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22-Oct-2012
1
1
Juda Agung, PhD
Singapore, 24 September 2012
Euro-Area Uncertainties and Implications on Indonesian Economy
2 Outline… 2
Fundamentals of Indonesian Economy Impacts of Renewed Global Uncertainties
Policy Challenges and Responses
22-Oct-2012
2
Indonesian economy remains resilient… Despite global slowdown, Indonesia’s growth remains strong, posted an average of 6.0 % during 2007-2012. The Q2-2012 show that the economy is resilient amidts sharp fall in exports.
Inflation has fallen sharply, reaching a single digit. Core inflation has been fairly stable in the last 3 years at around 4%.
3
GDP Growth 2002 - 2012
3
4
5
6
7
8
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
5 Year Average: 5.1% 2002 - 2006
%, yoy
5 Year Average: 6.0% 2007 - 2011
-
4
8
12
16
20
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
%, yoy
CPI Inflation 2002 - 2012
Q2-
2012
6.4%
Strong Domestic Demand … GDP Growth by Expenditure
-1.9
2.0
-3.0
3.7
2.3
0.4
2.8
1.1
2.3
-4.1
0.9
2.9
0.5
2.8
-6 -4 -2 0 2 4 6
- Statistical Discrepancy
- Change in Inventories
Import
Export
Gross Fixed Cap Formation
- Government C.
- Household C.
Q2-2012 Q1-2012
Contribution of Growth (%)
22-Oct-2012
3
...supported by growing middle class consumers..
Middle Class Consumers (ADB)
5
Income Groups
(BPS)
28.4
104.5
129.2
15%
46%
54%
0%
10%
20%
30%
40%
50%
60%
0
20
40
60
80
100
120
140
160
19
90
19
93
19
96
19
99
20
02
20
05
20
06
20
07
20
08
20
09
20
10
Jumlah Middle Class Rasio Middle Class
Juta orang Persen
20.9 18.8 19.6 16.9
36.9 36.4 35.7 34.7
42.2 44.8 44.8 48.4
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2002 2005 2008 2011
Low income Middle income High income % share
Source: Susenas Survey (BPS)
... continuous increasing FDI... As a destination for FDI, Indonesia made impressive gains, moving up from ranking 20th in 2010 to 9th in recent survey.
Realized FDI (USD billion)
6
The A.T. Kearney FDI
Confidence Index, 2012
22-Oct-2012
4
Underpinned by structural reform… Structural reforms has been fruitful, reflected in improved business climate and rising investment, while consistent fiscal discipline has led to a downward trend of external debt.
Investment (% of GDP)
7
External Debt (% of GDP)
62.2%
151.2%
105.6%
85.3%
65.7%55.1%
35.9% 30.1%28.3%
27.3%
0%
20%
40%
60%
80%
100%
120%
140%
160%
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
*
Q2
- 2
01
2*
19.9 19.4
22.424.1
27.7
32.1
32.8
15
20
25
30
35
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
as % of GDP
Yet, Indonesia is not completely immune..
Direct impact from Euro-crisis would be limited since the share of Indonesian
export to China is less than 20%. Similarly, direct impact through banking sectors
is limited.
But, the indirect impact through China would be significant, since China is the
major destination of Indonesian exports.
Financial channel is working through the capital flows movements.
Trade Links with Euro-Area (Share of export to EA)
Banking Links with Euro-Area (Share of Assets owned by EA banks)
22-Oct-2012
5
Trade Channel… Through trade channel, renewed global slowdown has negative spillover to Indonesia exports.
9
2012
Jan-
Jun** Q. III Q. II*
1 China 13.5 19.4 89.1 84.1 37.6 33.3 2.5
2 Japan 11.4 22.1 20.4 17.2 0.1 3.3 -7.3
3 USA 9.6 30.5 21.8 14.5 5.9 -6.1 -5.3
4 India 7.9 39.4 92.6 37.6 4.8 16.8 -25.2
5 Singapore 6.4 15.7 20.9 25.8 -3.2 -10.5 -15.4
6 Malaysia 5.8 54.6 31.2 11.0 -10.9 -3.6 -13.9
7 South Korea 4.5 10.9 16.8 -1.2 6.3 -4.3 -8.3
8 Thailand 3.5 101.4 9.5 23.1 -8.7 -21.7 12.0
9 Netherlands 2.8 53.9 105.2 19.7 -1.2 5.5 -26.6
10 Taiwan 2.7 31.4 33.5 41.7 21.2 10.1 -3.0
Total 100.0 30.1 39.6 28.7 8.7 4.0 -8.5
Q. I
Share
(%)
2011
Q. IV Q. I Q. II
Growth y.o.y (%)
2012
Indonesian export to China… Indonesia’s Exports to China are largely for China’s domestic demand (Consumption and Investment).
Different from other Asian, Indonesian role in Chinese production network is relatively low ...
Decomposition of Asia’s Exports to China
10
Elasticities of Asia’s exports to Chinese domestic demand vs Chinese exports
Source: Citi Research
22-Oct-2012
6
Temporary External Imbalances… Rebalancing sources of growth toward domestic demand lead to a widening CA deficit.
Nevertheles, CAD reflects higher I, rather than higher C; and financed by FDI...
11
Current Account Balance (% of GDP)
Negara
Correlation to Saving Correlation to
Investment
1985-2005
1985-2005 (exclude
crisis)
1985-2005
1985-2005
(exclude crisis)
Indonesia -0.08 0.10 -0.50 -0.36
Malaysia 0.48 0.48 -0.93 -0.93
Philippines 0.20 -0.04 -0.80 -0.86
Singapore 0.69 0.72 -0.34 -0.47
Thailand -0.37 -0.58 -0.97 -0.97
1990-2011
1990-2011 (exclude
crisis)
1990-2011
1990-2011
(exclude crisis)
Indonesia -0.05 -0.09 -0.68 -0.65
Sumber: Moreno (2008), BI estimates
Correlation between CA vs Savings and Investment
Financial Channel… Through financial channel, capital flows have been volatile since the mid-2011, while exchange rate were under pressure...
Shallow financial markets and large share of foreign ownership...
Capital Flows and Exchange Rate
12
8,500
8,700
8,900
9,100
9,300
9,500
(8,000)
(6,000)
(4,000)
(2,000)
-
2,000
4,000
6,000
Jan-
11
Feb-
11
Mar
-11
Apr
-11
May
-11
Jun-
11
Jul-1
1
Aug
-11
Sep-
11
Oct
-11
Nov
-11
Dec
-11
Jan-
12
Feb-
12
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
StockGovt. BondSBIIDR/USD
USD Mn IDR/USD
Euro debt
crisis and
US rating
downgrade
Greece
election
22-Oct-2012
7
Still, Indonesia is in a much better shape… Indonesia has sufficient policy space to respond. Adequate reserves and flexible exchange rate can provide a cushion, monetary and fiscal policy could be deployed to provide ample stimulus to growth if needed...
Reserves (USD biilion)
13
Fiscal and Monetary Policy Space
109
-
20
40
60
80
100
120
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Jan
-08
Jul-
08
Jan
-09
Jul-
09
Jan
-10
Jul-
10
Jan
-11
Jul-
11
Jan
-12
Jul-
12
International Reserve in US$
• How to reduce widened CA deficit. While it is temporary, we need to be vigilant.
• Global slowdown would be long lasting
• Oil imports continue to increase in line with higher oil consumption and sluggish production.
• FDI inflows are mostly domestic markets oriented.
• What are appropriate measure to manage strong domestic demand, while inflation remains well anchored?.
• How to prepare ‘tail risk’ events, which could be triggered by Euro (Grexit and contagion) or US (fiscal clift).
14
Policy Challenges Going Forward
22-Oct-2012
8
15
Policy Responses
Policy Mix Current Policy Stances
Monetary Policy Interest rate policy is relatively neutral given inflation is under control (within the target range for 2012 and 2013).
Exchange Rate Policy - In the episode of cap inflows, partially absorbing appreciation with FX reserve -Recently, exchange rates move more flexible as part of adjustment process in external imbalances. CB intervene to smooth out volatility. - Financial deepening in FX markets (forward market)
Macroprudential Policy -In the episode of cap inflows, macroprudential policy to limit hot money (minimum holding period, limit on foreign borrowing, and FX reserve req) - Recently, measure to limit credit expansion in some sectors (property and automotive).
Crisis Management - crisis management protocol at the level of authorities as well as national wide. - Better interagency coordination
Monetary policy mix is necessary given the multichallenges...But fiscal and structural policies are imperative to solve medium term issues.
THANK YOU
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