Bank Indonesia (BI), which raised its rate by 25 basis points in November in response to President Joko Widodo's cut in fuel subsidies, will target inflation of 4.0 percent, plus/minus one percentage point, in 2015, down from 2014's target of 4.5 percent, also plus/minus one percentage point.
Indonesia's consumer price inflation rate rose to 8.36 percent in December, up from 6.23 percent in November and 8.38 percent in December 2014 due to the fuel price hike and domestic price shocks.
Nevertheless, BI considered inflation to have remained under control in with core inflation up to 4.93 percent in December from 4.21 percent in November.
Indonesia's economic growth is expected to strengthen this year, with growth forecast from 5.4 to 5.8 percent, up from 5.1 percent in 2014, which was down from 5.8 percent in 2013.
BI said growth this year will be helped by expanding government consumption and investment, including infrastructure investment, on top of strong household consumption. Part of the reason for the cut in fuel subsidies was to allow the government to channel funds into productive investments, and help it reduce its budget and the country's current account deficit.
Indonesia's foreign exchange reserves at the end of December rose to US$111.9 billion, up from $111.1 billion end-November, and BI expects the current account deficit to improve further, though the government's infrastructure projects "could potentially stifle improvements in the current account deficit," the BI said.
But ongoing structural reforms should also help attract capital inflows in the form of foreign direct and portfolio investment, offsetting the current account deficit.
Indonesia's current account deficit narrowed to $6.835.9 billion in the third quarter of 2014 from $8.689 billion in the second quarter. Its Gross Domestic Product expanded by 2.96 percent in the third quarter from the second quarter for annual growth of 5.01 percent, down from 5.12 percent.
The Bank of Indonesia issued the following statement:
'The Bank Indonesia Board of Governors, convening on 15th January 2015, decided to hold the BI Rate at 7.75%, with the Lending Facility and Deposit Facility rates to remain at 8.00% and 5.75% respectively.
An overall assessment of domestic economic performance in 2014 along with the economic outlook for 2015 and 2016 indicate that such policy is consistent with efforts to control inflation towards its target corridor of 4±1% in 2015 and 2016, as well as manage the current account deficit to a more sustainable level. Amidst a number of onerous global and domestic challenges throughout 2014, domestic economic performance in Indonesia was relatively sound with macroeconomic stability maintained and economic rebalancing ongoing in a more sustainable direction in line with solid economic fundamentals coupled with economic stabilisation polices and structural reforms implemented by Bank Indonesia and the Government. Moving forward, the Indonesian economy is expected to improve further with robust domestic economic growth and maintained macroeconomic stability, supported by global recovery momentum and ongoing structural reforms to reinforce national economic fundamentals. Bank Indonesia policy will remain directed towards achieving the inflation target, managing the current account deficit and maintaining financial system stability. To that end, Bank Indonesia will continue to strengthen its monetary and macroprudential policy mix, bolster the payment system and intensify coordination with the Government in terms of controlling inflation, reducing the current account deficit and promoting structural reforms in order to support higher economic growth.
National macroeconomic stability management was required in 2014 to confront the challenge of uncertainty surrounding the normalisation of the Federal Reserve’s monetary policy stance as well as a weaker-than-expected and uneven global economic recovery. On one hand, the US recovery gained momentum, while the recovery in Europe remained more moderate. On the other hand, China’s economy continued to decelerate and the economy of Japan slipped back into recession. The slower global economic recovery, coinciding with a lower international oil price due to abundant supply, particularly from the US, ultimately drove down global commodity prices significantly. Growing uncertainty surrounding the normalisation policy of the Federal Reserve, especially during the second half of 2014, combined with US dollar appreciation against all global currencies, also escalated the risk of capital reversal from emerging market countries, including Indonesia. Looking ahead, economic recovery in advanced countries, specifically the US, will persist into 2015, thus bolstering growth in Indonesia through the trade channel. Nevertheless, several external risks will remain a test of national macroeconomic stability in 2015, particularly escalating volatility on global financial markets in line with possible hikes to the Fed Funds Rate and the downward trend of commodity prices.
Congruent with the moderating global economy and national economic stabilisation policy, domestic economic growth slowed in 2014. The Indonesian economy achieved 5.1% growth in 2014, decelerating from 5.8% in 2013. From an external standpoint, domestic economic moderation was the result of declining exports due to weaker demand and low international commodity prices as well as policy to restrict exports of unrefined minerals. Despite the overall decline of exports, manufacturing exports surged in line with the US recovery. On the domestic demand side, however, the slowdown was attributed to limited government consumption as budget cuts took effect. Meanwhile, investment activity also experienced limited growth. Persistently robust economic growth was maintained by solid household consumption. In 2015, stronger economic growth is forecasted, namely in the 5.4-5.8% range. In a departure from conditions in 2014, on top of strong household consumption, expanding government consumption and investment in line with greater fiscal capacity to support productive economic activities, including infrastructure development, will catalyse high economic growth.
Against a backdrop of global economic dynamics, the Indonesia balance of payments improved in 2014 in line with consistent stabilisation policy. The current account deficit decreased in comparison to the previous year as manufacturing exports surged and imports declined in line with weak domestic demand, the rupiah exchange rate undulated in accord with its fundamental value and the oil price dropped. Meanwhile, the capital and financial account recorded a substantial surplus, backed by positive growth in terms of foreign direct investment and portfolio investment. Solid investment performance was bolstered by the positive perception of investors concerning the domestic economic outlook along with attractive returns. Consequently, foreign exchange reserves at the end of December 2014 swelled to US$111.9 billion, equivalent to 6.5 months of imports and servicing external debt, which is well beyond international adequacy standards of around three months. Moving ahead, the current account deficit is expected to improve. The decreasing international oil price and government subsidy reforms will improve the oil and gas account. In contrast, expanding non-oil/gas imports, as the government ramps up infrastructure projects, could potentially stifle improvements in the current account deficit. In terms of the capital and financial account, solid economic fundamentals due to ongoing structural reforms will attract capital inflows in the form of foreign direct investment and portfolio investment, which should be sufficient to offset the current account deficit.
The rupiah depreciated against the US dollar in 2014 but appreciated against the currencies of other leading trading partners. Rupiah depreciation against the US dollar in the fourth quarter of 2014 was due to US dollar appreciation against nearly all global currencies after the release of improved US economic data as well as the planned hike to the Fed Fund Rate. Point to point, the rupiah depreciated 1.74% (yoy) in 2014 to a level of Rp12,385 per US dollar. Meanwhile, against other currencies, such as the yen and euro, the rupiah appreciated relatively strongly despite remaining competitive with trading partner countries. Bank Indonesia consistently maintained rupiah stability in accordance with its fundamental value, thereby supporting macroeconomic stability as well as controlled economic rebalancing in a sounder and more sustainable direction.
Inflation in 2014 remained under control amidst intense pressures from administered prices and volatile foods. Inflation in 2014 was 8.36% (yoy), lower than the 8.38% posted in the previous year and in line with the inflation target set at 4±1%. Higher inflation was the result of a subsidised fuel price hike and the impact of domestic food price shocks at the end of 2014. The subsidised fuel price hike pushed up prices directly and through the second-round effect. In addition to fuel prices, administered prices were also adjusted several times in 2014, including the basic electricity rate and LPG prices. Notwithstanding, core inflation was controlled at 4.93% (yoy) in line with Bank Indonesia policy to manage domestic demand, maintain exchange rate stability and anchor inflation expectations as well as improve coordination with the government to control inflation. Bank Indonesia is assured that inflation will remain under control within its target corridor of 4±1% in 2015, supported by stable core inflation and a declining international oil price that is projected to contribute to deflation. In order to safeguard attainment of the inflation target, Bank Indonesia will continue to bolster coordination with the central and local governments through national and regional inflation controlling teams in order to manage food inflation and administered prices.
Financial system stability was maintained with the support of tenacious banking sector resilience and improving financial market performance in 2014. Banking industry resilience remained solid with credit risk, liquidity risk and market risk well mitigated and the support of a sound capital base. In November 2014, the capital adequacy ratio remained high at 19.6%, which is well above the minimum threshold of 8%, while the ratio of non-performing loans (NPL) remained low and stable at around 2.0%. Credit growth is projected at 11.9% (yoy) in November 2014, lower than the 22.2% (yoy) achieved during the same period of the preceding year. Bank Indonesia considers the credit slowdown consistent with domestic economic moderation. Meanwhile, deposit growth was 13.8% (yoy) in November 2014, unchanged from the previous year. On the other hand, bank liquidity conditions improved in line with more expansive government financial operations. In future, as the economy gains momentum, deposit and credit growth are projected to accelerate to 14-16% and 15-17% respectively. Meanwhile, the capital market also improved, as indicated by a 22.3% rally on the IDX Composite compared to the previous year. Besides, the yields of tradeable government securities (SBN) decreased.
Bank Indonesia policy in 2015 will continue to focus on maintaining macroeconomic and financial system stability through efforts to strengthen the monetary, macroprudential and payment system policy mix. In the monetary sector, policy will consistently aim to control inflation towards its target corridor and reduce the current account deficit to a more sustainable level through interest rate policy and stabilising the exchange rate in line with its fundamental value. In terms of macroprudential policy, selectively looser macroprudential policy to expand funding sources for the banking sector will simultaneously support financial market deepening and catalyse credit extension to priority productive sectors. Meanwhile, payment system policy will be directed towards developing a more efficient domestic payment system industry. The panoply of aforementioned policies will be accompanied by greater coordination with the government and relevant agencies in order to maintain macroeconomic stability with an increasingly solid economic structure and to support higher economic growth."
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