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Managing Global Shocks:The Case of Indonesia
Dr. Hartadi A. Sarwono
Deputy Governor
IIF Asian Regional Economic Forum – Singapore, March 5, 2009
1. Crisis highlights2. Macroconomic Condition and Outlook
- Economic Growth- Balance of Payments- Exchange Rate- Inflation
3. Banking Sector
Outline2
Crisis Highlight
• The current global financial debacle has a destabilizing impact all over the world.
• The crisis has continued to remain unfolding with its full impacts difficult to assess.
• In Indonesia, the exogenous shock has led to the pressure stemming mainly from the reversal of capital outflows as foreign investors began to unwind their position to cover their loss of investments and partly reduce their exposure.
• IMF/WB’s World Economic Outlook has been continued revising global outlook down-ward:
– Global Economic Growth from 1.6% to 0.5%
– World Trade Volume from 1.5% to -3.0%
3
Gross Domestic Product (1)
The Indonesian economy had generally performed well in the first three quarters of 2008.
However, the economic landscape was subsequently reshaped by the intensifying downturn in the global financial market on the last quarter
4
• Domestic demand is still the main source of growth in 2008 supported by the growth of consumption 5.9% and investment 11.7%.
• Exports declined significantly in the 4th quarter of 2008.
Gross Domestic Product (2)
• The economy still relies on the non-tradable sectors.
• The manufacturing sector declined.
5
Slower Growth in 2009
• The challenge is the potential slowdown in external sector.
• Export is expected to decline due to slowdown of both global demand and commodity price.
• Import will also drop as domestic economic activities decline.
• Bank Indonesia estimates the economic growth will slow in 2009 to around 4.0% as compare to the previous estimate of around 4.0%-5.0%.
• The source of growth will come mainly from domestic demand.
6
• Balance of Payments remained sound in 2008.
• Slowing global demand, increasing import, and investors risk
aversion gradually put pressure on the current account as well
as financial account.
7
Trade and Current Account Balance in 2008
• The performance of overall BoP in 2008 remain sound
• 1stH 2008 benefited from global commodity price increased and buoyant domestic economic activities
• Pushing Non-oil/gas Exports growth to 22.4% in Q3-08 and Imports to 44.7% in Q3-08
• However, Exports declined significantly to 0.2% in Q4-08 and Imports dropped to 28.6% in Q4-08.
• This showed that the impact of global economy slow-down to exports is deeper than the impact of domestic economic activities to imports.
• Current Account turned from $2.6 bio surplus in Q1-08 to deficit in the rest of 2008 bringing overall surplus albeit small by end of 2008 around $600.0 mio.
8
22.4
0.2
44.7
28.6
0
5
10
15
20
25
30
35
40
45
50
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Exports (y.o.y)
Imports (y.o.y)
%
2007 2008
• The impact of the global economy slow-down is much more severe to the economy through export channel, as compare to the impact of the slow-down of domestic economy through import channel.
Exports vs Imports Growth
9
• Capital outflows signified at the 4th quarter of 2008.• Reflected on a drop in foreign reserves .
Foreign Holding on Domestic Assets & Foreign Reserves
10
0
10
20
30
40
50
60
70
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000 Central Bank Certificates Gov't Securities
Official Foreign Reserves (rhs)
USD million USD billion
Capital & Financial Account in 2008
• Capital Account remained surplus in Q3-08 of $515 mio down from $2.6 bio surplus in Q2-08
• Capital reversal occurred in Q4-08 due to strong selling of foreign owned SBI and government bonds:
– SBI dropped from $6.7 bio in Q3-08 to $800.0 mio in Q4-08
– Bonds declined from $11 bio in Q3-08 to $8.0 bio in Q4-08
• Foreign Exchange Reserves quickly down to $51.6 bio in Q4-8 from around $60.0 bio in Q3-08
11
Currently, foreign reserves stabilizes at US 50 - 51 billion and it covers 5.4 months of imports & official debt repayment
Foreign Reserves in terms of Month of Imports
12
-
1
2
3
4
5
6
-
10
20
30
40
50
60
70 Ja
n
Feb
Mar
Apr
May Jun Jul
Aug
Sept
Oct
Nov Des Jan
06/F
eb
13/F
eb
23/F
eb
27/F
eb
Foreign Reserves (lhs)
Month of Imports & Official Debt Repayment
USD billion Month
2008 2009
Looking Forward into 2009: CA Deficit
• The combination of global economic slowdown and further decline of commodity prices affects export performance.
• The accompanying fall in imports prevents the current account going deep into negative territory.
• Non-oil/gas Exports is expected to decline -25% to -28%.
• Non-oil/gas Imports also drop to -24% to -27%.
• The deficit of Current Account is estimated around 0.5% GDP.
13
Looking Forward into 2009: Capital A/C Private Sector
• Expect continued de-leveraging and consolidation of global financial markets which affects private capital flows.
• Private Sector Debts:
– Short-term debts matured this year $17.4 bio including interest payment ($2 bio)
– Estimate of Trade Financing of $5.2 bio in the form of Bankers Acceptance and Trade Credits.
– Total private debt falls due in 2009 is estimated $22.6 bio
• Of all $17.4 bio, around 31% is obtained from parent company and affiliates.
• Of all $17.4 bio, around 57% is owned by foreign and join corporation.
14
Private Short-term Debts:SDDS versus Regular Debt Report
15
USD million
Looking Forward into 2009: Capital A/C Public Sector
• Potential outflow from foreign owned SBI and government bonds will be diminished.
• Significant outflow during Q4-08 has left only institutional and long-term investors
• The recent issuance of global MTN of $3.0 bio showed that market appetite is still positive
• Expect more inflows from government financing of deficit and fiscal stimulus.
• The government secured its 2009 Budget deficit (2.6% of GDP) from both domestic and foreign financing.
• The government received commitment of contingency facility from multilateral and bilateral donors.
16
Budget Financing in 2009The government has secured funding sources
(USD bn)
17
Exchange rate: Rp11,000/USD
Budget Financing in 2009The Prospective Target of Bonds Issuance
Bonds Issuance
18
(USD bn)
Budget Financing in 2009Contingency Facility from Multilateral & Bilateral Donors
(USD bn)
Contigency/Additional Loan
*) under negotiation
19
Indonesia’s debt burden improved andthe indicators are better than the tresholds
Debt Ratios
20
27.59
87.02
-
50
100
150
200
250
300
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Debt/GDP Debt/X DSR
%
WB Threshold
Exchange Rate
• The Rupiah exchange rate is not immune or completely insulated from the global risk aversion toward emerging markets.
• Liquidity has dried up the domestic foreign exchange supply.
• Bank Indonesia has been present in FX market to reduce volatility without allowing substantial reduction in the foreign exchange reserves.
• Bank Indonesia will maintain this approach to mitigate inflationary pressure stemming from depreciation, and to improve market confidence during episodes of shocks and limited supply.
21
The Rupiah has been depreciated sharply around 18% in
Q4-08 bringing annual average depreciation of around
5.4% from Rp9.140/$ in 2007 to Rp9.665/$ in 2008.
Exchange Rate
22
8600
9000
9400
9800
10200
10600
11000
11400
11800
12200
126000
1-J
an-0
8
14
-Jan
-08
25
-Jan
-08
07
-Feb
-08
20
-Feb
-08
04
-Mar
-08
17
-Mar
-08
28
-Mar
-08
10
-Ap
r-0
8
23
-Ap
r-0
8
06
-May
-08
19
-May
-08
30
-May
-08
12
-Ju
n-0
8
25
-Ju
n-0
8
08
-Ju
l-0
8
21
-Ju
l-0
8
01
-Au
g-0
8
14
-Au
g-0
8
27
-Au
g-0
8
09
-Sep
-08
22
-Sep
-08
03
-Oct
-08
16
-Oct
-08
29
-Oct
-08
11
-No
v-0
8
24
-No
v-0
8
05
-Dec
-08
18
-Dec
-08
31
-Dec
-08
13
-Jan
-09
26
-Jan
-09
06
-Feb
-09
19
-Feb
-09
Rp/USDRp/USD
1215011980
Adequacy of the Foreign Exchange Reserves
• The current $50 bio Foreign Reserves may be adequate in normal times but not enough to underpin confidence in the extremely dynamic situation.
• The government budget support in the form of foreign loans and bonds
• As member of Asean +3 Indonesia has established:– Bilateral Swap Arrangement with +3 countries of $18 bio
– Chiang Mai Initiatives Multi-lateralization (CMIM) “pooling funds” of $120 bio.
• Establishing central banks’ contingency Currency Swap facilities.
• Establishing other contingency facility with multilateral financial institutions.
23
Headline inflation has been trending down
Inflation
24
Inflation Outlook
• Inflation has been trending down from the peak to arrive at 11.1% in 2008.
• Expected to drop further closer to the lower range of 5%-7% in 2009, in line with slowing demand globally and domestically, as well as falling commodity prices.
• With inflationary pressure diminishing, Bank Indonesia sees more rooms for monetary policy easing.
• Bank Indonesia remains committed to focus on achievement of the medium term inflation outlook.
25
Banking Indicators: CAR & NPLs
Banking sector remained sound• Minimal exposure on “toxic” assets.
• CAR remained solid.• Credit risks also kept in check.
26
-
1
2
3
4
5
6
7
8
9
10
-
5
10
15
20
25 Ja
n-0
5
Ma
r-0
5
Ma
y-0
5
Ju
l-0
5
Se
p-0
5
No
v-0
5
Ja
n-0
6
Ma
r-0
6
Ma
y-0
6
Ju
l-0
6
Se
p-0
6
No
v-0
6
Ja
n-0
7
Ma
r-0
7
Ma
y-0
7
Ju
l-0
7
Se
p-0
7
No
v-0
7
Ja
n-0
8
Ma
r-0
8
Ma
y-0
8
Ju
l-0
8
Se
p-0
8
No
v-0
8
Ja
n-0
9
CAR (lhs) NPLs (gross)
%%
Loans was remarkably high accompanied with
sufficient sources of loans funding
Banking Indicators: Deposit & Loan Growth
27
-
5
10
15
20
25
30
35
40
Ja
n-0
5
Fe
b-0
5
Ma
r-0
5
Ap
r-0
5
Ma
y-0
5
Ju
n-0
5
Ju
l-0
5
Au
g-0
5
Se
p-0
5
Oct-
05
No
v-0
5
De
c-0
5
Ja
n-0
6
Fe
b-0
6
Ma
r-0
6
Ap
r-0
6
Ma
y-0
6
Ju
n-0
6
Ju
l-0
6
Au
g-0
6
Se
p-0
6
Oct-
06
No
v-0
6
De
c-0
6
Ja
n-0
7
Fe
b-0
7
Ma
r-0
7
Ap
r-0
7
Ma
y-0
7
Ju
n-0
7
Ju
l-0
7
Au
g-0
7
Se
p-0
7
Oct-
07
No
v-0
7
De
c-0
7
Ja
n-0
8
Fe
b-0
8
Ma
r-0
8
Ap
r-0
8
Ma
y-0
8
Ju
n-0
8
Ju
l-0
8
Au
g-0
8
Se
p-0
8
Oct-
08
No
v-0
8
De
c-0
8
Ja
n-0
9
Deposits Loans
%, yoy
Banking Sector Outlook: 2009
• Banking system is expected to expand its lending growth of around 14%-16%
• Backed by 10%-12% deposits growth and sizeable secondary reserves in the form of SBI and bonds.
• NPL is expected to increase around 5%-6%.
• Banks will directly provide loan loss provisions and restructure bad loans. CAR is expected to decline around 14%-15%.
• The impact of weaker Rupiah is quite limited due to bank generally holds low NOP around 4-5% whereas the maximum limit is 20%.