narrow Money 1) Quasi Money 2) Broad Money 3)

Outstanding Share(%) Outstanding Share(%) OutstandingChange(%)

Annual Quarterly

2003 223,799 23.42 731,893 76.58 955,692 8.1 3.17

20044) 253,818 24.56 779,710 75.44 1,033,528 8.1 4.70

20054) 281,905 23.43 921,310 76.57 1,203,215 16.4 4.60

20064)

January 281,412 23.63 909,422 76.37 1,190,834 17.2

February 277,265 23.22 916,599 76.78 1,193,864 18.0

March 277,293 23.20 917,774 76.80 1,195,067 17.1 -0.68

April 282,400 23.57 915,613 76.43 1,198,013 14.7

May 304,663 24.62 932,840 75.38 1,237,503 18.3

June 313,415 24.99 940,590 75.01 1,254,005 16.8 4.93

July 311,822 24.98 936,414 75.02 1,248,236 14.7

August 329,372 25.93 941,006 74.07 1,270,378 13.8

September 333,905 25.86 957,491 74.14 1,291,396 12.3 2.98

October 346,414 26.13 979,244 73.87 1,325,658 13.7

November 342,645 25.60 995,910 74.40 1,338,555 14.6

December 361,073 26.13 1,021,001 73.87 1,382,074 14.9 7.00

2007 4)

January 344,840 25.28 1,019,067 74.72 1,363,907 14.5

February 346,573 25.36 1,020,247 74.64 1,366,820 14.5

March 341,833 24.84 1,034,114 75.16 1,375,947 15.1 -0.44

April 351,259 25.39 1,032,318 74.61 1,383,577 15.5

May 352,629 25.31 1,040,468 74.69 1,393,097 12.6

June 381,376 26.27 1,070,598 73.73 1,451,974 15.8 5.53

July 397,823 27.01 1,075,129 72.99 1,472,952 18.0

August 402,035 27.03 1,085,506 72.97 1,487,541 17.1

September 411,281 27.19 1,101,475 72.81 1,512,756 17.1 4.19

October 414,996 27.12 1,115,149 72.88 1,530,145 15.4

November 424,435 27.27 1,131,765 72.73 1,556,200 16.3

December 460,842 28.05 1,182,361 71.95 1,643,203 18.9 8.60

2008 4)

January 420,298 26.45 1,168,664 73.55 1,588,962 16.5

February 411,327 25.77 1,184,763 74.23 1,596,090 16.8

March 419,746 26.45 1,167,049 73.55 1,586,795 15.3 -3.43

April 427,028 26.54 1,181,846 73.46 1,608,874 16.3

May 438,544 26.80 1,197,839 73.20 1,636,383 17.5

June 466,708 27.46 1,232,772 72.54 1,699,480 17.0 7.10

July 458,379 27.30 1,220,641 72.70 1,679,020 14.0

August 452,445 27.00 1,222,985 73.00 1,675,430 12.6

September 491,729 27.81 1,276,521 72.19 1,768,250 16.9 4.05

October 471,354 26.14 1,331,578 73.86 1,802,932 17.8

November 475,053 25.80 1,366,110 74.20 1,841,163 18.3

December 466,379 24.76 1,417,472 75.24 1,883,851 14.6 6.50

Table 16. Money Supply

1) Consists of currency and demand deposits2) Consists of time and saving deposits in rupiah and foreign currency, and demand deposits in foreign currency held by residents3) Consists of narrow money (M1) and quasi money4) Excluding frozen banks data (7 banks since April 4, 1998, 3 banks since August 21, 1998, 38 banks since March 13, 1999, 1 bank since April 23, 1999, 1 bank since January 28, 2008, 2 banks since October

20, 2000, and 1 bank since October 30, 2001)


185Appendices

Item 2005 2006 2007 20082008

I II III IV

Money Supply

Broad Money (M2) 169,687 178,859 261,129 240,647 -56,408 112,685 68,770 115,601

Narrow Money (M1) 28,087 79,168 99,769 5,537 -41,096 46,962 25,021 -25,350

Currency 15,051 26,693 32,410 25,959 -18,424 24,458 33,713 -13,788

Demand Deposits 13,036 52,475 67,359 -20,422 -22,672 22,504 -8,692 -11,562

Quasi Money1) 141,600 99,691 161,360 235,110 -15,312 65,723 43,749 140,951

Affecting Factors:

Net foreign assets 49,436 100,182 111,438 77,644 24,346 13,587 -36,934 76,645

Net claims on central government 882 7,587 -9,010 -118,261 -121,502 -16,331 -11,258 30,830

Claims on business sector 123,039 98,228 203,925 307,831 34,504 113,600 97,582 62,145

Claims on official entities/state enterprises 1,140 10,887 17,206 10,419 -6,507 7,658 7,185 2,082

Claims on private enterprises and individuals 121,899 87,341 186,719 297,412 41,011 105,941 90,397 60,062

Net other items -3,672 -15,334 -57,027 -26,568 6,243 1,829 19,379 -54,019

Table 17. Changes in Money Supply and its Affecting Factors

1) Consists of time and saving deposits in rupiah and foreign currency, and demand deposits in foreign currency held by residents


186 Appendices

MaturityDecember2003 December2004 December2005 December2006 December2007 December2008

RupiahForeign

CurrencyRupiah

ForeignCurrency

RupiahForeignCurrency




StateBanks

1 Month 6.61 1.60 6.17 3.90 11.84 3.98 8.71 4.24 7.00 3.89 10.14 4.57

3 Month 7.11 1.68 6.47 2.86 11.71 4.00 9.60 4.11 7.33 4.09 10.47 5.44

6 Month 7.96 1.90 6.99 6.45 10.21 3.82 10.53 4.24 7.13 4.07 10.61 4.14

12 Month 10.55 2.13 7.17 2.34 11.49 3.58 11.80 4.02 8.41 3.65 11.44 3.75

24 Month 16.13 2.36 8.09 2.10 12.46 3.90 11.86 3.87 10.80 3.69 7.84 3.52

Private National Banks

1 Month 6.63 1.17 6.58 1.95 12.23 3.53 9.16 4.00 7.31 3.94 11.30 4.33

3 Month 7.20 1.40 6.98 2.51 11.95 3.47 9.88 3.74 7.64 4.14 11.65 4.94

6 Month 8.65 1.57 7.38 2.51 10.14 3.11 10.79 4.13 7.90 4.02 10.05 4.51

12 Month 10.07 2.32 7.12 2.64 9.90 3.02 11.48 3.71 7.87 4.27 9.36 3.72

24 Month 15.55 3.01 8.87 … 10.18 … 11.96 2.75 11.59 3.92 9.00 4.04

RegionalGovernmentBanks

1 Month 6.78 1.20 6.86 7.00 10.28 3.32 8.77 3.78 7.24 3.73 9.83 3.28

3 Month 7.31 1.31 7.09 … 10.86 4.06 9.35 4.04 6.76 4.01 9.38 3.27

6 Month 8.63 1.41 7.29 … 9.92 2.04 10.83 3.81 7.74 3.96 10.11 4.47

12 Month 10.84 2.75 6.82 … 9.46 2.05 11.47 4.43 8.73 4.44 8.81 3.25

24 Month 17.01 … 9.47 … 8.50 … 10.94 … 10.17 0.00 7.38 …

Foreign Banks & Joint Banks

1 Month 6.54 1.70 6.06 1.82 10.51 3.45 8.48 4.28 7.27 4.40 10.78 3.35

3 Month 6.66 1.67 5.81 2.10 11.67 3.63 9.50 4.47 7.30 4.44 11.97 3.31

6 Month 6.38 2.00 6.02 1.94 10.38 3.48 10.80 4.34 7.58 4.63 10.66 3.47

12 Month 8.61 2.45 6.09 2.20 12.53 2.78 10.96 3.48 8.29 4.42 10.24 3.02

24 Month 15.80 3.10 4.74 … 9.55 … 10.52 4.35 9.83 4.80 9.47 …

CommercialBanks

1 Month 6.62 1.26 6.43 1.98 11.98 3.70 8.96 4.14 7.19 4.01 10.75 4.28

3 Month 7.14 1.54 6.71 2.14 11.75 3.68 9.71 4.11 7.42 4.26 11.16 4.55

6 Month 8.25 1.84 7.12 4.90 10.17 3.56 10.70 4.22 7.65 4.27 10.34 4.16

12 Month 10.39 2.23 7.07 2.32 10.95 3.07 11.63 3.71 8.24 4.21 10.43 3.58

24 Month 16.13 2.71 8.12 2.10 12.39 3.90 11.84 4.22 10.83 4.52 8.62 3.74

Table 18. Interest Rates on Time Deposits in Rupiah and Foreign Currency by Group of Banks1)

1) Weighted average, at the end of periods

(percent per annum)

187Appendices

PeriodValue of Transaction(BillionsofRupiah)

WeightedAverageInterestRate(PercentperAnnum)

2003 1)

January - March 3,360 10.63April - June 3,680 9.77July - September 3,310 8.00October - December 4,044 7.42

2004 1)


2005 1)


2006 1)


2007 1)


2008 1) January 12,362 6.33 February 12,947 7.09 March 12,105 7.85 January - March 12,482 7.05 April 9,469 7.58 May 8,381 7.98 June 5,649 8.47 April - June 7,850 7.93 July 8,494 8.96

August 10,136 9.21September 8,482 9.53July - September 9,011 9.23October 6,514 9.99November 3,418 9.91December 4,112 9.66October - December 4,681 9.87

Table 19. Interbank Money Market in Jakarta (Average Transaction Volume Morning & Evening Session - Various Maturity) 1)

1) Daily average figures

188 Appendices

Table 20. Issuance, Repayment, and Outstanding of Bank Indonesia Certificates (SBIs)

Notes: SBI was introduced in February 1984. Since July 1998, the selling of SBIs was executed by Stop Out Rate (SOR) system action1) Daily Average

EndofPeriod Issuance Repayment Outstanding1)

January - December 2003 1,225,665 1,197,376 105,402January - December 2004 1,194,384 1,197,054 102,732

2005January 118,995 100,671 114,756February 118,437 117,733 122,570March 123,692 188,328 122,851April 110,781 53,995 92,516May 98,141 111,002 104,283June 148,605 149,109 103,166July 94,859 99,501 96,786August 83,682 95,045 93,629September 46,573 40,996 51,972October 38,791 40,891 44,252November 56,365 38,394 46,699December 80,628 65,257 70,047





189Appendices

Items 20031)20041) 2005 2006 2007 2008

Budget2) Realization Budget-rII2) Realization Budget-r2) Realization 3) Budget-r2) Realization

3) Budget-r2) Realization 3)

Government Revenues and Grants 341,396 349,934 403,366 540,126 495,154 659,115 637,797 694,088 708,658 894,990 978,616

Domestic Revenues 340,929 349,300 403,104 532,671 493,858 654,882 635,940 690,265 706,954 892,042 976,316

Tax Revenues 242,048 272,175 280,559 351,974 346,997 425,053 409,055 492,011 491,835 609,228 658,667

Domestic Taxes 230,934 260,224 267,817 334,403 331,759 410,226 395,822 474,551 470,906 580,248 622,355

Income Tax (PPh) 115,016 133,968 119,515 180,253 175,543 213,698 208,834 251,748 238,740 305,016 327,499

Non-Oil/Gas 95,293 120,835 99,020 143,017 140,403 175,012 165,644 214,481 194,736 251,366 250,480

Oil/Gas 19,723 13,133 20,494 37,236 35,140 38,686 43,190 37,268 44,004 53,650 77,019

Value Added Tax (PPN) 77,082 86,273 102,573 102,671 101,295 132,876 123,033 152,057 155,187 195,464 209,639

Land and Building Tax (PBB) 8,677 8,031 11,684 13,375 16,184 18,154 20,716 22,026 23,619 25,266 25,358

Duties on Land and Building Transfer 2,229 2,668 3,001 3,661 3,429 4,386 3,179 3,966 5,936 5,431 5,574

Excise Duties 26,277 27,671 29,173 32,245 33,256 38,523 37,772 42,035 44,681 45,718 51,252

Other Taxes 1,654 1,614 1,872 2,198 2,050 2,590 2,287 2,720 2,743 3,354 3,034

International Trade Taxes 11,114 11,951 12,742 17,570 15,239 14,827 13,233 17,460 20,929 28,979 36,311

Import Duties 10,885 11,636 12,444 16,591 14,921 13,583 12,142 14,418 16,691 17,821 22,765

Export Tax 230 315 298 980 318 1,244 1,091 3,042 4,238 11,158 13,547

Non-Tax Revenues 98,880 77,125 122,546 180,697 146,860 229,829 226,885 198,254 215,119 282,815 317,649

National resources Revenues 67,739 47,241 96,717 144,361 110,441 165,695 164,773 115,053 132,893 192,790 222,866

Oil 48,871 28,248 72,742 102,196 72,805 122,964 125,146 78,235 99,156 149,111 168,871

Gas 12,631 15,754 18,801 36,364 30,983 36,825 32,941 29,484 25,628 33,836 42,595

Natural Resources 6,238 3,238 5,174 5,801 6,653 5,906 6,686 7,334 8,109 9,843 11,400

profit Transfer from SOEs 12,833 11,454 10,644 12,000 12,777 20,800 21,451 21,800 23,222 31,244 29,088

Bank Indonesia Surplus 0 0 13,669 13,669 0 0

Other Non-Tax Revenues (PNPB) 18,308 18,430 15,185 24,336 23,643 43,334 40,661 47,731 45,335 58,781 65,695

Grants 468 634 262 7,455 1,296 4,233 1,857 3,823 1,704 2,948 2,300

Government Expenditures 376,505 374,351 427,176 565,070 509,622 699,099 670,591 752,373 757,245 1,017,389 985,663

Central Government Expenditures 256,191 255,309 297,454 411,667 359,158 478,250 444,197 498,172 503,977 724,966 693,031

Routine Expendiures 186,944 184,438 236,003 326,924 301,557 408,470 385,266 426,488 439,570 617,945 619,758

Personnel Expenditures 47,662 56,738 52,743 61,167 54,339 79,075 72,873 97,983 90,373 123,542 112,763

Material Expenditures 14,992 17,280 15,518 42,312 29,240 55,992 47,066 61,824 54,150 67,476 55,184

Interest Payment 65,351 65,651 62,486 60,982 65,151 82,495 79,026 83,555 79,551 94,794 88,623

Domestic Debt 46,356 41,276 39,286 42,307 43,496 58,155 54,897 58,803 53,822 65,814 59,923

Foreign Debt 18,995 24,375 23,200 18,675 21,655 24,340 24,129 24,752 25,728 28,980 28,700

Subsidies 43,899 26,362 91,529 119,089 120,784 107,628 107,410 105,073 150,214 234,405 275,291

Fuel 30,038 14,527 69,025 89,194 95,737 80,609 85,136 55,604 83,792 187,108 223,013

Non-Fuel 9,901 10,995 16,076 23,643 17,892 21,367 15,911 49,469 49,308 47,297 52,277

Tax born by Government 3,960 840 6,429 6,253 7,156 5,651 6,363 0 17,114 0 0

Social Aid 41,018 43,392 52,272 50,678 59,702 56,934

Other Routine Expenditures 15,042 18,407 13,727 43,374 32,043 42,262 35,500 25,781 14,604 38,025 30,964

Development Expenditures 69,247 70,871 61,450 84,743 57,601 69,780 58,931 71,684 64,407 107,021 73,273

Rupiah Financing 47,510 50,500 48,018 54,747 33,454 55,258 52,292 70,826 66,223 107,617 74,615

Project Aid 21,737 20,371 13,432 29,997 24,147 25,475 19,829 23,205 14,391 21,751 14,865

Regional Expenditures 120,314 119,042 129,723 153,402 150,464 220,850 226,394 254,201 253,268 292,423 292,632

Balancing Funds 111,070 112,187 122,868 146,160 143,251 216,798 222,348 244,608 244,007 278,436 278,913

Revenues Sharing 31,370 26,928 36,700 52,567 49,729 59,564 65,133 62,726 62,947 77,727 78,619

General Allocation Funds 76,978 82,131 82,131 88,766 88,762 145,664 145,652 164,787 164,823 179,507 179,507

Special Allocation Fund 2,723 3,128 4,036 4,828 4,760 11,570 11,563 17,094 16,237 21,202 20,787

Special Autonomy and Equalization Funds 9,244 6,855 6,855 7,243 7,213 4,052 4,047 9,593 9,261 13,987 13,719

Table 21. State Budget

Source: Ministry of Finance1) State Budget Figures2) State Budget Approved by Parliament3) Preliminary realization January 1 - December 31, 2008 (unaudited, revised version I)


190 Appendices

Items 20031)

2004 2005 2006 2007 2008

Budget2) Realization 3) Budget-PII2) Realization

3) Budget-PII2) Realization 3) Budget-P2)Realization

3) Budget-P2)Realization 3)

I. Domestic Financing 34,562 40,556 51,867 29,786 24,659 55,258 52,292 70,826 66,223 108,440 75,115

1.Domestic Banks (SILPA/SIKPA) 4) 10,705 19,199 25,727 4,271 700 17,907 15,223 10,622 8,420 -11,700 -11,700

2.Non-Domestic Banks 23,857 21,358 26,141 25,515 23,959 37,351 37,069 60,204 57,803 120,140 86,815

a.Privatization 7,301 5,000 3,520 0 0 1,000 400 2,000 304 500 82

b.Asset Recovery 19,661 5,000 15,751 8,625 6,558 2,580 2,684 1,658 2,413 3,850 2,810

c. Domestic Bonds, net -3,105 11,358 6,870 22,086 22,596 35,772 35,986 58,546 57,086 117,790 85,923

i. Government Bonds 11,319 32,500 23,362 43,315 46,824 43,315 47,324 99,266 117,149 157,000 126,245

ii.Domestic Debt/Bond Amortization

-14,424 -21,142 -16,492 -21,229 -24,228 -7,543 -11,339 -40,720 -60,063 -39,210 -40,322

d.Government Investment Fund - - - -5,195 -5,195 -2,000 -2,000 -2,000 -2,000 -2,000 -2,000

II.Foreign Financing, net 548 -16,139 -28,057 -4,842 -10,260 -15,274 -19,316 -12,540 -23,924 -13,114 -18,708

1.Gross Drawing 20,360 28,237 18,434 35,541 26,870 37,550 33,409 42,210 33,998 48,141 44,467

Program Loan 1,792 8,500 5,059 11,270 12,309 12,075 13,580 19,005 19,608 26,390 29,602

Project Loan 18,568 19,737 13,375 24,271 14,561 25,475 19,829 23,205 14,391 21,751 14,865

International Obligation

2.Amortization -19,812 -44,376 -46,491 -40,383 -37,130 -52,824 -52,725 -54,751 -57,922 -61,255 -63,175

Net Financing 35,109 24,418 23,810 24,944 14,399 39,984 32,975 58,285 42,299 95,326 56,407

Table 22. Budget Deficit Financing

Source: Ministry of Finance1) State Budget Figures2) State Budget Approved by Parliament3) Preliminary realization January 1 - December 31, 2007 (unaudited, revised version IV)4) Excessed Budget Financing (SILPA) and Shortage of Budget Financing (SIKPA)


191Appendices

EndofPeriod

DemandDeposits TimeDepositsSaving

DepositsTotal

RupiahForeign

CurrencySubTotal Rupiah2) Foreign

CurrencySubTotal

2003 155,898 68,861 224,759 356,287 76,840 433,127 244,440 902,326

2004March 155,529 72,712 228,241 331,602 73,782 405,384 247,991 881,616 June 163,796 81,279 245,075 337,841 71,091 408,932 261,041 915,048 September 165,622 80,175 245,797 340,411 71,038 411,449 270,996 928,242 December 171,661 75,482 247,143 352,723 68,567 421,290 296,647 965,080

2005March 177,592 77,170 254,762 351,599 70,055 421,654 284,657 961,073 June 193,561 80,559 274,120 376,493 78,236 454,729 284,415 1,013,264 September 185,917 93,732 279,649 409,322 113,432 522,754 280,749 1,083,152 December 194,533 88,122 282,655 456,739 112,935 569,674 281,757 1,134,086

2006January 194,318 85,801 280,119 457,340 110,384 567,724 274,555 1,122,398 February 196,370 85,175 281,545 468,331 113,043 581,374 271,700 1,134,619 March 193,434 86,276 279,710 471,782 109,631 581,413 268,319 1,129,442 April 194,735 82,182 276,917 475,618 105,932 581,550 270,318 1,128,785 May 214,736 83,862 298,598 483,298 114,485 597,783 275,629 1,172,010 June 215,132 83,240 298,372 489,962 111,595 601,557 279,534 1,179,463 July 211,881 85,835 443,787 485,376 105,907 591,283 281,729 1,316,799 August 231,906 85,826 462,213 487,223 110,214 597,437 284,038 1,343,688 September 230,307 84,318 314,625 500,122 110,062 610,184 291,999 1,216,808 October 236,385 90,630 327,015 504,082 114,363 618,445 299,479 1,244,939 November 240,060 86,751 326,811 515,295 112,006 627,301 309,028 1,263,140 December 251,219 88,568 339,787 511,356 113,234 624,590 334,380 1,298,757



Table 23. Funds Mobilization by Commercial Banks 1)

1) Including deposits owned by the Central Government and non-residents2) Including certificates of deposits


192 Appendices

EndofPeriod

StateBanksRegionalDevelopment

BanksPrivate National Banks

Foreign Banks & Joint Banks

CommercialBanks

WorkingCapital Investment Working

Capital Investment WorkingCapital Investment Working

Capital Investment WorkingCapital Investment

2003 16.18 15.54 19.08 17.20 14.66 15.75 11.02 12.60 15.07 15.68

2004 14.32 14.10 17.54 16.24 13.13 13.91 9.33 11.44 13.41 14.05

2005 15.71 14.98 16.85 15.51 16.95 16.23 14.50 15.55 16.23 15.66

2006

March 15.89 15.05 16.90 15,61 17.13 16.65 14.20 15.14 16.35 15.90

June 15.71 15.09 16.77 15.47 16.93 16.66 13.64 15.69 16.15 15.94

September 15.64 15.11 16.70 15.55 16.50 16.13 12.71 15.00 15.82 15.66

December 15.36 14.98 16.60 15.28 15.41 15.42 11.42 13.21 15.07 15.10

2007

January 15.20 14.75 16.28 15.16 15.34 15.21 10.84 12.50 14,90 14.85

February 15.11 14.70 16.35 15.17 15.16 14.98 10,44 12.22 14.71 14.71

March 14.89 14.49 16.20 15.22 14.84 14.73 10.54 12.48 14.49 14.53

April 14.76 14.44 15.97 15.09 14.54 14.46 10.35 12.21 14.30 14.38

May 14.60 14.22 15.90 15.19 14.25 14.22 10.16 12.06 14.06 14.16

June 14.40 14.03 15.79 15.02 14.07 14.04 9.86 11.57 13.88 13.99

July 14.26 13.81 15.71 14.99 13.84 13.88 9.86 11.56 13.71 13.82

August 14.54 13.98 15.64 14.93 13.50 13.69 9.85 11.37 13.66 13.75

September 13.90 13.43 15.66 14.81 13.24 13.49 10.04 11.32 13.31 13.45

October 13.68 13.27 15.51 14.71 13.13 13.37 10.19 10.53 13.16 13.28

November 13.64 13.19 15.37 14.70 13.12 13.26 10.25 10.70 13.16 13.19

December 13.47 12.93 15.33 14.61 12.96 13.11 10.23 10.56 13.00 13.01

2008

January 13.52 12.90 15.24 14.56 12.98 12.90 10.17 10.19 12.99 12.81

February 13.46 12.82 15.15 14.46 13.04 12.76 10.01 10.21 12.96 12.71

March 13.34 12.69 15.02 14.32 12.96 12.54 10.02 10.72 12.88 12.59

April 13.28 12.64 14.85 14.11 12.94 12.39 10.92 11.25 12.93 12.47

May 13.22 12.58 14.74 13.92 13.02 12.2 10.54 11.49 12.92 12.36

June 13.16 12.73 14.55 13.71 13.12 12.34 10.99 11.79 12.99 12.51

July 13.19 12.70 14.49 13.60 13.35 12.54 11.29 12.10 13.14 12.61

August 13.33 12.86 14.57 13.51 13.75 12.85 11.67 12.41 13.42 12.86

September 13.61 13.12 14.47 13.44 14.42 13.48 12.60 13.16 13.93 13.32

October 14.14 13.47 14.44 13.39 15.29 14.21 13.81 14.11 14.67 13.88

November 14.52 13.82 14.50 13.34 15.81 14.61 14.56 15.26 15.13 14.28

December 14.61 13.85 14.43 13.52 15.90 14.85 14.58 15.00 15.22 14.40

Table 24. Interest Rates on Rupiah Credits by Group of Banks 1)

1) Weighted average

(percent)

193Appendices

1) Excluding inter-bank loans, loans to the Central Government and non-residents, and aid counterpart fund


Item 2003 2004 2005 20062007 2008

Mar Jun Sep Dec Mar Jun Sep Dec

CreditsinRupiah 342,026 438,880 566,444 639,153 640,239 689,779 732,986 793,186 832,491 929,941 1,008,452 1,057,083

Agriculture 20,759 26,604 29,437 34,932 33,715 36,289 37,036 41,123 41,900 46,003 49,463 53,825

Mining 1,546 1,467 2,247 2,658 2,611 2,740 2,599 2,789 2,991 4,220 4,263 4,386

Manufacturing 67,323 77,299 98,096 104,457 102,276 104,302 108,304 115,172 123,331 136,825 144,310 159,486

Trade 74,787 97,988 121,216 145,871 147,758 162,444 173,292 186,881 191,949 216,502 224,149 230,810

Services 68,007 86,045 110,100 126,325 123,768 137,087 147,198 165,965 174,767 199,796 231,048 242,791

Others 109,603 149,476 205,349 224,910 230,111 246,917 264,557 281,256 297,553 326,595 355,219 365,785

CreditsinForeignCurrency

95,917 114,668 123,226 147,984 154,475 165,207 174,275 201,926 196,681 212,178 231,049 243,096

Agriculture 3,548 5,772 7,241 10,071 9,304 10,160 12,044 14,783 14,209 13,811 13,432 12,334

Mining 3,515 6,263 5,627 11,238 12,559 16,185 13,717 22,551 24,646 24,931 26,030 26,154

Manufacturing 55,801 66,304 71,582 77,976 79,857 80,525 81,618 88,636 88,302 95,489 104,293 109,666

Trade 9,470 13,046 12,893 16,525 18,663 19,074 22,987 28,789 20,590 23,800 26,921 27,197

Services 21,123 21,812 24,844 31,313 33,444 37,562 43,301 46,476 48,394 53,093 59,710 67,168

Others 2,460 1,471 1,041 861 649 1,700 607 691 540 1,053 663 577

Total 437,942 553,548 689,669 787,136 794,714 854,986 907,260 995,111 1,029,172 1,142,120 1,239,501 1,300,179

Agriculture 24,307 32,376 36,678 45,003 43,019 46,448 49,081 55,905 56,110 59,814 62,894 66,160

Mining 5,061 7,730 7,873 13,896 15,168 18,925 16,316 25,340 27,636 29,151 30,293 30,541

Manufacturing 123,125 143,603 169,678 182,432 182,132 184,827 189,922 203,808 211,633 232,314 248,603 269,152

Trade 84,257 111,035 134,108 162,396 166,421 181,518 196,279 215,670 212,539 240,302 251,071 258,005

Services 89,129 107,858 134,943 157,638 157,214 174,652 190,497 212,441 223,164 252,891 290,760 309,959

Others 112,063 150,946 206,389 225,771 230,760 248,616 265,165 281,947 298,090 327,648 355,880 366,362

194 Appendices

Table 25. Commercial Bank’s Credits in Rupiah and Foreign Currency by Economic Sector1)


Item 2003 2004 2005 20062007 2008

Mar Jun Sep Dec Mar Jun Sep DecWorkingCapitalCredits

343,626 436,684 557,207 638,265 644,791 691,737 737,554 811,348 837,295 930,142 1,008,102 1,045,758

Agriculture 11,703 18,889 21,014 25,804 24,171 26,227 27,483 31,924 30,968 35,547 37,180 36,532

Mining 2,951 3,575 4,239 8,503 9,967 10,151 7,614 14,693 17,033 18,889 20,823 19,076

Manufacturing 92,045 106,948 130,374 141,670 142,145 143,211 147,640 159,118 167,330 184,081 197,458 213,130

Trade 70,147 91,548 112,072 137,103 140,332 153,414 167,640 185,623 181,962 205,333 213,683 219,601

Services 54,718 64,777 83,120 99,414 97,416 110,117 122,013 138,041 141,909 158,643 183,075 191,057

Others 112,062 150,947 206,388 225,771 230,760 248,617 265,164 281,949 298,093 327,648 355,883 366,362

InvestmentCredits 94,316 116,864 132,463 148,872 149,923 163,249 169,706 183,764 191,877 211,977 231,400 254,421

Agriculture 12,604 13,487 15,664 19,199 18,847 20,222 21,597 23,982 25,141 24,267 25,715 29,628

Mining 2,110 4,155 3,635 5,393 5,202 8,776 8,702 10,647 10,604 10,262 9,470 11,464

Manufacturing 31,080 36,655 39,304 40,763 39,988 41,616 42,281 44,690 44,304 48,233 51,145 56,022

Trade 14,110 19,486 22,036 25,293 26,089 28,104 28,639 30,046 30,577 34,969 37,387 38,405

Services 34,412 43,081 51,824 58,224 59,797 64,531 68,487 74,399 81,251 94,246 107,683 118,902

Others - - - - - - - - - - - -

Total 437,942 553,548 689,669 787,136 794,714 854,986 907,260 995,111 1,029,172 1,142,120 1,239,501 1,300,179

Agriculture 24,307 32,376 36,678 45,003 43,019 46,448 49,081 55,905 56,110 59,814 62,894 66,160

Mining 5,061 7,730 7,873 13,896 15,168 18,925 16,316 25,340 27,636 29,151 30,293 30,541

Manufacturing 123,125 143,603 169,678 182,432 182,132 184,827 189,922 203,808 211,633 232,314 248,603 269,152

Trade 84,257 111,035 134,108 162,396 166,421 181,518 196,279 215,670 212,539 240,302 251,071 258,005

Services 89,129 107,858 134,943 157,638 157,214 174,652 190,497 212,441 223,164 252,891 290,760 309,959

Others 112,063 150,946 206,389 225,771 230,760 248,616 265,165 281,947 298,090 327,648 355,880 366,362

1) Excluding inter-bank loans, loans to the Central Government and non-residents, and aid counterpart fund

Table 26. Commercial Bank’s Credits in Rupiah and Foreign Currency by Type of Credit and Economic Sector 1)

195Appendices

Office2003 2004 2005 2006 2007 2008

Inflow Outflow Inflow Outflow Inflow Outflow Inflow Outflow Inflow Outflow Inflow Outflow

Jakarta 50.3 79.3 59.9 87.2 71.3 101.40 49.9 83.73 33.6 57.68 39.3 66.71

Medan 19.8 20.9 21.7 22.4 24.3 25.47 29.1 31.79 18.8 23.20 21.3 23.84

Padang 13.5 17.9 16.5 21.6 18.4 23.98 18.5 25.01 8.3 18.43 9.5 19.64

Palembang 13.5 13.5 17.1 17.2 20.2 20.83 22.3 24.11 11.4 15.76 16.0 18.67

Bandung 33.7 18.7 36.8 21.1 41.1 23.76 42.9 24.30 14.1 5.21 20.2 8.02

Semarang 30.4 22.6 36.1 26.7 41.0 30.24 37.3 29.37 20.2 10.67 21.1 12.46

Surabaya 33.5 30.1 37.6 33.8 41.4 37.03 42.2 39.79 20.7 18.56 26.5 24.07

Denpasar 11.0 12.8 13.1 14.7 15.1 16.82 16.3 19.08 5.7 8.53 4.9 8.99

Banjarmasin 13.4 17.9 15.1 19.9 17.5 23.42 16.8 24.75 6.7 15.72 6.9 17.44

Makassar 18.0 20.2 20.7 22.7 24.2 26.76 29.7 35.89 14.8 21.89 19.0 25.94

Total 237.1 253.9 274.7 287.4 314.3 329.7 304.9 337.8 154.2 195.6 184.6 225.8

Table 27. Flow of Banknotes in Bank Indonesia Head Office and Regional Offices1)

1) Adjusted, due to changes on working region of Bank Indonesia Regional Office.

Office2003 2004 2005 2006 2007 2008

Inflow Outflow Inflow Outflow Inflow Outflow Inflow Outflow Inflow Outflow Inflow Outflow

Jakarta 4.2 219.3 36.5 235.4 63.5 263.5 23.1 196.7 15.8 160.9 5.3 160.0

Medan 2.1 27.5 8.2 33.2 18.9 27.4 13.3 18.9 4.6 6.7 0.3 7.4

Padang 0.6 23.4 22.2 22.2 2.8 17.5 1.8 10.7 1.7 10.0 1.2 15.7

Palembang 3.6 16.9 5.0 16.1 6.9 10.9 5.7 8.4 1.5 6.2 0.7 11.7

Bandung 67.6 14.4 87.1 32.5 94.7 27.9 73.0 11.2 39.6 1.7 21.9 5.3

Semarang 44.9 11.9 57.4 21.3 78.4 14.6 64.2 6.4 40.3 4.3 19.7 3.9

Surabaya 8.2 50.3 9.5 39.1 14.1 29.3 11.7 27.2 2.5 21.2 0.6 25.8

Denpasar 1.0 13.6 1.7 17.5 6.6 16.5 6.0 9.3 0.9 8.5 0.5 11.5

Banjarmasin 1.1 25.6 3.6 30.7 2.4 22.3 0.9 14.7 0.3 14.0 0.1 19.8

Makassar 2.2 20.3 4.7 22.6 10.9 21.0 6.6 10.8 1.0 6.5 1.2 11.6

Jumlah 135.4 423.2 236.0 470.6 299.2 450.7 206.3 314.3 108.2 239.9 51.5 272.6

Table 28. Flow of Coins in Bank Indonesia Head Office and Regional Offices1)

1) Adjusted, due to changes on working region of Bank Indonesia Regional Office.

(trillions of rupiah)


196 Appendices

Countries 2003 2004 2005 2006 2007* 2008*

World 4.0 5.3 4.8 5.4 5.2 3.4

Industrial Countries 1.9 3.2 2.5 2.9 2.7 1.0

United States 2.5 3.6 3.1 2.9 2.0 1.1

Europe 0.8 2.0 1.5 2.8 2.6 1.0

Germany -0.3 1.1 0.8 2.9 2.5 1.3

France 1.1 2.5 1.7 2.0 2.2 0.8

Italy - 1.2 0.1 1.9 1.5 -0.6

Japan 1.4 2.7 1.9 2.2 2.4 -0.3

United Kingdom 2.8 3.3 1.8 2.8 3.0 0.7

Canada 1.9 3.1 3.1 2.8 2.7 0.6

NIEs 3.0 5.5 3.1 3.8 5.6 2.1

Developing Countries 6.7 7.7 7.5 8.1 8.3 6.3

Africa 4.7 5.8 5.6 5.6 6.2 5.2

Latin America 2.4 6.0 4.6 5.5 5.7 4.6

Asia 8.3 8.8 9.2 9.8 10.6 7.8

China 10.0 10.1 10.4 11.1 13.0 9.0

Indonesia 4.8 5.0 5.7 5.5 6.3 6.1

Malaysia 5.5 7.2 5.2 5.9 6.3 5.8

Thailand 7.1 6.3 4.5 5.0 4.8 4.7

Philipine 4.9 6.4 4.9 5.4 7.2 4.4

Vietnam 7.3 7.8 8.4 8.2 8.5 6.3

Central and Eastern Europe 4.8 6.7 5.6 6.3 5.4 3.2

CIS 7.9 8.4 6.6 7.7 8.6 6.0

Russia 7.3 7.2 6.4 6.7 8.1 6.2

Middle East 6.6 5.6 5.4 5.6 6.4 6.1

Table 29. World Economic Growth

Source: IMF, World Economic Outlook October 2008 *) IMF, World Economic Outlook Update January 2009, except Indonesia, Malaysia, Thailand, Filipina and Vietnam

(percent)

197Appendices

Countries 2003 2004 2005 2006 2007 2008

World 3.5 3.6 3.7 3.6 4.0 6.2 Industrial Countries 1.7 2.0 2.0 2.1 2.1* 3.5*

United States 2.1 2.9 3.2 3.2 2.9 4.2 Europe 2.2 2.0 1.9 1.9 2.1 3.5

Germany 1.0 1.8 2.0 2.0 2.3 2.9 France 2.2 2.3 1.9 1.9 1.6 3.4 Italy 2.8 2.3 2.2 2.2 2.0 3.4

Japan -0.3 - -0.3 0.3 - 1.6 United Kingdom 1.4 1.3 2.0 2.3 2.3 3.8 Canada 2.7 1.8 2.2 2.0 2.1 2.5 NIEs 1.5 2.4 2.3 1.6 2.2 4.8 Other Industrial Countries 1.8 1.7 2.1 2.1 1.9 4.4

Developing Countries 5.7 5.4 5.2 5.1 6.4 * 9.2*Africa 7.8 5.5 6.6 6.3 6.6 6.6 Latin America 10.6 6.5 6.3 5.4 5.3 5.3 Asia 2.5 4.1 3.6 4.0 5.4 7.8

China 1.2 3.9 1.8 1.5 4.8 6.4 Indonesia 6.1 10.5 13.1 6.3 6.2 9.8 Malaysia 1.1 1.4 3.0 3.6 2.0 6.0 Thailand 1.8 2.8 4.5 4.6 2.2 5.7 Philipine 3.5 6.0 7.6 6.7 2.8 10.1 Vietnam 3.2 7.7 8.3 7.5 8.3 24.0

Central and Eastern Europe 9.2 6.1 4.9 5.0 5.6 7.8 CIS 11.9 10.3 12.1 9.4 9.7 15.6

Russia 13.7 10.9 12.7 9.7 9.0 14.0 Middle East 6.2 7.2 6.9 7.5 10.6 15.8

Table 30. World Inflation Rate

Source: IMF, World Economic Outlook October 2008 *) IMF, World Economic Outlook Update January 2009

Description 2000 2001 2002 2003 2004 2005 2006 2007 2008

Government Bond Yield (10 years)

United States 5.11 5.05 3.82 4.25 4.22 4.39 4.70 4.02 2.21

Japan 1.65 1.37 0.91 1.37 1.44 1.48 1.69 1.51 1.17

Europe 4.85 5.00 4.20 4.29 3.68 3.31 3.95 4.33 2.95

LIBOR 6 Months

USD 6.20 1.98 1.38 1.22 2.78 4.70 5.37 4.60 1.75

Yen 0.54 0.10 0.07 0.07 0.07 0.08 0.63 0.98 0.95

Euro 4.83 3.25 2.80 2.16 2.21 2.64 3.86 4.71 2.98

Exchange Rate

Yen/USD 114.84 131.40 118.69 106.92 102.48 117.48 118.88 112.02 90.21

USD/EUR 0.93 0.89 1.05 1.26 1.37 1.18 1.32 1.47 1.41

USD/GBP 1.49 1.45 1.61 1.78 1.93 1.72 1.96 2.01 1.45

Table 31. Interest Rate and Exchange Rate

Source: Bloomberg

(percent)

198 Appendices

Abbreviations

ABA Interbank Asset

ACIA ASEAN Comprehensive Investment Agreement

ADB Asian Development Bank

AKKI Indonesia Credit Card Association

ANZ Australian-New Zealand

APBN State Budget

APBN-P Revised State Budget

API Indonesian Banking Architecture

APMK Card Based Payment System

ARM Adjustable Rate Mortgages

AS United States

ASEAN Association of South-East Asian Nations

ATM Automatic Teller Machine

ATMR Risk Weighted Asset

Bapepam-LK Indonesia Capital Market and Financial Institution Supervisory Agency

Basyarnas National Sharia Arbitration Board

BBM Fuel (Oil)

BEI Indonesia Stock Exchange

BI-SSSS Bank Indonesia - Scriptless Security Settlement System

BIG-eB Bank Indonesia Government - Electronic Banking

BIT Bilateral Investment Treaty

BLS Baseline Economic Survey

BLR Base Lending Rate

BLT Direct Cash Transfer

BMT Baitul Maal wa Tamwil

BPS Statistic Indonesia

BoP Balance of Payment

BOPO Operational Cost to Operational Income

Botasupal Coordinating Board for Eradication of Counterfeit Money

BPR Rural Bank

BPRS Sharia Rural Bank

BTS Base Transceiver Station

BUK Conventional Bank

BUMN State-Owned Enteprises

BUS Sharia Bank

BUSN National Private Bank

CAR Capital Adequacy Ratio

CDO Collateralized Debt Obligations

CDS Credit Default Swaps

CIP Covered Interest Parity

CMIM Chiang Mai Initiative Multilateralisation

CP Consultative Paper

CPO Crude Palm Oil

DBH Revenue Sharing Fund

DG Board of Governors

DJIA Dow Jones Industrial Average

199Appendices

DKBU Directorate of Credit, Rural Bank and Micro, Small and Medium Enterprise

DMO Domestic Market Obligations

DPbS Directorate of Islamic Banking

DPK Deposits

DPNP Directorate of Banking Research and Regulation

DPR House of Representatives

DSAK The Indonesia Accounting Standards Board

DSR Debt Service Ratio

EMEAP Executives Meeting of East-Asia Pacific Central Banks

E-money Electronic Money

FDI Foreign Direct Investment

FDR Financing to Deposit Ratio

FES Sharia Economic Festival

FIPPA Foreign Investment Promotion and Protection Agreement

FLI Intraday Liquidity Facility

FPD Emergency Funding Facility

FPJP Short Term Funding Facility

FRT Fixed Rate Tender

FTA Free Trade Arrangement

FTE Fine Tune Expansion

FTK Fine Tune Contraction

FtS Failure to Settle

GCG Good Corporate Governance

GWM Reserve Requirement

HHI Herfindahl-Hirschman Index

HJE Retail Selling Price

HKMA Hongkong Monetary Authority

HtM Hold to Maturity

IAI The Indonesian Accountants Institute

iB Islamic Banking

ICAAP Internal Capital Adequacy Assessment Process

ICOR Incremental Capital Output Ratio

IDB Islamic Development Bank

IHK Consumers Price Index

IHKEI Indonesia Export Commodities Price Index

IHPB Wholesale Price Index

IHSG Composite Stock Price Index

IMF International Monetary Fund

IPO Initial Public Offering

JETRO Japan External Trade Organization

JIBOR Jakarta Inter Bank Offered Rate

JPSK Financial Safety Net

KBI Bank Indonesia Branch Office

KI Investment Loan

KIK Collective Investment Contract

200 Appendices

KK Consumption Loan

KKBI Bank Indonesia Branch Office Coordinator

KKMB Bank Financial Consultants Partner

KMK Working Capital Credit

KPJU Commodity, Product, and Type of Business

KPMM The Minimum Capital Requirement

KPR Housing Credit

KSSK Monetary and Financial Stability Committee

KUR Micro Credit

KYC Know Your Customers

LDR Loan to Deposit Ratio

LKS Sharia Financial Institution

LN Overseas

LPG Liquefied Petroleum Gas

LPKD Local Insurance Credit Corporation

LPS Indonesia Deposit Insurance Corporation

LRPD Local Banking Research Agency

LTCM Long Term Capital Management

M1 Narrow Money

M2 Broad Money

MBS Mortgage-Backed Securities

MEA ASEAN Economic Community

MKM Small, Micro, and Medium

MoU Memorandum of Understanding

MPU Money Circulation Management

MUI Indonesian Council of Religious Scholars

NAB Net Asset value

NFA Net Foreign Assets

NPF Non Performing Financing

NPI Indonesia’s Balance of Payments

NPL Non Performing Loan

NYSE New York Stock Exchange

O/N Overnight

OPEC Organization Petroleum of Exporting Countries

OPT Open Market Operation

ORI Indonesian Retail Bond

PAPI Indonesia Banking Accounting Guidelines

PBI Bank Indonesia’s Regulation

PDB Gross Domestic Product

PE Export Duty

Permendag Minister of Trade Regulation

Perppu Government Regulation in Lieu of Law

PHK Layoff

Pilkada Election of the heads of local government

PIP Government Investment Center

PKSH Price Stabilization Policy Package

PMA Foreign Investment

201Appendices

PMDN Domestic Invesment

PMK Ministry of Finance Regulation

PNBP Non-Tax Revenue

PNPM National Community Empowermnet Program

PNS Civil Servant

POLRI Indonesian National Police

PPA Assets Management Company

PPh Income tax

PPN-DTP Government-Borne Value Added Tax

PSAK Statements of Financial Accounting Standards

PUAB Inter-Bank Money Market

PVP Payment Versus Payment

PYD Financing Extended

RATER Reliability, Assurance, Tangibility, Emphaty, Responsiveness

RDG Board of Governor’s Meeting

RI Republic of Indonesia

ROA Return on Asset

RRT Weighted Average

RTGS Real Time Gross Settlement

RUPS Shareholder General Meeting

SBI Bank Indonesia Certificate

SBN State Securities

SBSN Sharia Compliant Government Securities

SD Elementary School

SE Circular Letter

SID Debtor Information System

SILPA Unused Budget

SK Consumer Survey

SKDU Business Survey

SKNBI Bank Indonesia National Clearing System

SPE Retail Survey

SREP Supervisory Review Process and Evaluation

SSB Securities

SUN Government Bond

SWBI Wadiah Certificate of Bank Indonesia

TD Time Deposit

TKI Indonesian Foreign Worker

TMF Capital and Financial Account

TNI Indonesian National Army

TPID Regional Inflation Control Team

TPPU Money Laundering

TPT Textile and Textile Products

TPT Open Unemployment Rate

TSA The Standardised Approach

UIP Uncovered Interest Rate Parity

ULN Foreign Debt

202 Appendices

UMKM Micro, Small and Medium Enterprises

UMP Minimum Wage by Province

UK-YD Bank Notes in Circulation

USDCHATS United States Dollars Clearing House Automated Transfer System

UUS Sharia Business Unit

UYD Currency in Circulation

VIX Volatility Index

VRT Variable Rate Tender

WEO World Economic Outlook

WTI West Texas Intermediate

WTO World Trade Organization

WTV World Trade Volume

YoY Year on Year

203Appendices

EDITORIAL TEAM

Steering Committee

Made Sukada; Hendar

Chief Editors

Darsono; Juda Agung

Chief Authors

Pribadi Santoso; Elisabeth Sukawati; Junanto Herdiawan

Authors

Haris Munandar; Handri Adiwilaga; Leslie Djuranovik; A.V. Hardiyanto; Hesti Werdaningtyas; Dian Ayu Yustina;

Ndari Suryaningsih; Sahminan; Juli B. Winantya; Yayat Cadarajat; Dony H. A. Ardiansyah; TM Arief Mahmud;

Kiki Nindya Asih; Dythia Sendrata; Muslimin Anwar; Nugroho Djoko P.; Dhaha P. Kuantan; Iwan Chandra;

Sari Nadia Rizal; Arief A. Rasyid; Aulia Fadhly; Darjana; Boyke Suadi; Noviati; Rini Rintakawati; Erna Nilampermata;

Andi W. Riyadno; Susiati Dewi; Ayu Rulita Dewi; Beny Okta Tutuarima; Ali Sakti;

M. Cahyaningtyas; Roris Daya Restu; Fenty Tri Suryani; Kusuma Ayu Kinanti

Clarita Ligaya Iskandar; Diah Esti Handayani; Sari Binhadi

Contributors

Directorate of Economic Research and Monetary Policy; Directorate of Economic and Monetary Statistics;

Directorate of International Affair; Directorate of Monetary Management; Directorate of Reserve Management;

Directorate of Banking Research and Regulation; Directorate of Sharia Banking;

Directorate of Accounting and Payment System; Directorate of Currency Circulation;

Directorate of Credit, Rural Bank and Micro Small and Medium Enterprises;

Directorate of Strategic Planning and Public Relations; Secretariat Bureau

204 Appendices

2008 ECONOMIC REPORT ON INDONESIA

Documents

Transcript of 2008 ECONOMIC REPORT ON INDONESIA