2018ECONOMIC

REPORTON INDONESIA

ISSN 0522-2572

VisionTo become a central bank that creates tangible contribution to the Indonesian national economy and be the best central bank amongst emerging market countries.

Mission1. To achieve and maintain Rupiah stability through effective monetary

policy and Bank Indonesia policy mix;

2. To maintain financial system stability through effective macroprudential policy in synergy with microprudential policy by the Financial Services Authority (OJK);

3. To develop digital economy and finance through strengthening Bank Indonesia payment system policy in synergy with the government and other strategic partners policies;

4. To support macroeconomic stability and sustainable economic growth through achieving synergy among Bank Indonesia’s policy mix, Government’s fiscal policies and structural reforms as well as other strategic partners policies;

5. To strengthen the effectiveness of Bank Indonesia policy and economic financing, including infrastructure, through the acceleration of financial market deepening.

6. To develop Islamic economy and finance at the national level and the regional level; and

7. To strengthen the international role, organisation, human resources, governance and information system of Bank Indonesia.

Strategic ValuesBank Indonesia’s strategic values are: (i) trust and integrity; (ii) professionalism; (iii) excellence; (iv) public interest; and (v) coordination and teamwork, based on the nobility of religious values.

Contents | ECONOMIC REPORT ON INDONESIA 2018iv |

CONTENTS

C h a p t e r 1

Global Economy 1

1.1. Global Economic Slowdown 2

1.2. Federal Funds Rate Hike Continues 7

1.3. Global Financial Market Uncertainty 7

1.4. Divergent Global Policy Response 8

1.5. Strengthening International Cooperation 11

Box 1.1. IMF–World Bank Annual Meetings in Nusa Dua, Bali 14

C h a p t e r 2

Economic Growth 17

2.1. Increasing Domestic Demand 19

2.2. Secondary and Tertiary Sectors Drive Growth 23

2.3. Growth Accelerated in Most Regions 25

2.4. Growth Quality Improved 29

Box 2.1. Stimulating Export-Oriented Manufacturing 34

C h a p t e r 3

Balance of Payments 37

3.1. Intense Pressure in the Second and Third Quarters of 2018 39

3.2. Regaining Momentum in the Fourth Quarter of 2018 41

3.3. External Resilience Maintained 44

Box 3.1. Controlling the Current Account Deficit 48

C h a p t e r 4

Inflation and the Exchange Rate 51

4.1. Pressure on Exchange Rate Remained Contained 52

4.2. Renewed Improvement in the Forex Market 55

4.3. Efficient Forex Market Structure 56

4.4. Stable Low Inflation 57

4.5. Subdued Regional Inflation 64

C h a p t e r 5

Monetary Policy 69

5.1. Increasing the Policy Rate 70

5.2. Maintaining the Exchange Rate in Line with Fundamentals 71

5.3. Maintaining Adequate Liquidity 72

5.4. Strengthening the Global Financial Safety Net 74

5.5. Building Closer Policy Coordination 76

5.6. Transmission Functioning Well 77

Box 5.1. Implementation of the Average Statutory Reserve Requirement 80

Box 5.2. Bank Indonesia Sukuk as an Instrument for Monetary Operations and the Sharia Money Market 82

Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv

Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vi

Charts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

Diagrams and Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi

Bank Indonesia Board of Governors . . . . . . . . . . . . . . . . . . . . . . . xiv

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xviii

General Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxiii

ECONOMIC REPORT ON INDONESIA 2018 | Contents | v

C h a p t e r 6

Financial Market Deepening Policy 85

6.1. Preparing a National Strategy 86

6.2. Promoting Financing Through Efficiency 88

6.3. Accelerated Deepening of the Capital Market 92

6.4. Expanding Innovations for Infrastructure Financing 93

Box 6.1. Improvements to Money Market Benchmark Rates (IndONIA and JIBOR) 95

Box 6.2. Provisions for Domestic Non-deliverable Forward Transactions 97

Box 6.3. Promoting the Private Sector Role in Infrastructure Financing 99

C h a p t e r 7

Macroprudential Policy 103

7.1. Relaxing Loan-to-Value/Financing-to-Value for Home Ownership Loans, and Extending Financing Access for Micro, Small and Medium Enterprises 104

7.2. The Macroprudential Intermediation Ratio 107

7.3. Macroprudential Liquidity Buffer 107

7.4. Holding the Countercyclical Capital Buffer at 0% 108

7.5. Strengthening Supervision and Coordination 109

7.6. Increased Intermediation, Stability Maintained 111

Box 7.1. MSME Financial Reports Survey 114

C h a p t e r 8

Payment System Policy 117

8.1. Expansion of Electronic Payments 118

8.2. Strengthening of Payment Ecosystems and Digital Finance 119

8.3. Extending the Reach of Rupiah Services 120

8.4. Strengthening of Risk Control 122

8.5. Strengthening of Institutional Coordination 124

Box 8.1. Non-Cash Social Assistance for Economic Empowerment 126

Box 8.2. Consumer Protection to Support the Optimization of Payment Systems 128

C h a p t e r 9

Fiscal Policy and Structural Reform 131

9.1. Increase in Tax Revenues 132

9.2. Sharpening State Expenditure 135

9.3. Strengthening the Financing Strategy 137

9.4. Encouraging the Fiscal Role of the Regions 138

9.5. Expanding Infrastructure Development 141

9.6. Accelerating Structural Reform 142

Box 9.1. Social Protection and Transfers to Regions for Equitable Economic Growth 145

Box 9.2. Fiscal Incentives to Promote Economic Growth 147

C h a p t e r 1 0

Economic Outlook and Policy Direction 151

10.1. Global Economy to Remain Unfavorable 152

10.2. Domestic Economy to Remain Strong 153

10.3. Optimism in the Medium Term 157

10.4. Increasingly Solid Policy Synergy 162

10.5. Consistent Implementation of Structural Reforms 167

Box 10.1. Tourism to Boost Foreign Exchange 175

Box 10.2. Regional Economic Development Strategy 177

Box 10.3. Strengthening the Sharia Economic Development Platform 179

Appendices 183

Contents | ECONOMIC REPORT ON INDONESIA 2018vi |

TABLES

1. Global Economy 1

Table 1.1. World GDP Growth 2

2. Economic Growth 17

Table 2.1. Gross Domestic Product by Expenditure 19

Table 2.2. Gross Domestic Product by Industrial Origin 23

Table 2.3. Corporate Financial Performance 25

3. Balance of Payments 37

Table 3.1. Indonesia’s Balance of Payments 38

Table 3.2. Oil Exports 42

Table 3.3. Oil Imports 43

Table 3.4. Indicator of External Sector Resilience in terms of Solvency 45

4. Inflation and the Exchange Rate 51

Table 4.1. Supply and Price Stabilization Policy 62

5. Monetary Policy 69

Table 5.1. Financial Cooperation in GFSN 75

Table 5.2. Financial Cooperation in LCS framework 76

9. Fiscal Policy and Structural Reform 131

Table 9.1. State Revenue and Expenditure 134

Table 9.2. Surplus, Deficit, and SiLPA 141

10. Economic Outlook and Policy Direction 151

Table 10.1. Global GDP Outlook 152

Table 10.2. Projection of Export Commodity Price Index 153

Table 10.3. GDP Outlook by Expenditure 2019 154

Table 10.4. GDP Outlook by Industrial Origin 2019 155

ECONOMIC REPORT ON INDONESIA 2018 | Contents | vii

CHARTS

1. Global Economy 1

Chart 1.1. Advanced Economies GDP Growth 3

Chart 1.2. US Fiscal Budget 3

Chart 1.3. US Consumption and Earnings 3

Chart 1.4. US Labor Market Indicators 4

Chart 1.5. Euro Area Exports 4

Chart 1.6. Purchasing Manager Index, Euro Area 4

Chart 1.7. Advanced Economies Inflation Rate 5

Chart 1.8. Japan Inflation Rate 5

Chart 1.9. Indonesia Export Commodities Price Index (IHKEI) and PMI 6

Chart 1.10. Global Energy Prices 6

Chart 1.11. Stock Price and US Government Bond Yield 7

Chart 1.12. Global Liquidity Indicators 7

Chart 1.13. Cumulative Change of Non-Resident Ownership in Portfolio Investment in Emerging Economies 8

Chart 1.14. Global Financial Market Uncertainty and Risk Indicators 8

Chart 1.15. Changes of Monetary Policy Rate in Emerging Economies 9

Chart 1.16. Monetary Policy Rate in Advanced Economies 9

Chart 1.17. Target and Realization of China’s Budget Deficit 10

2. Economic Growth 17

Chart 2.1. Indonesia’s Economic Growth 18

Chart 2.2. Wages of Workers and Farmers Terms of Trade 20

Chart 2.3. Consumer Confidence Index 20

Chart 2.4. Leisure and Non-Leisure Consumption 20

Chart 2.5. Contribution of Non-Construction Investment Growth to GDP 21

Chart 2.6. Cement Sales and Construction Investment 21

Chart 2.7. Domestic Capital Investment Realization 21

Chart 2.8. Non-Oil and Gas Real Imports 22

Chart 2.9. Real Exports and World Trade Volume 22

Chart 2.10. Non-Oil and Gas Real Exports 22

Chart 2.11. Motor Vehicle and Motorcycle Sales 23

Chart 2.12. Online Sales 24

Chart 2.13. Purchasing Managers Index and Manufacturing Sector Growth 24

Chart 2.14. Nonfinancial Corporate Profitability 24

Chart 2.15. Nonfinancial Corporate Productivity 25

Chart 2.16. International Visitors and Hotel Occupancy Rates 25

Chart 2.17. Household Consumption by Region 26

Chart 2.18. NPISH Consumption by Region 26

Chart 2.19. Government Consumption by Region 27

Chart 2.20. GFCF by Region 27

Chart 2.21. Manufacturing Sector by Region 28

Chart 2.22. Mining and Quarrying Sector by Region 28

Chart 2.23. Open Unemployment Rate 29

Chart 2.24. Contribution of Labor Growth by Employment Status 29

Chart 2.25. Online Job Vacancy Indicator 30

Chart 2.26. Contribution of Labor Growth by Sector 30

Chart 2.27. Open Unemployment Rate by Province 30

Chart 2.28. Poverty Rate 31

Chart 2.29. Poverty Rate by Province 31

Chart 2.30. Gini Ratio 32

Chart 2.31. Gini Ratio by Province 32

3. Balance of Payments 37

Chart 3.1. Indonesia’s Balance of Payments 39

Chart 3.2. Current Account 39

Chart 3.3. Non-oil and Gas Trade Balance 40

Chart 3.4. Non-oil and Gas Imports by Type of Goods 40

Chart 3.5. Natural Resource Commodity Based Exports 40

Contents | ECONOMIC REPORT ON INDONESIA 2018viii |

CHARTS

Chart 3.6. Oil and Gas Trade Balance and Oil Prices 41

Chart 3.7. Portfolio Investment 41

Chart 3.8. Commodity Prices and Non-oil and Gas Exports 42

Chart 3.9. Portfolio Investment by Sector 43

Chart 3.10. Private Sector Other Investment Liabilities Transactions 43

Chart 3.11. Number of Indonesian Migrant Workers (PMI) and Remittances 44

Chart 3.12. Official Reserve Assets 44

Chart 3.13. Debt Service Ratio 45

Chart 3.14. External Debt Growth 46

Chart 3.15. External Debt to GDP Ratio 46

4. Inflation and the Exchange Rate 51

Chart 4.1. VIX and DXY 53

Chart 4.2. Indonesia’s Credit Default Swaps (CDS) and Other Developing Countries 53

Chart 4.3. Exchange Rate Changes 54

Chart 4.4. Exchange Rate Volatility 55

Chart 4.5. Inflow of BI Certificate (SBI), Government Debt Securities (SUN) and Stocks 55

Chart 4.6. Bid-Ask Spread in US Dollar/Rupiah Spot Transactions 56

Chart 4.7. Spot Transaction Volume 56

Chart 4.8. Derivative Transaction Volume 56

Chart 4.9. Developments of THB and MYR in the Mechanism of The Local Currency Swap Cross Currency Dealer 57

Chart 4.10. Consumer Price Index and Its Targets 57

Chart 4.11. Core Inflation 58

Chart 4.12. Demand Pull Indicators 59

Chart 4.13. Contribution Core Inflation of Goods 59

Chart 4.14. Contribution of Core Services Inflation 59

Chart 4.15. Component of Housing Services 60

Chart 4.16. Core Traded Inflation, Exchange Rate and Global Commodity Price 60

Chart 4.17. Wholesale Inflation and Core Inflation 60

Chart 4.18. Inflation Expectations 60

Chart 4.19. Volatile Food Inflation 61

Chart 4.20. Inflation of Chicken and Eggs 61

Chart 4.21. Contribution of Volatile Food Inflation 61

Chart 4.22. Monthly Rice Inflation 62

Chart 4.23. Global Food Prices and VF Inflation 63

Chart 4.24. VF inflation during the Religious Festivities in 2018 63

Chart 4.25. Contributors of Administered Prices Inflation 63

Chart 4.26. Airfares Inflation 64

Chart 4.27. Ditsribution of Province Inflation 65

Chart 4.28. Regional Inflation 65

Chart 4.29. Disaggregation of Sub-groups of Selected Spices by Region 65

Chart 4.30. Food Inflation by Regions 66

Chart 4.31. Disaggregation of Food Inflation by Commodities 66

5. Monetary Policy 69

Chart 5.1. Interest Rate Differential and Real Interest Rate 71

Chart 5.2. Contractionary Monetary Operation Position and Bank Holdings of Government Securities 74

Chart 5.3. Growth of Base Money Components 74

Chart 5.4. Growth of Base Money and Its Affecting Factors 74

Chart 5.5. Inflow of BI Certificate (SBI), Government Debt Securities (SUN) and Stocks 78

Chart 5.6. Time Deposits Rate by Tenor 78

Chart 5.7. Credit Growth and Credit Rate 78

Chart 5.8. Time Deposit and Credit Rate Spread 79

Chart 5.9. Growth of M2 Components 79

ECONOMIC REPORT ON INDONESIA 2018 | Contents | ix

CHARTS

6. Financial Market Deepening Policy 85

Chart 6.1. Indonesia’s Economic Financing 87

Chart 6.2. Comparison of Financial Market Deepening 87

Chart 6.3. Position of Repo and Interbank Money Market 89

Chart 6.4. Instrument Variations and Tenors in Money Market 90

Chart 6.5. Certificate of Deposits 90

Chart 6.6. Daily Average Repo Transaction Volume Based on Tenor 92

Chart 6.7. Transaction Volume and Position of Domestic Non-Deliverable Forward 92

Chart 6.8. Transaction Volume and Position of CSO 92

7. Macroprudential Policy 103

Chart 7.1. Bank Indonesia’s Residential Property Price Index (IHPR) 105

Chart 7.2. Growth of Home Ownership Loans by Type of House 105

Chart 7.3. NPL of Home Ownership Loans by Type of House 106

Chart 7.4. Achievement of MSME Credit Target 106

Chart 7.5. Banking Liquidity Resilience 108

Chart 7.6. Sharia Banking Liquidity Resilience 108

Chart 7.7. Credit to GDP Gap 109

Chart 7.8. Banking Credit Growth and NPL 111

Chart 7.9. Share of Domestic Financing 112

Chart 7.10. Financial System Stability Index 112

Chart 7.11. Capital Adequacy Ratio (CAR) 112

Chart 7.12. Foreign Net-Buy in Government Debt Securities and 10-Year Government Securities Yield 113

Chart 7.13. Foreign Net-Buy in Stock Market and JCI 113

8. Payment System Policy 117

Chart 8.1. Transactions Using ATM/Debit Cards 120

Chart 8.2. Off-Us Transactions Value of GPN Cards 120

Chart 8.3. Currency in Circulation (CiC) 121

Chart 8.4. Comparison of Currency in Circulation 121

Chart 8.5. Quality Survey of Banknotes in Circulation 122

Chart 8.6. Intraday Liquidity Facilities (FLI) Usage Volume 123

Chart 8.7. Daily Average BI-RTGS Transactions 123

9. Fiscal Policy and Structural Reform 131

Chart 9.1. Tax Revenue and Growth 133

Chart 9.2. Tax Revenue, Tax Ratio, and Tax Ratio Exclude Oil and Gas 133

Chart 9.3. Non-oil and Gas Income Tax Growth 134

Chart 9.4. Import Growth and Tax on Import 135

Chart 9.5. Non-tax Revenue Growth 135

Chart 9.6. Thematic Budget Expenditure 136

Chart 9.7. Health and Education Budget through TKDD 136

Chart 9.8. State Expenditure 137

Chart 9.9. Composition of State Expenditure 137

Chart 9.10. Fiscal Deficit and Primary Balance 137

Chart 9.11. Composition of Government Debt Based on Currency 138

Chart 9.12. Composition of Government Securities 138

Chart 9.13. Composition of Government Debt to GDP 139

Chart 9.14. Government Debt Ratio of Selected Countries 139

Chart 9.15. Components of Revenue in Regional Budget (APBD) 139

Contents | ECONOMIC REPORT ON INDONESIA 2018x |

CHARTS

Chart 9.16. Local Revenue by Region 140

Chart 9.17. Composition of Expenditure in Regional Budget (APBD) 140

Chart 9.18. Composition of Regional Budget Expenditure by Region 140

Chart 9.19. Realization of Expenditure in Regional Budget (APBD) 141

Chart 9.20. Realization of Infrastructure Budget 142

Chart 9.21. Share of PSN’s Financing 142

Chart 9.22. PSN Realization Development 143

10. Economic Outlook and Policy Direction 151

Chart 10.1. Allocation of Subsidies and Social Assistance in State Budget 154

Chart 10.2. Estimation of National Strategic Projects (PSN) 155

Chart 10.3. Inflation Forecasts 156

Chart 10.4. Global Economic Productivity 158

Chart 10.5. Estimated Completion of PSN Infrastructure Projects 159

Chart 10.6. Projection of Fintech Transaction in Indonesia 162

Chart 10.7. Poverty Rates and Economic Gaps in Indonesia 167

Chart 10.8. Infrastructure Competitiveness Ranking 168

Chart 10.9. Indonesia Infrastrusture Quality Ranking 168

Chart 10.10. Average Comparison of School Year 169

Chart 10.11. Comparison of Human Development Index 169

Chart 10.12. Comparison of Innovation Index 169

Chart 10.13. Ease of Doing Business Ranking 170

Chart 10.14. Quality of Indonesian Government’s Governance 170

Chart 10.15. Growth and Share of Manufacturing 170

Chart 10.16. Composition of Indonesia Exports 171

Chart 10.17. Indonesia Export and Economic Performance 171

Chart 10.18. Employment Share of Manufacturing Sector and Level of Income 172

Chart 10.19. Volume of Bond Trading in Secondary Market 173

Chart 10.20. Foreign Ownership of Government Bond 174

ECONOMIC REPORT ON INDONESIA 2018 | Contents | xi

DIAGRAMS AND FIGURES

2. Economic Growth 17

Figure 2.1. Regional Economic Growth in 2018 26

3. Balance of Payments 37

Figure 3.1. External Debt Profile 46

4. Inflation and the Exchange Rate 51

Diagram 4.1. Determinants of Inflations in 2018 53

Figure 4.1. Map of Regional Inflation Development (%yoy) 64

Figure 4.2. Regional Inflation Control Program 67

6. Financial Market Deepening Policy 85

Figure 6.1. National Financial Market Development and Deepening Strategy Framework 87

Figure 6.2. Benchmark Rate and Interest Rate Derivative Market Development 91

Figure 6.3. Infrastructure Financing Scheme 94

10. Economic Outlook and Policy Direction 151

Figure 10.1. Priority Program of TPID 2019 - 2021 158

Figure 10.2. Target and Achievement of Public-Private Partnerships (KPBU) and Non-Budget Investment Financing (PINA) 173

Board of Governors | ECONOMIC REPORT ON INDONESIA 2018xiv |

BOARD OF GOVERNORS

PERRY WARJIYOGOVERNOR – FROM MAY 2018,DEPUTY GOVERNOR – UNTIL APRIL 2018

ERWIN RIJANTODEPUTY GOVERNOR

ROSMAYA HADIDEPUTY GOVERNOR

ECONOMIC REPORT ON INDONESIA 2018 | Board of Governors | xv

MIRZA ADITYASWARASENIOR DEPUTY GOVERNOR

SUGENGDEPUTY GOVERNOR

DODY BUDI WALUYODEPUTY GOVERNOR

Board of Governors | ECONOMIC REPORT ON INDONESIA 2018xvi |

AGUS D.W. MARTOWARDOJOGOVERNOR

UNTIL MAY 2018.

BOARD OF GOVERNORS

Foreword | ECONOMIC REPORT ON INDONESIA 2018xviii | Foreword | ECONOMIC REPORT ON INDONESIA 2018xviii |

Perry WarjiyoThe Governor of Bank Indonesia

FOREWORD

ECONOMIC REPORT ON INDONESIA | Foreword | xix

The policy mix boldly and consistently taken by Bank Indonesia in synergy with the Government and the Financial Services

Authority brought the Indonesian economy safely through 2018.

While offering praise and thanksgiving to God the Almighty, I have the honor on behalf of the Board of Governors of Bank Indonesia to present this book, the 2018 Economic Report on Indonesia. This book provides a comprehensive evaluation of developments in the Indonesian economy, the policy responses chosen by Bank Indonesia over the course of 2018 and the economic outlook and direction of Bank Indonesia policy for 2019. The publication of this book is also a fulfillment of Bank Indonesia’s accountability and transparency requirements under the Bank Indonesia Law.

From the day I was sworn in as Governor of Bank Indonesia on 24 May 2018, global economic and financial developments were fraught with an uncertainty that threatened the economies of some nations. A series of potentially destabilizing events occurred in quick succession: the increased frequency and magnitude of increases in the Federal Funds Rate, trade tensions from actions launched by the United States against countries including China, falling commodity prices, the uncertainty over Brexit and a number of geopolitical risks. In consequence, global investors engaged in a large-scale rush to withdraw funds from emerging markets, thus threatening the external stability of these countries, including Indonesia. Not only did various currencies depreciate sharply against the US dollar, but balance of payments disequilibrium also exacerbated risks of macroeconomic and financial system instability. Argentina and Turkey were hit by crisis, while other emerging market nations struggled hard to bolster the external resilience of their economies against the adverse impact of this global contagion.

We give thanks that the policy mix boldly and consistently taken by Bank Indonesia –in synergy with the Government and the Financial Services Authority – brought the Indonesian economy safely through 2018. The external resilience of the Indonesian economy was strong and

growth maintained momentum. The preemptive, front-loading and ahead-of-the-curve rate increases in monetary policy rate responses, and stabilization of the exchange rate, brought about a decisive turnaround in conditions, particularly in the fourth quarter of 2018. Foreign capital inflows resumed in substantial volume and the return to equilibrium in the balance of payments prompted strong appreciation in the rupiah. Prudent fiscal policy provided support for macroeconomic stability, while financial stability was maintained through coordination under the Financial System Stability Committee. Accommodative policies were pursued to bolster growth momentum: measures involved financial market deepening, macroprudential policies, the payment system, a fiscal stimulus commensurate with fiscal space, and acceleration of a number of structural reform policies.

Looking ahead, we are optimistic that the Indonesian economy will continue to improve. Growth will be higher, while macroeconomic and financial system stability will remain firmly in hand. This optimism is based on the solid policy synergy forged between Bank Indonesia, the Government, the Financial Services Authority and other authorities in their national economic policy mix. The focus of monetary and fiscal policy coordination remains macroeconomic stability, with the available space used to deliver growth stimuli. Likewise, financial system stability will be strengthened further by close policy coordination and supervision among the Ministry of Finance, Bank Indonesia, the Financial Services Authority and the Indonesian Deposit Insurance Corporation, the four members of the Financial System Stability Committee. Their coordination covers measures for prevention and resolution of financial crises.

The optimism for higher economic growth, especially in the medium term, is the result of structural reform policies that have already been implemented and will

Foreword | ECONOMIC REPORT ON INDONESIA 2018xx |

Jakarta, March 2019The Governor of Bank Indonesia

Perry Warjiyo

continue to generate benefits in the future. Over the past five years, accelerated infrastructure construction for connectivity and development of economic and tourism zones have not only improved logistical efficiency, but also productivity, and will continue to so do in the future. Similarly, further improvements will be made in the investment climate and ease of doing business. Industry and tourism development policies will reduce the current account deficit and reinforce the structure of the economy. Greater balance will be achieved between the primary commodity base, manufacturing and services. The digital economy and digital finance are expected to promote development of micro, small and medium enterprises and financial inclusion across Indonesia. Bank Indonesia will make decisive contributions to this optimism for higher growth through financial market deepening, macroprudential policies, the payment system and sharia economics and finance.

The 2018 Economic Report on Indonesia has undergone various improvements in chapter structure, content and writing. After the General Review, the next four chapters offer detailed presentations of developments in the global and domestic economy, focused on economic growth,

the balance of payments, inflation and the exchange rate. Policy responses are discussed in the subsequent five chapters on monetary policy, financial market deepening policy, macroprudential policies, payment system policy and fiscal and structural reform policy. The final chapter of the book presents the economic outlook for Indonesia, the challenges ahead and the future policy direction of Bank Indonesia.

In conclusion, my hope is that this book will not only serve as a useful reference, but will also strengthen optimism for a brighter outlook for the Indonesian economy. This optimism is reflected in the Pakarena dance that features on the cover of this book. The Pakarena dance comprises clockwise body movements in unison with harmonious ascending and descending hand gestures, resembling the cycle of human life. The graceful movements symbolize synergy and togetherness in addressing the problems and challenges we face as we move forward in our quest for improvement. May God the Almighty continuously bestow His guidance, protection, goodness and blessing for our every prayer and endeavor in bringing progress to the Indonesian economy and our beloved nation.