Monetary Policy Stance amid the Risk of Uneven Global ......Monetary Policy Stance amid the Risk of...

Monetary Policy Stance amid the Risk of

Uneven Global Growth and External

Imbalance

Agus D.W. Martowardojo

Governor

Bank Indonesia

Prepared for Mandiri Investment Forum, January 27, 2015

1 Global Economic

Constellation

2

Multi Speed Recovery: A Weak and Uneven Economic Recovery Across The Globe

3

2012 2013 2014 2015 2016

Oct 2014 Projection

Jan 2015 Projection

Oct 2014 Projection

Jan 2015 Projection

World 3.4 3.3 3.3 3.8 3.5 4.0 3.7

US 2.3 2.2 2.2 3.1 3.6 3.0 3.3 Euro Area

-0.7 -0.4 0.8 1.3 1.2 1.7 1.4

Japan 1.5 1.5 0.9 0.8 0.6 0.8 0.8

China 7.7 7.7 7.4 7.1 6.8 6.8 6.3

Russia 3.4 1.3 0.2 0.5 -3.0 1.5 -1.0

India 4.7 5.0 5.6 6.4 6.3 6.5 6.5

Global Economic Growth Landscape (%)

Source: IMF

4

Source: Bloomberg, JP Morgan

Increased Volatility Together with

USD Appreciation

60

65

70

75

80

85

0

2

4

6

8

10

12

14

Emerging Market Volatility

G7 Countries Volatility

USD Trade Weight Index (RHS)

Note: Volatility Indexes refer to JP-M Volatility Index

Global Economic & Financial Crisis: More Frequent, With the Shorter Interval

5

Mexico Econ Crisis

Asia Financial

Crisis Argentina Econ Crisis

Subprime

Mortgage Crisis

Global Financial

Crisis

Irish Bank Crisis

Icelandic Fin. Crisis

European Debt Crisis

1994

2008-2010 2008-2012

2007

1999-2002

2010-2011

1997-1998

Russia Ruble Crisis

2014-2015

2008-2009

United States:

Solid Employment, Strong Growth

6

2.3

-4.1

3.1 2.7

4.5

10.2

5.7

2

6

10

-6

-4

-2

0

2

4

I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III

2007 2008 2009 2010 2011 2012 2013 2014

GDP Unemployment(%) (%)

Source: CEIC

China: Lower Growth, Uncertain Prospect Spreading the Negative Spillover to EM

7

6

9

12

15China GDP Emerging & Developing Asia GDP

(%)

Source: IMF *) forecast

Euro: ECB Quantitative Easing is Coming, 1,1 Trillion Euro to fight deflation and cure the stubbornly high unemployment

8

6

7

8

9

10

11

12

13

-6

-4

-2

0

2

4

6

Euro GDP Euro Unemployment(%) (%)

Source: Bloomberg

Risk of Economic

Stagnation

Japan Bond-Buying Program: The Next Chapter of Extreme Monetary Policy

9

-3

-2

-1

0

1

2

3

4

5

0

50

100

150

200

250

300

350

Th

ou

san

ds

Bank of Japan Total Asset Japan Inflation(%) (Yen Trillion)

Source: Bloomberg

BoJ

Bond-Buying

Program

Global Liquidity In The Near Future:

Are They Replaceable?

10

0

2

4

6

8

10

12

2010 2011 2012 2013 2014

ECB BoJ FED

(%) Central Bank Money Supply Growth

Source: Bloomberg Note: Money Supply M2

Toward FED

Normalization

The Increasing Trend of Foreign Holding on

Government Bond Pose Vulnerability Challenges for

Macro-Environment

11

Foreign Holding in the Indonesian Bond Market

Source: Bloomberg Note: Money Supply M2

470.80

0.37

15%

20%

25%

30%

35%

40%

200

250

300

350

400

450

500Indonesian Government Bond (Stock)

Foreign Holding of Indonesian Government Bond

(Rp Trillion)

2 Twin Shocks

12

Twin Shocks

13

Falling

Oil Prices

The Strength

of the US

Dollar $

14 Unique Price Drop: Oversupply Driven by the Supply Side

Source: Bloomberg

-6

-4

-2

0

2

4

6

8

89

91

93

95

97

2013 2014

Spread World Oil Demand World Oil Supply

(Million Barrel / Day) (Million Barrel / Day)

Oversupply

Undersupply

15 A Positive Supply Shock for Asia

The Impact of every 10% drop in oil prices on Asian Economies

Source: BoFA

-0.2

0.1

0.15

0.15

0.2

0.25

0.25

0.3

0.45

0.45

Malaysia

Indonesia

China

Singapore

Hong Kong

India

Taiwan

Philippines

Korea

Thailand

-0.3

-0.4

-0.25

-0.1

-0.15

-0.4

-0.25

-0.45

-0.25

-0.25

-0.1

0.3

0.2

0.4

0.5

0.4

0.2

0.2

0.6

0.8

GDP Inflation CA Balance

(percentage point)

Note: CA Balance refer to CA/GDP

estimates

Robust US Dollar Performance Smashes All

Emerging Market Currencies

16

90

95

100

105

110

115

120

Japanese Yen

Malaysian Ringgit

Brazilian Real

South African Rand

Turkey Lira

Indonesian Rupiah

Indian Real

Thailand Baht

Philippines Peso

(Index Jan 14 = 100)

Source: Bloomberg

Exchange Rate Index Versus US Dollar

Euro & Japanese Yen

Have Weakened By Design

17

Source: Bloomberg

100

105

110

115

120

125

0.7

0.75

0.8

0.85

0.9

0.95 USDEUR USDJPY

The US Dollar Has Only Just Started to Rise 18

90

95

100

105

110

115

120

125

130

135

Source: FRED

Trade Weighted US Dollar Index

Against Main Trading Partner

(1997=100)

Note: Main trading partner comprises 26 countries + Euro Area

Strongest USD Position (2002)

3

19

Structural

Challenges

Fed Fund Rate: After More Than 6 Years,

Any Tiny Rise Will Affect.

20

5

10

15

20

25

30

0

1

2

3

4

5

6

FED Fund Rate Emerging Market Volatility Index(%) (%)

> 6 Years of Ample Liquidity

Source: FED, JP Morgan (JP-M Emerging Market Volatility Index)

Crisis

Indonesia Records the Highest

Portofolio Inflows Ever

21

-45

-30

-15

0

15

30

45

Gov. Bond BI Certificates Equity(RP Trillion)

The FED Tapering Rp 40 Trillion

Outflow

Free-Fall of Russian Ruble

Outflow Rp 28.4 Trillion

Capital Flows

Source: BI

Furthermore, a vulnerabilities that can

constrained our sustained growth path

22

Source: BI Note: *) Preliminary Figures

2.47

-4.47

-3.07

-6

-5

-4

-3

-2

-1

0

1

2

3

4

-20

-15

-10

-5

0

5

10

15

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

**

Q2

**

Q3

**

2009 2010 2011 2012 2013* 2014

(%) (USD Billion) Indonesia Current Account

Nominal Current Account

Current Account (% GDP)

But it entail risks...

Rapid Growth of Private External Debt

23

134

161

40

70

100

130

160

190Government Private

(USD Billion)

Indonesia External Debt

Source: BI

Addressing

Macro Imbalances

24

-12

-7

-2

3

8

13

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

**

Q2

**

Q3

**2011 2012 2013* 2014

(USD Billion)

Capital & FinancialAccount

Current Account

Overall Balance

Source: BI Note: *) Preliminary Figures , **) Very Preliminary Figures

Fundamental Inefficiency in the

Indonesia Economy

25

Source: World Bank

-8

-6

-4

-2

0

2

4

6

8

10

0

5

10

15

20

25

30

35

40

45Spread Deposit Rate Lending Rate

(%) Indonesia Bank Rate

Crisis

Higher investment risk behind an inefficient

economy should be solved by addressing the

structural challenges

26

0

5

10

15

20

25

(%) Lending Rate

Across Income Group

(Average 2009-2013) Low

Income

Lower-Middle Income

Upper-Middle Income

High Income

Source: World Bank

4

27

Policy

Direction

28

Source: BPS, BI

10.20

8.69

3.56

5.15

3.98

4.93

2

4

6

8

10

12

1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10 1 4 7 10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

(%)

Core inflation remained stable Hovering around 4.0±1% in the last five years

where monetary policy play a key role in preserving

inflation expectations stayed under control

Core Inflation Indonesia

Why Inflation Targetting? 29

3

4

5

6

7

8

9

10

11

3 4 5 6 7 8

(%)

(%)

Source: BI, BPS

Core Inflation VS Economic Growth

Co

re I

nfl

ati

on

Real Economic Growth

“To Achieve High Growth, We Have To Maintain Low & Stable Inflation”

Indonesia

Period: 2002-2014 (quarterly)

Wages Pressure 30

Source: BPS

19.78

8.36

0

5

10

15

20

25

30

35

40Minimum Wages Pressure (YoY) Inflation (YoY)

(%)

Higher inflation must push the wages to go up, even faster than

the price itself, hurting our real sector competitiveness

Consistent & Bold

Monetary Policy Measure

31

0

5

10

15

20BI Rate Inflation

Fuel ↑ Rp2400

BI Rate ↑ 25 bps

Fuel ↑ Rp4500

BI Rate ↑ 100 bps

Fuel ↑ Rp6000

BI Rate ↑ 25 bps

Fuel ↑ Rp6500

BI Rate ↑ 25 bps

Fuel ↑ Rp8500

BI Rate ↑ 25 bps

Source: BI, BPS

5

32

Outlook

Outlook 33

Economic Growth 5.4 - 5.8%

Inflation 4±1%

Credit 15 - 17%

Deposit 14 - 16%

Current Account Deficit -2.5 to -3% GDP

2015

34

Thank You!

Bank Indonesia January, 2015

stafgbi@bi.go.id