Monetary Policy Review - March 2010 · Monetary Policy Review - March 2010 1 Monetary Policy Review...

Monetary Policy Review - March 2010

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Monetary Policy ReviewMarch 2010

The Monetary Policy Review (MPR) is published monthly by Bank

Indonesia after the Board of Governors’ Meeting each February,

March, May, June, August, September, November, and December.

This report is intended as a medium for the Board of Governors

of Bank Indonesia to present to the public the latest evaluation of

monetary conditions, assessment and forecast for the Indonesian

economy, in addition to the Bank Indonesia monetary policy

response published quarterly in the Monetary Policy Report in

January, April, July, and October. Specifically, the MPR presents an

evaluation of the latest developments in inflation, the exchange

rate, and monetary conditions during the reporting month and

decisions concerning the monetary policy response adopted by

Bank Indonesia.

Board of Governors

Darmin Nasution Deputi Gubernur Senior

Hartadi A. Sarwono Deputi Gubernur

Siti Ch. Fadjrijah Deputi Gubernur

S. Budi Rochadi Deputi Gubernur

Muliaman D. Hadad Deputi Gubernur

Ardhayadi Mitroatmodjo Deputi Gubernur

Budi Mulya Deputi Gubernur


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Table of Contents

I. Monetary Policy Statement ..........................................................3

II. The Economy and Monetary Policy ..............................................6

Developments in the World Economy .....................................................6

Economy Growth in Indonesia ...............................................................8

Inflation ..........................................................................................11

Rupiah Exchange Rate ....................................................................13

Monetary Policy ..............................................................................15

Interest Rates ...............................................................................15

Deposits, Credits, and Money Supply ...........................................17

The Stock Market ........................................................................18

The Government Securities Market ..............................................19

Mutual Funds Market ..................................................................20

Banking Conditions .....................................................................20

III. Monetary Policy Response ..........................................................21


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I. MONETARY POLICY STATEMENT

The process of global economic recovery continues to move forward,

driven primarily by the economy of China. Bolstering China’s economic

might is brisk investment growth, high levels of foreign direct investment

(FDI) and comparatively strong bank lending. Economies in advanced

nations have begun moving in a more optimistic direction, led by the US

and Japan. The turnaround in the two economies is reflected in the rise

in retail sales and manufacturing activity, which has helped bring down

levels of unemployment. On the other hand, Europe’s economic recovery

faces heavy challenges despite signs of renewed activity in manufacturing

and initial improvement in retail sales. The fiscal crisis in Greece rooted

in structural issues and high unemployment levels continue to daunt

economic recovery in the region.

The Greek crisis has brought added pressure to bear on global financial

markets with the strongest effects felt in emerging markets, including

Indonesia. The fiscal crisis in Greece has triggered risk aversion among

investors, who are shying away from emerging market assets and shifting

investments back into safe haven assets. Reflecting this are lower yields on

US treasury bonds and appreciation in the US dollar. The present investor

behaviour has resulted in higher risk premia and prompted a downturn on

global stock markets.

Global liquidity is now in abundant supply, prompting some central banks

to begin phasing out their quantitative easing policies. Clearer signals

of monetary tightening have surfaced in Asia. This is evident from steps

taken by China and India to increase the minimum reserve requirement. In

coming months, emerging markets are likely to pursue a more rapid exit

strategy compared to developed countries, with management of foreign

capital flows likely to pose extraordinary challenges.

The steady improvement in the global economy has had a positive effect

on growth in the domestic economy and particularly exports. Exports

mounted significantly in Q4/2009 in response to the more upbeat

condition of the global economy. Like before, the G3 nations dominate

Indonesia’s export markets with a combined share at about 40%. The

steady improvement in the condition of the G3 economies has given an

added boost to optimism for improvement in Indonesia’s exports, which

in turn will fuel manufacturing growth particularly in export-oriented


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industries. The rising income effect of manufacturing activity, spurred by

exports, will strengthen public purchasing power.

The more conducive condition of the economy will also bring added

investment, led by investment in infrastructure such as roads, ports and

energy. The government has also begun taking action to address various

regulations hampering investment. The objective is for the real sector to

take optimum advantage of the momentum of international and domestic

economic recovery. These developments have engendered strong optimism

for the domestic economic outlook in 2010.

In regard to prices, inflationary pressure eased during February 2010.

Measured for the month, inflation in February 2010 reached 0.30%

(mtm), down from 0.84% (mtm) in the preceding month. All inflation

determinants contributed to the modest inflation during the month under

review. Food supply bottlenecks, which emerged briefly during January,

were comparatively subdued in February. Added to this, pressure from

imported inflation stayed low with the support of relative stability in the

rupiah. Domestic demand has similarly not generated significant upward

pressure on prices. Despite low monthly inflation, annual inflationary

pressure was recorded in February at 3.81% (yoy), up slightly from the

previous month’s level of 3.72% (yoy). This is explained by the base effect

factor from government decisions concerning administered prices last year.

The latest global developments have strongly influenced the direction of

Indonesia’s balance of payments. Economic recovery led by the countries

of Asia has boosted demand for exports of resource-based commodities.

Support for stronger export performance has also come from improvement

in manufactured exports, reflected in increased capacity utilisation in the

manufacturing sector. With exports forging ahead, imports are also on the

rise, although at a lesser pace. This augurs for an increased surplus in the

current account. The speed of recovery in the Asian region has also given

added attractiveness to investment in the region. In the wake of setbacks

from negative sentiment triggered by external developments, such as the

fiscal instability in Greece, fears of an asset price bubble in China and

unclear direction of monetary policy in the US, foreign investor interest

remains strong as reflected in the heavy surplus in the capital and financial

account. The improvement in the investment climate is reflected in the

mounting trend in investment visible in cash calls and loans. At the end

of February 2010, international reserves stood at 69.7 billion US dollars,

equivalent to 5.7 months of imports and servicing of official external debt.


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The solid condition of the balance of payments has kept the rupiah stable,

despite pressure from negative external sentiment. During February 2010,

the rupiah maintained more stable movement compared to the preceding

month, reflecting in the drop in volatility from 0.96% in January to 0.3%

in February. The rupiah closed February up 0.16% (p-t-p) at Rp 9,335 to

the US dollar.

In the domestic financial sector, financial market performance has held at

generally stable levels. On the money market, banks were comparatively

well supplied with liquidity. The abundance of short-term liquidity

resulted in the overnight interbank rate easing to levels approaching the

lower corridor of the BI Rate. On the stock market, the JSX Composite

underwent contraction mainly in response to negative external sentiment.

The negative sentiment dragging down the JSX Composite is explained,

among others, by the monetary tightening in China, worries over fiscal

sustainability in Greece and lack of a clear global exit strategy. On the

government securities market, yield moved in different directions according

to individual tenor. Yields on short-term Government Securities eased

further, contrasting with increases observed in medium and long tenor

instruments. This development was linked mainly to unsettled external

factors and the early effects of rising inflation expectations in 2010.

Developments on the mutual funds market largely tracked performance

in underlying assets. The indices for equity and mixed funds saw steep

correction at 1.6% and 0.7% in contrast to the index for fixed income

funds, which mounted further by 0.5%.

Monetary policy transmission in the financial sector has been limited.

Although deposit and loan interest rates are in decline, the scale of lending

remains limited. In January 2010, credit recorded negative growth, despite

the positive growth measured on an annual scale. Looking forward, the

downward trend in loan interest rates is expected to promote stronger

credit expansion in 2010.

On the micro level, conditions in the national banking system remain stable. Reflecting this is the comfortably safe level of the capital

adequacy ratio (CAR) alongside low non-performing loans (NPLs). In

further developments, liquidity in the banking system, including the

interbank money market, has progressively improved in tandem with

growth in depositor funds.

On 4 March 2010, the Board of Governors Meeting at Bank Indonesia decided to hold the BI Rate at 6.5%. The reasoning in


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this decision is that the 6.5% rate is consistent with the 5% ± 1% inflation target for 2010 and the current monetary policy stance is seen as conducive to economic recovery and the operation of the banking intermediation function.

II. THE ECONOMY AND MONETARY POLICYThe world economy is steadily improving even though overshadowed

briefly by the fiscal crisis in Europe. Uncertainty over resolution of the

fiscal crisis fuelled negative sentiment on global money markets that bore

down on the domestic money market early in the month. The growing

strength of the economic recovery in advanced nations (US and Japan) and

Asia (China and India) has had a beneficial effect on Indonesia with the

economy showing steady improvement and likely to outperform earlier

forecasts for 2010. In regard to prices, inflation eased during the month

under review and is forecasted to hold within the inflation targeting range

for the year as a whole. The exchange rate has maintained relative stability

despite a downturn early in the period under review, triggered by external

factors. In regard to the banking system, various indicators continue to

underscore the solid condition of Indonesia’s banks.

Developments in World EconomyThe world economy is showing steady improvement overall, despite persistent concerns over less conducive economic conditions in Europe. At this time, the global economy is still in recovery with

emerging markets, led by Asia, providing the driving force for the world

economy. Economies in advanced nations are improving as reflected in

the steady rise in leading indicators for the US economy and the onset of

decline in unemployment. Similar developments have taken place in the

Japanese economy, reflected in rising industrial production. Alongside

this, China’s economy, which has become the engine of world growth,

continues to forge ahead. On the other hand, Europe’s economic

growth lags behind the global economic recovery, due to the uncertainty

surrounding actions to tackle the fiscal crisis in Greece.

Signs of a turnaround in the US economy are evident in positive developments in US economic indicators such as industrial production (IP), which mounted 0.9% in January 2010. Added to


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this, retail sales have commenced an upward track, indicating the onset

of recovery in the domestic economy. US retail sales were up 0.5% (mtm)

in January 2010 (Graph 2.1), well ahead of the previous month (0.1%).

Rising export demand has fuelled expansion in production sectors, in turn

bring down levels of unemployment. It should also be noted that the US

trade deficit soared in January 2010, due to rising imports and higher

international oil prices. The US trade deficit now stands at 42.63 billion US

dollars, the highest level in the past year. This suggests that momentum is

beginning to return to the US economy.

Improvement in the Japanese economy is buoyed by rising exports amid continued weak domestic consumption. The 40.9% (yoy) surge

in Japanese exports has reinvigorated the manufacturing sector, which in

turn has stimulated demand for labour. Japanese household consumption

is also showing an improving trend, although not as strong or stable as

would be desired. Signs of Japanese consumer optimism are emerging, as

evident in the improvement in Japanese consumer confidence from 37.9

to 39.4 during January 2010. Household sentiment also strengthened to

39 from 37.6 (December 2009). On the other hand, economic growth in Europe is lagging behind the pace of global recovery. European

economies managed only 0.1% growth (qtq) in Q4/2009, following

0.4% (qtq) in the preceding quarter. The high downside risks in Europe’s

economic growth caused industrial production to drop 1.7% (mtm) during

December 2009 after charting positive growth at 1.4% (mtm) during the

month before. Some European nations continue to be daunted by the

threat of high unemployment. UK unemployment claims were up 23,500

in January 2010 with unemployment rising to 5%, the highest level since

1997. On one hand, consumption levels in Europe are no longer in decline,

as visible in rising retail sales. Manufacturing is also gaining ground in

keeping with the improvement in Europe’s exports. However, the high

levels of unemployment and fiscal deficits in some European economies

coupled with massive debts (mainly in the PIGS nations) are expected to

block the path to further recovery.

For the time being, global financial market performance is impacted by uncertainty over the resolution of the fiscal crisis in Europe. The

fiscal deficit in Greece has dampened risk appetite with investors shunning

emerging market assets and returning to safe havens. Reflecting this are

declining yields on US Treasury Bonds and appreciation in the US dollar,

prompting a slide in global stock markets alongside a rise in risk premia.

On the other hand, improving conditions in Asia, bolstered by more robust

Graph 2.1 US Retail Sales

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economic fundamentals, enabled the region’s financial markets to mount a

swift recovery in the face of pressure from sentiment over the Greek crisis.

With the improvement in the global economy and upward trend in commodity prices, global inflationary pressures in 2010 are predicted to mount. The global inflation forecast for 2010 overall edged

up slightly in February to 3.14% (yoy). Inflationary pressure in developing

countries is estimated at 5.07% (yoy), down from 5.4% (yoy) in the IMF

forecast. In advanced nations, inflation is expected to reach 1.61% (yoy),

ahead of the IMF forecast at 1.3% (yoy). With inflationary pressure on

the rise, emerging market nations are expected to shift more rapidly away

from easing. In advanced nations, however, this process will take longer in

view of the various issues yet to be resolved.

The predominant global monetary policy response has been to hold back from raising interest rates, with focus instead on management of money market liquidity. In February 2010, most major

central banks, including the Fed and BoJ, kept rates on hold in efforts to

stimulate domestic economic recovery. The Fed is keeping its policy rate

in the 0%-0.25% range due to slack conditions on the labour market and

low inflationary pressure. In Japan, the BoJ has held the reference rate

at 0.1% and will not expand buying of securities. To fend off prolonged

deflation, the Government of Japan has asked the BoJ to adopt a 1%

inflation target. At the same time, amid the continuing improvement

in the economy and the stable inflation outlook, the RBA has kept its

policy rate steady at 3.75%. Definite signals of monetary tightening

are becoming visible in developing nations, despite policy rates being

kept on hold. In some Asian countries, such as China and India, signs of

monetary tightening are already evident in decisions to raise the statutory

reserve requirement. On 25 February 2010, China’s central bank raised

the minimum reserve requirement by as much as 50bps to 16.5% in an

attempt to curb inflation and mounting asset prices (Graph 2.2). These

increases represent attempts by regulators to curb the rate of bank credit

expansion while preparing the ground for further monetary tightening

measures.

Economic Growth in IndonesiaThe economy is predicted to chart higher growth in Q1/2010 in line with domestic and external demand. The continued improvement

Graph 2.2 China and India’s Monetary Policy

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in growth during the quarter is supported by positive indications from

all aggregate demand components. The invigorated growth will be

driven by stronger performance in exports and investment compared to

earlier periods. The faster than predicted global economic recovery and

improvement in international commodity prices is driving the upward

trend in exports during Q1/2010. Investment is also forecasted to rise in

response to increased demand while business tendencies have held firm.

On the supply side, the improvement in sectoral performance at end-2009

is expected to carry forward into Q1/2010, bolstered by steadily rising

external and domestic demand. Key sectors, such as manufacturing and

the trade, hotels and restaurants sectors, have potential to chart stronger

growth during Q1/2010. Despite this, agriculture may see reduced growth

due to the shift in the harvest season to Q2/2010. Performance in other

sectors, such as transport and communications and the electricity, gas and

water utilities sector

Household consumption is expected to maintain brisk growth in Q1/2010. This forecast is consistent with developments in leading

household consumption indicators, which currently point to improvement.

Further evidence of upbeat growth in private consumption comes from

movement in indicators for durable goods consumption and retail sales

of non-durable goods (food and clothing). Private consumption has also

been strengthened by improvement in income levels in export-oriented

regions alongside sustained levels of consumer confidence. The planned

5% salary increase for civil servants, military and police and increases in

the regional minimum wage in early 2010 may provided added boost

to public purchasing power during the present quarter. However, when

compared to the Q1/2009 period, household consumption is expected to

chart reduced growth due to the high rates of spending by not-for-profit

organisations in advance of the legislative elections (base effect factor).

Support for the potential for higher household consumption in Q1/2010 is

visible in the movement of some early indicators. Car sales were up 69.9%

in January 2010, the strongest increase seen over the past year (yoy,

Graph 2.3). During January, the retail sales index mounted by as much

as 40.7% in annual terms (yoy, Graph 2.4). These gains were buoyed by

consumption in the clothing and accessories category and in foods and

tobacco. Also reflecting higher consumption growth were increases in

consumer goods imports during January 2010 (Graph 2.5). In a similar

vein, indicators linked to consumer financing, such as real M1 growth, are

also showing a rising trend (Graph 2.6).

Graph 2.3 Growth of Vehicle Sales

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Graph 2.4 Retail Sales Index (Bank Indonesia Retail Sales Survey)

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Graph 2.5 Growth of Consumption Goods Import and GDP Private Consumption

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The continued pace of export growth is stimulating investment performance in Q1/2010. Higher investment levels are reflected in

healthier growth for capital goods imports (Graph 2.7) and realised

construction investment, as indicated by sustained high levels of cement

consumption (Graph 2.8). Coupled with this, steady levels of business

optimism buoyed by the outlook of increased international orders and

selling prices also had a positive effect on investment growth during

Q1/2010. Construction is again forecasted to be the major source of

investment growth in Q1/2010. These indications of stronger investment

growth are borne out in several leading investment indicators. Reflecting

heightened investment growth are increases in capital goods imports and

cement consumption. In January 2010, imports of capital goods were up

35.6% (yoy), which compares to 9.29% (yoy) one month earlier. In regard

to construction investment, cement consumption charted significant

growth in January 2010 at 13.25% (yoy). However, indications of more

robust investment have not been matched by stronger financing, as

indicated by the low level of real investment credit expansion (Graph 2.9).

With the improvement in the global economy and commodity prices, export growth is forecasted to rise. Indicators of rising trends in

international market commodity prices, led by agricultural crops at 45.0%

(yoy) and manufactured goods at 25.7% (yoy) have kept global trade

running at high volume, as reflected in the Baltic Dry index (Graph 2.10).

The upward trend in consumer confidence and business sentiment in the

G3 nations and China also supports potential for increased export growth

in Q1/2010. Reflecting this is the rising demand in advanced nations,

led by the United States, and increased cargo loaded at Indonesia’s five

main seaports. In disaggregation by sector and commodity category,

non-oil and gas export growth continues to rely heavily on primary export

commodities, including coal and other mining products and industrial

products such as palm oil.

Import growth is predicted to climb in Q1/2010 in response to rising external and domestic demand. In the wake of the positive

trend at year-end, imports are predicted to gather momentum on the

strength of rising household consumption and demand for raw materials

and capital goods for production in the manufacturing sector. Besides

this, the current improvement in import growth is confirmed by more

modest decline in import duties in January 2010 at -12.27% or Rp 1.25

trillion. In the wake of the ACFTA launching in January 2010, imports of

Graph 2.7 Growth of Imports of Capital Goods

Graph 2.8 Growth of Cement Consumption

Graph 2.6 Growth of Real M1 and GDP Private Consumption

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manufactured products, such as Chinese textiles, are also expected to

rise. The most important contribution to this import growth comes from

increased imports of raw materials and intermediate inputs. Import growth

in January 2010 was driven by increased imports of commodities related

to capacity expansion, such as mechanical machinery/tools and electrical

machines and equipment.

The improvement in sectoral performance is set to continue in Q1/2010 in keeping with the gains reported in some sectoral indicators. Key sectors, such as manufacturing and the trade, hotels

and restaurants sectors, have potential to chart stronger growth during

Q1/2010. Despite this, agriculture may see reduced growth due to the

shift in the harvest season to Q2/2010. Robust performance is forecasted

for other high-growth sectors such as transport and communications and

the electricity, gas and water utilities sector. Key to buoyant growth in

transport and communications is the ongoing high levels of performance

in the telecommunications subsector.

InflationMonthly CPI inflation slowed in February 2010, despite an increase in the annual rate. Measured for the month, inflation in February

reached 0.30% (mtm), down from 0.84% (mtm) in the preceding month.

All inflation determinants supported the low inflation rate during the

month under review. However, the annual inflation rate came to 3.81%

(yoy), up from the earlier month recorded at 3.72% (yoy). Improving

conditions in supply of foodstuffs compared to earlier periods has helped

curb the intensity of inflationary pressures. Analysed by influencing factors,

the current inflation is linked primarily to seasonal factors. At the same

time, core inflation remained low, having eased in comparison to the

preceding month. External pressure through the import channel remains

minimal amid stability in the rupiah. On the domestic front, supply-demand

interaction has not resulted in any general upward pressure on prices.

In analysis by influencing factors, non-fundamentals were again the

major factors driving CPI inflationary pressure during February 2010.

Price movements for some volatile food commodities put further upward

pressure on prices due to inconsistent levels of distribution from crop

growing centres. On the other hand, fundamentals reflected in core

inflation eased in comparison to the month before, a result of subdued

Graph 2.9 Investment Credit and Gross Fixed Capital Formation

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Graph 2.10 Baltic Dry Index

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Graph 2.11 Inflation

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inflation expectations amid rising prices for some key commodities and

recovery in purchasing power. Besides this, mild pressure from external

factors coupled with the stability of the rupiah and a minimum output gap

is consistent with the increased demand that has not driven up inflation.

CPI inflation in February, disaggregated by expenditure category, was driven primarily by food stuffs. The index rise in the food

stuffs category is thought to be linked to strong pressure from rice

prices, even though the low 0.13% contribution to inflation was down

from the preceding month (0.35%). Another category with significant

upward pressure on CPI inflation is the processed food category with a

contribution of 0.07%. This is explained by prices for sugar and cooked

rice (a derivative from milled rice) that drove up prices during the month

under review.

Administered prices inflation during the month was minimal, due to the absence of increases in strategic items and of household fuel shortages caused by the conversion programme. The minimum

impact of government decisions involving strategic administered prices,

part of which resulted from the hike in electricity billing rates for customers

with 6600 VA connections, kept monthly administered prices inflation

during the month under review at 0.18%. Nevertheless, annualised

inflationary pressure in administered prices mounted significantly to 2.26%

from the previous month’s level of only -0.18%, due to the base effect

of the fuel price cut in 2009. The dominant commodities contributing to

inflation during the month under review were household fuels (0.01%)

and cigarettes (0.02%. The rise in the household fuels price index is

indicative of the absence of serious shortages in the implementation of

the conversion programme. In 2010, the conversion programme will

target a further 12.768 million households. As of 17 February, progress in

the conversion had reached 4.3%. At the same time, the drop in non-

subsidised fuel prices (Pertamax, Pertamax Plus, etc.) during the month

under review had neutral impact on administered prices inflation.

With rice prices stable, volatile foods inflation eased in comparison to one month earlier (Graph 2.13). During February 2010, inflation

in the volatile foods was recorded at 1.0% (mtm) or 5.19% (yoy). The

moderate increase in rice prices over the previous month helped mitigate

pressure in volatile foods inflation. This was expected with the onset

of improved conditions in market supply, even still short of normal. As

is widely known, the surge in rice prices during the preceding month

Graph 2.12 Inflation by Category of Goods and Services (%, mtm)

Graph 2.13 Volatile Food Inflation and Rice

Graph 2.14 Retailer Inflation Expectation (Bank Indonesia RetailSales Survey)

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is thought to be linked to soaring rice prices in inter island trade (rice

shipped from Java) within a context of tight supply, leading to rapid price

increases. Looking ahead, rice prices are predicted to fall in line with the

seasonal trend as the harvest begins in March and April. Rice is therefore

poised to become a deflater within the volatile foods category. Other

pressures driving up prices came from commodities such as hot red chilli

peppers and chicken meat. Prices increases for the two commodities are

thought to have resulted from tight supply and distribution hurdles related

to the monsoon season that brought severe flooding in some centres of

production and major transport links. These two commodities contributed

0.02% and 0.01% to the inflation figure. At the same time, price increases

for other international commodities had only limited impact on domestic

food prices.

Measured overall, core inflation was down from the previous month due to the subdued levels of inflation expectations and mild pressure from external factors. Core inflation in February 2010

was recorded at 0.15% (mtm) or 3.88% (yoy), down from the preceding

month’s levels of 0.59% (mtm) or 4.43% (yoy). From the external side,

minimum pressure from international commodity prices as a whole

(except sugar) alongside stability in the rupiah exchange rate kept external

pressures at a low level. Inflation expectations were also mild, due to

the absence of unfavourable shocks from external or domestic factors

(Graph 2.14). In regard to the output gap, recovery in purchasing power

accompanied by sustained levels of capacity utilisation generated a

positive impact on levels of core inflation. In analysis by commodity, sugar

accounted for a dominant contribution to core inflation, due to high prices

commanded by internationally sourced raw material commodities and

short supply (Graph 2.15). Sugar produced in an inflation contribution

of 0.01%, down from the preceding month’s contribution at 0.06%.

Another core commodity generating significant inflationary contribution

was cooked rice and rice porridge. In a contrasting development, gold, a

non-food core commodity, again produced a deflationary impact of 0.5%

in the core category (Graph 2.16).

Rupiah Exchange RateAfter a downturn from pressure in early February, the rupiah resumed appreciation towards the end of the month. Negative

Graph 2.15 International and Domestic Sugar Price

Graph 2.16 International and Domestic Gold Price

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Graph 2.17 AverageRupiah Exchange Rate

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sentiment early in the month over the fiscal deficit problems in Europe

bore down on global financial markets with fallout affecting the value of

the rupiah. However, this pressure was curbed with the release of reports

of improving economic indicators in various regions pointing to continued

recovery in the global economy. In response to these developments,

the average value of the rupiah slipped 0.68% in February 2010 to Rp

9,338 to the US dollar compared to Rp 9,275 to the US dollar one month

earlier (Graph 2.17). Although the rupiah underwent some turbulence,

movement during the month under review was more stable compared to

one month earlier. Reflecting this was the drop in volatility from 0.96%

(January 2010) to 0.30% (Graph 2.18).

The secure condition of economic fundamentals bolstered by high

returns on rupiah-denominated investments helped to keep investor risk

perceptions at subdued levels. This was evident in the relatively stable

indicators for investment risk in Indonesia, a factor that helped attract

capital inflows. The result of this was to increase the available supply of

foreign currency and maintain equilibrium in demand and supply on the

domestic forex market.

Despite brief correction in early February 2010 in line with mounting pressures on global financial markets, indicators of investment risk in Indonesia showed improvement midway through the month. The EMBIG spread indicator eased to 311 bps in February

2010 compared to 323 bps one month earlier. Yield spread for Indonesia

global bonds over US T-Notes similarly narrowed to 196 bps from 228

bps in the preceding month. The Credit Default Swap (CDS) spread, an

indicator of risk in Indonesian bonds, improved narrowly from 190 bps

in January 2010 to 189 bps in the month under review, consistent with

CDS movement in other Asian emerging markets (Graph 2.21). Another

risk indicator, the swap premium, maintained relatively stable movement

indicative of low pressure on the rupiah exchange rate (Graph 2.22).

Attractive yields on rupiah investments, like before, shored up the rupiah and thus prevented excessive decline. The broader

spread between domestic and international interest rates compared to

several other nations in Asia helped attract foreign funds for investment.

Uncovered Interest Rate Parity (UCIP) stood at 6.43% in February 2010,

essentially stable when compared to the previous month’s level of 6.48%.

Due to the improvement in risk indicators, Covered Interest Rate Parity

(CIP), the risk indicator for interest rate differential after allowing for risk,

Graph 2.18 Rupiah Exchange Rate Volatility

Graph 2.19 Performance of Global Stock Markets

Graph 2.20 Appreciation/Depreciation Exchange Rate Average (February 2010 compare to January 2010)

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was up from one month before. During the month under review, CPI

stood at 4.47%, ahead of the previous month’s level of 4.21%. Investment

returns on bonds, also higher compared to several other nations in Asia,

also offered attraction for inflows of foreign capital into the domestic

economy (Graph 2.23).

Monetary Policy

Interest RatesMonetary policy transmission through the interest rate channel operated smoothly during February 2010. The average overnight

rate on the interbank market came down 6 bps to 6.17% or 33 bps

below the BI Rate, even though the BI Rate has held steady at 6.5% since

August 2009. This was consistent with the flush condition of short-term

liquidity that kept the overnight rate close to the lower limit of the interest

rate corridor. This condition was subsequently transmitted to interbank

rates in longer tenors. Interbank rates in above overnight tenors eased

by approximately similar levels. The weighted average interbank rates in

the 2-6, 7, 8-26 and 27-30 day tenors came down by 6-9 bps. However,

weighted average interbank rates in above 30 day tenors moved up by 2

bps. The rise in interbank rates for over 30-day tenors is explained by thin

volume and frequency of transactions. The decline of interbank rates in

longer maturities carried over to bank time deposit rates, which also eased.

Liquidity conditions were stable in line with lower perceptions of risk. Key to this was the Bank Indonesia commitment to maintain

adequate liquidity levels on the money market by means of open market

operations (OMO) and standing facilities. The plentiful liquidity was

matched by more even distribution of liquidity on the money market,

reflected by the drop in the average spread between high and low

overnight rates from 17 bps in January 2010 to 15 bps in February 2010.

SBIs are now structured more competitively in the wake of intensive efforts by BI to improve the SBI maturity profile. The

SBI interest rate structure in February 2001 was a little steeper than one

month before, a result of the steady decline in weighted average 1-month

SBI rate. However, the weighted average 3-month and 6-month SBI rates

held generally firm. As a result, the weighted average 1, 3 and 6-month

Graph 2.21 Indonesia Risk Perception Indicator

Graph 2.22 Premium Swap

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Graph 2.23 Comparison of Some Regional Countries Yield Spread Government Bond

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SBI rates at end-February 2010 stood at 6.41%, 6.59% and 6.69%. The

purpose of this is to offer more incentive to the banking system to hold

funds in longer-tenor SBIs.

While the BI Rate remained unchanged, time deposit rates maintained downward movement. From January to February 2010, the

1-month deposit rate showed indications of sustained decline. At the same

time, banks were still visibly providing customers greater incentive to hold

funds in longer-term placements. In December 2009 in particular, rates for

24-month deposits mounted by 4 bps, in contrast to the decline in other

tenors. In analysis by bank category, the steepest drop in time deposit rates

took place at state-owned banks over the period that the BI Rate has been

kept on hold. Looking forward, deposit rates are predicted to ease further

in keeping with the banking focus on lowering cost of funds.

BI Rate transmission to loan interest rates improved due to softening perceptions of economic risk within the banking system.

Reflecting this is the steady decline in cost of funds for the banking system

and the narrowing spread for interest rates on working capital loans and

investment credit measured against the BI Rate. Despite this, the present

cost of funds for banks is still on the high side when compared to 2007-

2008, even though the current BI Rate is below the level of that period.

This condition is linked mainly to the realignment process for time deposit

rates, in which deposit rates have held above the BI Rate level since the

outbreak of the global crisis in October 2008. Improving perceptions of

economic risk in the banking system are expected to bring more aggressive

rate cuts for working capital credit. However, rates for consumption credit

are predicted to see the least decline, due to the comparative lack of

elasticity in this lending to movement in interest rates.

Table 2.1Development of Various Interest Rates

Interest Rate (%)

BI Rate 8.75 8.25 7.75 7.5 7.25 7.00 6.75 6.50 6.50 6.50 6.50 6.50Deposit Guarentee 9.50 9.00 8.25 7.75 7.75 7.50 7.25 7.00 7.00 7.00 7.00 7.001-month Deposit (Weighted Average) 10.52 9.88 9.42 9.04 8.77 8.52 8.31 7.94 7.43 7.38 7.16 6.87Base Lending Rate 14.18 13.98 13.94 13.78 13.64 13.40 13.20 13.00 12.96 13.01 12.94 12.83Working Capital Credit 15.23 15.08 14.99 14.82 14.68 14.52 14.45 14.30 14.17 14.09 13.96 13.69Invesment Credit 14.37 14.23 14.05 14.05 13.94 13.78 13.58 13.48 13.20 13.20 13.03 12.96Consumption Credit 16.46 16.53 16.46 16.48 16.57 16.63 16.66 16.62 16.67 16.53 16.47 16.42

2009

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


17

Deposits, Credits, and Money SupplyAggregate funding growth in January 2010 is estimated lower keeping with the beginning of year historical trend. General

factors slowing growth in depositor funds at the start of the year include

servicing of corporate debt by the private sector, while the government

again recorded net contraction due to the absence of major activity on

government projects. However, funding growth was down in 2009 at

12.5% (yoy), a level that compares to the previous year’s growth of 16.1%

(yoy). The overall depositor funds position mounted Rp 219.8 trillion to Rp

1,973.0 trillion.

Monetary policy transmission in the financial sector has been more limited. Although deposit and loan interest rates are in decline, the scale

of lending is still constrained. In January 2010, credit recorded negative

growth, despite the positive growth measured on an annual scale. This

is an indication of initial improvement in annualised credit expansion,

although it remains below the average for normal, non-crisis conditions

(2006 until early 2008). The strengthening of the domestic economy has

led to improved perceptions of economic risk in the banking system and

prompted some easing in lending rates. The improving perceptions of

economic risk are reflected in the downward trend in non-performing

loans (NPLs) since Q3/2009.

Economic liquidity expanded at a more rapid pace, despite not having

recovered to pre-crisis levels. Stronger growth in economic liquidity was

reflected in annual growth in M1, M2 and Rupiah M2. In December

2009, M1, M2 and rupiah M2 registered 11.9%, 13.2% and 14.0% (yoy)

growth, up from 6.8%, 11.5% and 13.0% (yoy) in the preceding month.

As a result, the M1 position widened in December 2009 by Rp 14.2 trillion

over the previous month to Rp 521.8 trillion. This rise is explained largely

by more robust growth in demand deposits held by individuals and other

private companies and is an early indication of invigorated economic

activity in society. In similar developments, the M2 and rupiah M2 positions

increased by Rp 78.9 trillion and Rp 82.8 trillion in line with addition to the

quasi-money component.

Graph 2.24 Development of Various Interest Rates

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Graph 2.25 Development of Funds, Credits, and BI Rate

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Graph 2.26 Credit Growth by Usage

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The Stock MarketThe Bank Indonesia decision to hold the BI Rate at 6.5% in February 2010 signals the likelihood of no significant inflationary pressure during the first half of 2010. The Bank Indonesia stance translates

into a measure to promote economic growth while keeping inflation

on track with the inflation target for 2010. The Q4/2009 GDP Release

in mid-February 2010 points to significant improvement in Indonesia’s

economic performance during the fourth quarter of 2009, buoyed

by an accommodative monetary policy. However, this commendable

achievement carried less weight with movement in the JSX Composite

Index, which in fact sustained contraction due to global pressures.

Dynamics on global financial markets were marked by a range of issues, including deficits in Europe, the plunging consumer confidence index in the US and the various open scenarios for a global exit policy. Developments in Europe rekindled jitters among global

financial market actors over the issue of resolution of the fiscal problems

of the PIGS nations (Portugal, Italy, Greece and Spain). In the US, financial

markets were hit by worries over the drop in the US consumer confidence

index, which dropped to a 10-month low. In Asia, the second hike in

China’s minimum reserve requirement has sent out a signal that emerging

markets will move forward with an exit policy ahead of other nations.

These global financial market developments also put pressure on the

domestic financial market, with the JSX Composite closing down 2.37% in

February at the 2,540.03 mark.

The slide in the JSX Composite was followed by capital outflows and drop in stock market liquidity, albeit on a limited scale. This

new development came in the wake of predictions that developing nations

will opt for an exit policy ahead of advanced nations. This issue set off

a round of capital outflows, although during the last week the inflows

of capital began booking a net purchase. During February 2010, foreign

investors recorded a net sale of Rp 1.82 trillion in contrast to the January

2010 net purchase of Rp 0.58 trillion. Accompanying this was a downturn

in domestic market trading volume in February. Average trading volume

dropped to Rp 3.69 trillion per day compared to the January average of Rp

3.95 trillion per day.

The downturn in the JSX Composite was also reflected in sectoral index performance. Correction sustained in the Composite index

Graph 2.27 Growth of Currency in Circulation (Nominal)

Graph 2.28 Growth of Currency in Circulation (Real)

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Graph 2.29 JCI and Regional Index

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was replicated across almost all sectors, except multifarious industry,

consumer goods, trade and agribusiness. Commodity-based sectors,

such as mining and estates, had earlier been expected to shore up JSX

Composite performance, but also suffered correction. The dip in mining

came in response to the 9.3% rise in world oil prices in February 2010 and

the 3.9% in the Baltic Dry index. In other developments, weaker activity

in agribusiness was related to lower earnings performance reported in

corporate balance sheets published by agribusiness companies.

The Government Securities MarketThe Bank Indonesia decision to hold the BI Rate met with varying response on the Government Securities market. During February

2010, yield on short and medium-term Government Securities was

relatively stable, easing only 0.01 bps. In contrast, yield on medium and

long-term tenors was up by 5 bps. This is explained by conditions on global

financial markets, which have entered a period of renewed turbulence in

response to the dynamics of the economies in China, the US and Greece

and the onset of rising inflation expectations in 2010.

The movement in mixed yield Government Securities was closely related to a combination of positive and negative risks on the Government Securities market during February 2010. External factors

represented a negative contribution to Government Securities. Indications

of this include a rise in the Emerging Market Bond Index Global (EMBIG)

and negative sentiment over the worsening of the Greek fiscal crisis. At

home, the factor driving negative sentiment was a renewed increase in

inflation expectations in 2010. Countering this were other factors, such

as sustainable fiscal management and the continued attractiveness of

yields on Government Securities, which helped bolster activity in these

instruments during February 2010.

Liquidity on the Government Securities market was relatively stable. Average trading volume in Government Securities was again

stable at Rp 3.3 trillion per day. The increased activity on the Government

Securities market was not matched by higher frequency in daily trading.

Frequency of trading fell to 216 transactions per day in February 2010,

which compares to the January 2010 level of 225 per day. Alongside this,

foreign buyers expanded their holdings of Government Securities, in so

doing booking a net purchase.

Graph 2.30 JCI and Average Trading Volume

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Graph 2.31 Government Securities Volume

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Graph 2.32 Government Securities Trading Frequency

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Mutual Funds MarketDeteriorating underlying assets performance, and for stocks in particular, caused mutual funds to sustain correction. Mutual fund

categories affected by the correction included equity and mixed funds,

in contrast to the modest gains in debt-based funds. Responding to

these developments, equity and mixed funds underwent 1.6% and 0.7%

correction in contrast to fixed income funds, which mounted further

by 0.5%. Despite this, the correction in equity and mixed funds was

still more moderate than the downturn on the stock exchange, which

sustained 1.9% correction. This indicates that investment managers had

achieved a healthy level of portfolio diversification in February 2010, thus

keeping correction to a minimum.

Mutual funds based on medium term notes (MTNs) made significant strides during February 2010. These gains have been driven by keen

interest from pension funds willing to invest in these products. However,

this trend calls for some vigilance in view of the restriction imposed by

Minister of Finance Regulation No. 199/2008 prohibiting pension funds

from investing directly in MTNs, including MTNs packaged as securitised

debt. Although the packaging of MTNs into mutual funds allows risk

to be spread among investment managers and custodians, MTNs have

historically suffered from high levels of default. To this end, the Capital

Market and Financial Institutions Supervisory Agency (Bapepam-LK) has

taken action to mitigate risk through a recording and rating mechanism

and only permitting pension funds with minimum Rp 200 billion

investment and adequate risk management to invest in mutual funds.

Condition of The Banking SystemIn the banking sector, performance remains generally sound. Key banking

indicators, such as the capital adequacy ratio (CAR), the non-performing

loans (NPLs) ratio, net interest margin (NIM) and return on assets (ROA),

held firm at adequate, stable levels amid the present instability of global

conditions. NPLs in January 2009 came well below the preceding month’s

level at 3.8%. In a similar vein, the CAR remained solid at 17.4%, well

above the 8% minimum prescribed by Bank Indonesia. ROA and NIM were

also stable at 2.6% and 0.5% (Table 2.2).

Graph 2.33 Index of Discretionary Funds, Fixed Income Funds, and Equity Funds

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III. MONETARY POLICY RESPONSEOn 4 March 2010, the Bank Indonesia Board of Governors Meeting

decided to hold the BI Rate at 6.50%. In the view of the Board of

Governors Meeting, the current level of the BI Rate at 6.50% remains

consistent with achievement of the 5%±1% inflation target for 2010

and offers adequate support for the economic recovery and banking

intermediation processes.

Table 2.2Main Indicators of Banking System

Main Indicators

Total Asset (T Rp) 2,310.6 2,307.1 2,344.9 2,352.1 2,327.4 2,309.8 2,354.3 2,331.4 2,384.6 2,388.6 2,392.7 2,439.7 2,534.1

DPK (T Rp) 1,753.3 1,745.6 1,767.1 1,786.2 1,780.9 1,783.6 1,824.3 1,806.6 1,847.0 1,857.3 1,863.5 1,897.0 1,973.0

Credit (T Rp) 1,353.6 1,325.3 1,334.2 1,342.1 1,332.1 1,339.2 1,368.9 1,370.2 1,400.4 1,399.9 1,410.4 1,430.9 1,470.8

LDR (%) 77.2 75.9 75.5 75.1 74.8 75.1 75.0 75.8 75.8 75.4 75.7 75.4 74.5

NPLs Gross* (%) 3.8 4.2 4.3 4.5 4.6 4.7 4.5 4.6 4.5 4.3 4.3 4.4 3.8

NPLs Net * (%) 1.5 1.6 1.6 1.9 2.0 1.9 1.7 1.7 1.5 1.3 1.2 1.4 0.9

CAR (%) 16.2 17.6 17.7 17.4 17.6 17.3 17.0 17.0 17.0 17.7 17.6 17.0 17.4

NIM (%) 0.5 0.5 0.3 0.6 0.5 0.5 0.5 0.5 0.5 0.4 0.5 0.5 0.5

ROA (%) 2.3 2.7 2.6 2.8 2.7 2.7 2.7 2.7 2.7 2.6 2.7 2.6 2.6

2008 2009

Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

* with channeling


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* Provisional Figures * Using 2000 base year (BPS-Statistic Indonesia) 1) end of week 2) weighted average 3) end period closing 4) closed file Sources : Bank Indonesia, except stock market data (BAPEPAM), CPI, export/import and GDP (BPS)

Latest Indicators

FINANCIAL SECTOR

P R I C E S

EXTERNAL SECTOR

QUARTERLY INDICATOR

INTEREST RATE & STOCK One month SBI 1) Three month SBI 1) One month Deposit 2) Three month Deposit 2) One week JIBOR 2) JSX Indices 3)

MONETARY AGGREGATES (billions Rp)Base Money M1(C+D) Currency (C) Demand Deposit (D) Broad Money (M2 = C+D+T) Quasi Money (T) Quasi Money (Rupiah) Time Deposit Saving Deposit Foreign Currency Deposit Broad Money Rupiah

Claim on Business Sector Credit by DMBs

CPI - monthly (%, mtm) CPI - 1 year (%, yoy)

Rp/USD (endperiod,midrate) Non oil/gas Export (f.o.b, million USD) 4) Non oil/gas Import (c$f, million USD) 4) Net International Reserve (million USD)

Real GDP Growth (% y-o-y) Consumption Investment Changes in Stocks Export Import

9.50 8.74 8.21 7.59 7.25 6.95 6.71 6.58 6.48 6.49 6.47 6.46 6.45 - 9.93 9.25 8.61 7.95 7.39 7.05 6.79 6.63 6.55 6.60 6.59 6.59 6.60 - 10.52 9.89 9.42 9.04 8.77 8.52 8.31 7.94 7.43 7.38 7.16 6.87 - - 11.34 11.13 10.65 10.09 9.68 9.25 8.99 8.73 8.35 7.97 7.68 7.48 - - 9.43 8.71 8.30 8.03 7.69 7.09 6.96 6.56 6.46 6.46 6.47 6.46 6.45 - 1,333 1,285 1,434 1,723 1,917 2,027 2,323 2,342 2,468 2,368 2,416 2,534 2,611 -

314,662 303,777 304,718 308,277 309,232 322,994 322,850 324,663 354,297 364,869 376,938 402,118 384,176 - 437,388 434,233 448,452 454,221 455,364 483,053 469,346 490,575 490,501 485,979 495,554 506,055 - - 191,339 186,611 186,538 191,194 192,143 203,838 201,172 200,871 210,822 206,305 212,547 226,382 209,993 - 246,049 247,622 261,914 263,027 263,221 279,215 268,174 289,704 279,679 279,674 283,007 279,673 - - 1,754,293 1,773,980 1,794,004 1,794,888 1,807,388 1,859,690 1,841,112 1,871,955 1,889,157 1,900,907 1,928,840 2,002,990 - - 1,316,905 1,339,747 1,345,553 1,340,667 1,352,024 1,376,637 1,371,766 1,381,381 1,398,656 1,414,928 1,433,286 1,496,935 - - 1,175,565 1,190,990 1,202,724 1,205,976 1,217,906 1,245,822 1,245,247 1,251,225 1,272,217 1,285,497 1,297,781 1,359,001 - - 686,919 703,027 706,002 705,379 715,139 726,088 724,888 727,889 731,202 741,072 738,118 755,996 - - 488,645 487,964 496,722 500,597 502,767 519,733 520,359 523,336 541,015 544,425 559,663 603,005 - - 141,341 148,757 142,828 134,691 134,118 130,815 126,519 130,156 126,439 129,431 135,505 137,934 - - 1,612,953 1,625,223 1,651,176 1,660,197 1,673,270 1,728,875 1,714,594 1,741,800 1,762,718 1,771,476 1,793,335 1,865,056 - -

1,391,619 1,403,408 1,401,342 1,387,947 1,392,747 1,419,799 1,435,290 1,465,870 1,463,662 1,478,447 1,503,304 1,543,901 - - 1,293,600 1,305,681 1,303,885 1,292,306 1,298,095 1,320,131 1,333,469 1,351,511 1,348,857 1,361,096 1,383,567 1,408,669 - -

-0.07 0.21 0.22 -0.31 0.04 0.11 0.45 0.56 1.05 0.19 -0.03 0.33 0.84 0.30 9.17 8.60 7.92 7.31 6.04 3.65 2.71 2.75 2.83 2.57 2.41 2.78 3.72 3.81

11,355 11,980 11,575 10,713 10,340 10,225 9,920 10,060 9,681 9,545 9,480 9,400 9,365 9,335 6,345 6,713 7,473 7,053 8,229 8,470 8,437 8,966 8,200 9,714 8,678 11,048 - - 5,706 5,008 5,819 5,488 6,366 6,987 7,720 7,313 5,589 7,405 7,109 8,044 - - 47.96 47.17 50.68 51.72 51.65 50.99 50.72 50.84 53.81 55.68 56.15 57.69 61.59 62.14

4.53 4.08 4.16 5.43 7.28 6.27 5.44 5.91 -0.92 3.01 4.35 4.49 -148.07 97.07 90.63 6.24 -18.73 -15.52 -7.79 3.67 -24.42 -21.04 -14.67 1.62

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb

2009 2010

Q.I Q.II Q.III Q.IV

2009

Monetary Policy Review - March 2010 · Monetary Policy Review - March 2010 1 Monetary Policy Review...

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