Indonesian Economy Beyond 2014:Continue to be positive being the third fastest growing G-20 economy

Dr. SugengChief Representative Office, Bank Indonesia New York

Washington DC, December 11, 2014

2Key MessagesA Strong economic fundamental … The Indonesian economy has a strong economic fundamental: economic growth is

still high with inflation in a check. Meanwhile, the rupiah exchange rate is relatively stable along with its fundamental. This brought about resilience in the face of uncertainty in the world economy.

The economic resilience was supported by prudent monetary and fiscal policies as well as bold and pre-emptive policy responses by Bank Indonesia since June 2013, with a close coordination with the Government fiscal policy and structural reforms.

Challenges and prospect Some challenges are still lingering on Indonesia’s economy: (i) to bring the fiscal

and current account conditions to a sustainable levels, (ii). to cut down inflation expectation, (iii) to manage stability against the Fed’s monetary normalization, (iv) to face an economic slowdown in China, Japan, and Europe.

With strengthening its monetary and macro-prudential policy mix to manage macro- economic and financial stability as well as coordination with the government, Indonesia’s economy is expected to have a better prospect in the years to come.

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Strong Economic Fundamentals …

4Indonesia Potential Growth

Indonesia’s Economic Growth (2003 – 2013)

GDP 2013: 5.8% GDP 2014: 5.1% – 5.5% supported by strong domestic demand

5Economic Growth from demand side

The domestic demand is still the driving force of growth.

Economic Growth by Components (%, yoy)

6The third fastest growing economy.......

7Inflation remained fundamentally under control….

Core inflation has been fairly stable in the last 3 years, reaching 4.2% (yoy) in Nov. 2014 CPI inflation in Nov. 2014 was 6.23% (yoy), a higher compared to 4.83% in Oct. 2014 due to

fuel price hikes of around 30%. Impact of fuel price hikes on inflation will be diminishing in January 2015

Inflation increases due to fuel price hikes ...

8Foreign Exchange Reserves are on an upward trend….

Foreign exchange reserves at the end of Nov-2014 reached US$111 billion,equivalent to 6.6 months of imports or 6.4 months of imports and foreign debtpayments.

The availability of reserves as the second line of defense in the form of bilateral currencyswap agreement (China, South Korea, and Japan), besides from Chiang May InitiativeMultilateralization (CMIM) Agreement.

9A sound banking sector

10Prudent fiscal policy and debt management ….

112014 and going forward

SOME CHALLENGES …

12Maintaining fiscal sustainability ……

Fuel subsidy is continually mounting that pontentially exceeds the deficit target of 2.4% GDPin 2014.

Thus, cutting the budgets or increasing the subsidized fuel price is needed.

13Maintaining a sound balance of payments …..

Current Account Deficit is still relatively high, but in a decline trend …

Trade BalanceBalance of Payments

The deficit reached 3.07% of GDP in QIII-2014, lower than 4.06% in QII-2014. However, overall BoP was in increasing surplus of $6.5 billion in Q3-2014 , larger than

$4.3 billion in QII-2014 due to strong capital inflows both in the form of Foreign Direct Investment and portfolio investment.

14The Rupiah exchange rate against US dollar development….

• The increase of current account deficit had an impact on the rupiah depreciation.

• But in fact, this is necessary to prevent the widening of current account deficit and ensure that the economic slowdown remains manageable.

• Current pressures on the Rupiah remain, mainly comes from strengthening us dollar.

15Inflation Risk

4,82*)

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2010 2011 2012 2013 2014

Spread (RHS)Inflation ExpectationCPI (yoy)

Financial Sector Inflation Expectation Retail Sales Inflation Expectation

Inflation expectation begin to increase triggered by fuel price hike expectation ….

16Increase in external vulnerability

External debts has increased, especially those of private sectors, raising concerns onstrengthening prudential for better risk mitigation ..

Debt Service Ratio (DSR) Breakdown

17Global Uneven Growth . . .

The Fed policy normalization

European economy stagnation

Sl Slow growth of China

Decelerating growth of Japan

In the face of elevated global risks

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POLICY RESPONSES BY THE GOVERNMENT AND BANK INDONESIA IN 2014 . . .

19Fiscal Reform . . .

Fiscal sustainability..

Creating a huge amount of fund for financing:- Infrastructure- Social goal ( People-based

subsidy )

The new government increased domestic oil prices by around 30% on November 18, 2014.

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20Some measures conducted by Bank Indonesia ….

Pre-emptive Monetary Policy Mix conducted in 2013 and 2014: • Continuing a tight bias monetary policy. The increase of BI Rate to 7.75% in November

2014 is to anchor inflation expectation and to ensure that inflationary pressures remain under control and temporary, after the subsidized fuel price hike, and that inflation promptly returns towards its target corridor of 4±1% in 2015.

• Allowing more flexibility on the movement of the rupiah exchange rate in line with its fundamentals

• Strengthening payment system policy to support the smooth expansion of government social assistance program to public in order to tight over the impact of fuel price hikes through the use of electronic money and the implementation of Digital Financial Services (DFS)

• Adopting macro-prudential measures (LTV etc)• Deepening the financial market• Strengthening coordination with the Government i.e. via Inflation Controlling Team and

Regional Inflation Controlling Team

As an independent body, Bank Indonesia will maintain macro economy stability, financial stability, and ensure the payment system in a sound, efficient and safe condition

21BI Policy response on corporate external debt . . .

• Improving corporate external debt management in order to mitigate default risk.

• Strengthening accurate data and information of non-bank corporate external debt to support monetary policy formulation.

Increase of Corporate External Debt Risk due to:

•Global Risk: the possibility of global liquidity tightening , weak external demand for exports, and low commodity price.

•Domestic Risk: Increase of DSR and Debt/GDP causing currency risk, liquidity risk, and over-leverage risk.

Phase 2: Over-leverageRegulation

Corporate must fulfill credit rating minimum requirement to apply external debt

1. The rating must be issued by approved BI ‘s rating agency

Legal Basis: Law No.23 Year 1999/No.6 Year 2009 regarding Bank Indonesia, Article 10 point 1 (b)

• Improved corporate’s risk mitigation to reduce currency & maturity mismatch caused by external debt.

• Enhanced forex market deepening.

• Safeguard macro and financial system stability.

Phase 1: Currency and Maturity Mismatch Regulation

1. Hedging Ratio Requirement

2. Liquidity Ratio Requirement

Strengthen reporting requirement to include balance sheet condition.

Increase risks

Policy responses

Expected results

22.

Economic Prospects …..

23Economic Outlook

Economic Growth

Inflation

5.1-5.5%

> 4.5±1%

2014

CA Deficit(% GDP)

±3%

2015

5.4-5.8%

<3%

4.0±1%

24A positive factor for supporting a better economic prospects:

The new Government committed to maintain and improve investment environment, infrastructure, and political stability

Ministers in Economic Area are professional:- Minister of Finance (Bambang Brodjonegoro)- Minister of Energy and Mining (Sudirman Said)- Coordinating Minister of Economic Affairs (Sofyan Djalil)- State-owned Enterprises Ministry (Rini Soemarno)

Thank You

26Appendix

Extra slide

27Managing External Debts …..Indonesian external debts has increased, especially those of private sectors, raising concerns on strengthening prudential for better risk mitigation ..

Overall external debt end of July 2014 at USD 290.6 billion, of which public debt at USD 134.2 billion (46.2%) and private debt at USD 156.4 billion (53.8%). Debt service ratio (DSR) at 50.3%, mostly DSR of the private sector, while DSR of public

sector remains very low and continues declining. Short-term debt (remaining maturity) accounts for 20.6% of total debt. Debt to GDP ratio

at 33.9% while debt to export ratio at 133.0%.

DSR - GovernmentDSR - Private

DSR

Outstanding External Debts DSR: Government and Private

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Adjustment on fuel price subsidy will increase risk of inflation . . .

• Rp2000/L increase on fuel price subsidy will increase inflation around 2.4-2.8%. Yetthe impact will be temporary.

• BI will strengthen coordination with Government through TPI/ TPID to overcome second round effect and to guidance the inflation toward its BI’s target.

Impact of fuel price hikes toward inflation

Dampak Kenaikan BBM (Premium dan Solar)

Dampak Kenaikan Harga BBM BersubsidiBobot SBH 2012 (%)

Inflasi (%) Sumbangan (%)

Dampak langsung 1,27 - Bensin 3,95 30,77 1,21 - Solar 0,16 36,36 0,06

Dampak tidak langsung ke tarif angkutan 0,73 - Angkutan ASDP 0,01 14,68 0,00 - Angkutan Antar Kota 0,66 14,00 0,09 - Angkutan Dalam Kota 2,57 24,18 0,62 - Angkutan Laut 0,05 3,04 0,00

- Tarif KA 0,12 5,73 0,01 - Tarif Taksi 0,09 10,18 0,01

Dampak tidak langsung ke komoditas lainnya *) 0,57 - Core 63,10 0,57 0,36 - Volatile Food 17,46 1,21 0,21Total dampak ke Inflasi IHK 2,58*) Dampak tidak langsung berdasarkan estimasi dengan data terkini, yg mana elastisitas 10% kenaikan harga BBM bersubsidi akan menambah tekanan inflasi core sekitar 0,17% dan VF sekitar 0,36%.

29Economic Growth by Sector

The domestic demand is still the driving force of growth.

%Y-o-Y, Tahun Dasar 2000

I II III IV I II IIIAgriculture 3.7 3.3 3.3 3.8 3.5 3.2 3.4 3.7Mining and Quarrying 0.1 (0.6) 2.0 3.9 1.3 (0.4) (0.3) 0.3Manufacturing Industries 6.0 6.0 5.0 5.3 5.6 5.1 5.0 4.6Electricity, Gas and Water Supply 7.9 4.0 3.8 6.6 5.6 4.8 8.1 6.2Construction 6.8 6.6 6.2 6.7 6.6 6.7 6.4 6.3Trade, Hotel & Restaurant 6.5 6.4 6.1 4.8 5.9 4.8 4.5 4.2Transport and Communication 9.6 10.9 9.9 10.3 10.2 10.2 9.8 9.0Financial, Ownership and Business 8.2 7.7 7.6 6.8 7.6 6.1 6.2 6.0Services 6.5 4.5 5.6 5.3 5.5 5.7 5.7 6.5Gross Domestic Product 6.0 5.8 5.6 5.7 5.8 5.2 5.1 5.0Source : BPS-Statistics Indonesia

Sector 2013 2013 2014

DXY Index: Januari – Desember 2014