REPUBLIC OF INDONESIA Recent Economic Developments August 2011
Published by Investors Relations Unit – Republic of Indonesia Address Bank Indonesia International Directorate Investor Relations Unit Sjafruddin Prawiranegara Building, 5 th floor Jalan M.H. Thamrin 2 Jakarta, 10110 Indonesia Tel +6221 381 8316 +6221 381 8319 +6221 381 8298 Facsimile +6221 350 1950 E-mail contactIRU-DL@bi.go.id
Table of Content Executive Summary Improved International Perception and Rising Investment Preserved Macroeconomic Stability to Support Further Growth Prudent Fiscal Management Improved Government Debt Position
Executive Summary
Macroeconomic Overview GDP Growth Inflation CPI (%, yoy) Core (%, yoy) 7.0% 20.00 Volatile Food (%, yoy) Administered (%, yoy) 6.0% 15.00 5.0% 10.00 4.0% 3.0% 5.00 % 2.0% 0.00 1.0% Jan Mar May Jul Sep Nov Jan Mar May Juli Sep Nov Jan Mar May July 0.0% -5.00 2005 2006 2008 2008 2009 2010 Q1 Q2 Q3* 2009 2010 2011 2011 2011 2011 -10.00 * Bank Indonesia projection Balance of Payments Foreign Exchange Reserves M Billion USD Billion USD BillionUSD foreign exchange reserves (LHS) 15 120 month of import & government debt service (RHS) 100 10 140.00 12.00 80 120.00 5 10.00 60 100.00 8.00 0 80.00 6.00 40 60.00 4.00 -5 40.00 20 2.00 20.00 -10 0 - - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q2** Q1* May Jun Aug Sep Oct Jan Feb Mar Apr May Jun Aug Sep Oct Jan Feb Mar Apr May June Jul Nov Dec Jul Nov Dec Jul 2007 2008 2009 2010* 2011 2009 2010 2011 Current Acc. Cap. & Fin. Acc Reserve Assets (RHS) 5
Executive Summary • Domestic economy expected to continue charting strong growth, mainly supported by solid export performance, strong household consumption, and investment. Investment performance also expected to grow faster driven by higher demand and the realization of Government’s capital expenditure. In the 2 nd quarter of 2011, the economy charted 6.5% (yoy) growth, in line with the projection , and is forecasted even stronger in Q3/2011 and trough out 2011 to reach 6.6%. The continuing strong economic activities confirm the outlook of economic growth to potentially reach the upper bound of 6.3-6.8% in 2011 and 6.4-6.9% in 2012. • The inflation pressure remained subdue, as reflected in July 2011 inflation which is still in line with its seasonal patterns . The CPI inflation in July 2011 came to 0.67% (mtm) or 4.61% (yoy). Core inflation reached 0.42% (mtm) or 4.55% (yoy) driven by the increase in global commodity prices and the increase in domestic demand. Looking forward, the increasing inflation is forecasted to grow from household consumption during Ramadhan and Eid holidays. However, Government policies on securing supply of foods is predicted to mitigate volatility of the prices hence inflation will be under control. • The overall balance of payments in Q2/2011 posted a surplus of US$11.9 billion , rose significantly from US$7.7 billion surplus in the preceding period. Spurring this increase was a sharp rise in the capital and financial account surplus that outweighed a decrease in the current account surplus. In response, international reserves at the end of June 2011 boosted to US$119.7 billion, equivalent to 6.8 months of imports and servicing of official external debt. Furthermore, the international reserves at the end of July 2011 reached USD 122.7 billion, or equivalent to 7 months of imports and external debt services of the Government Investment realization up to the 1 st half of 2011 spurred optimism that the full year target of Rp240 trillion is achievable . Total • investment realization in the 2 nd quarter of 2011 is Rp. 62.0 trillion (around USD7.2 billion) with 85% of investments directed outside of the island of Java. The realization figures until the 1 st semester of 2011 came to Rp.115.6 trillion or 48.2% from the target and an increase of 24.4% compared to the realization at the same period in 2010. • On the fiscal front, Indonesia continue to perform a prudent fiscal management in 2011, with strong commitment to fiscal consolidation, aiming on continue declining debt-to-GDP ratio, diversifying government debt profile, and reducing funding reliance on international capital market. • Financial System Stability had been maintained as indicated by the Financial Stability Index which were well below the treshold of 2 (1.61 on July 2011). • In the Board of Governors’ Meeting held on Tuesday August, 9, 2011, Bank Indonesia decided to keep the BI rate unchanged at 6.75% . Bank Indonesia is confident that the impact of the recent turmoil in the global financial markets due to the downgrade of US credit rating to the domestic financial market is limited, and can be contained with continuous monitoring of market development and coordination with the Government. Bank Indonesia is strongly confident that the implementation of monetary and macroprudential policy mix can secure macroeconomic stability and keep inflation within the targets, that is, 5% + 1% in 2011 and 4.5% + 1% in 2012. 6
Improved International Perception and Rising Investment
Improving International Perception: Acknowledged by Rating Agencies Resilient economy, which impressively navigates through the global crisis and continued confidence in economic outlook, the Republic continued to receive good reviews. S&P (April 8, 2011): upgraded Indonesia’s long -term foreign currency rating to BB+ from BB with positive outlook. With the rating upgrade, puts Indonesia 1 notch closer to investment grade by the three major rating agencies. The positive outlook also indicates the possibility of Indonesia to have another upgrade in the near future. The main factor supporting this decision is continuing improvements in the government's balance sheet and external liquidity, against a backdrop of a resilient economic performance and cautious fiscal management. Fitch Ratings (February 24, 2011): affirmed Indonesia’s long -term foreign and local currency issuer default ratings (IDRs) at ‘BB+’ and revised the outlooks on both to Positive from Stable. Fitch stated key factors supporting this action were strong economic growth, well above of the ‘BB’ and ‘BBB’ range medians. Encouragingly, Indonesia’s growth has not been accompanied b y the emergence of potentially-risky external imbalances – rising savings rates have largely matched the growing investment, and especially the performance of Indonesia's balance of payments. Modest current account surplus is always maintained since 1998. The strengthening of foreign exchange reserves reached USD96.2 billion, equivalent to 7 months of imports and debt payments become critical factors that support the credit profile of Indonesia. Moody’s Investors Service (January 17, 2011): upgraded Republic of Indonesia’s foreign and local -currency bond ratings to Ba1 with stable outlook. This follows Moody’s release last December which placed the ratings on a review for possible upgrade. The key factors supporting this action were (1) economic resilience which accompanied by sustained macroeconomic balance; (2) Improved government’s debt position and central bank’s foreign currency reserve adequacy; and (3) Improved prospects for fore ign direct investment inflows which expected to fortify Indonesia’s external position and economic outlook. Japan Credit Rating Agency, Ltd (July 13, 2010): upgraded Indonesia's sovereign rating to Investment Grade from BB+ to BBB- with stable outlook. The first upgrade to reach investment grade in the last 13 years reflects enhanced political and social stability, sustainable economic growth , alleviated public debt burden as a result of prudent fiscal management, reinforced resilience to external shocks stemming from the foreign reserves accumulation and an improved capacity for external debt management and efforts made by the current administration to outline the framework to deal with structural issues such as infrastructure development. 8
Sovereign Rating History Solid economic fundamentals supported the improvement of Indonesia’s sovereign credit rating since 2001 9
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