Increasing demand from Indonesia’s trading partners and higher export commodity prices have been a boon to exports, with shipments of coal, motor vehicles, iron and steel as well as metal ore and scrap metal recording positive growth in the fourth quarter of 2019.
Spatially, nickel ore exports from Sulawesi and copper exports from West Nusa Tenggara have also increased.
Consumer confidence is rising, which has maintained household consumption along with seasonal factors towards the year-end.
Meanwhile, investment continues to improve, boosted by regional investment in downstream nickel processing located in Sulawesi.
A bump in the Manufacturing Purchasing Managers’ Index and other recent indicators of export sales and domestic sales are indicative of stronger investment.
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Bank Indonesia expects a steady rise in investment due to infrastructure development and surging business confidence resulting from expanding exports and improvements in the ease of doing business in line with current government policy, including implementation of the Omnibus Law on Job Creation.
Consequently, economic growth was recorded at 5.1 percent in 2019, which Bank Indonesia projects to lie in the range of 5.1 to 5.5 percent for 2020, Bank Indonesia Governor Perry Warjiyo stated.
In addition, Indonesia’s balance of payments (BOP) is expected to continue gaining strength in the fourth quarter of 2019, thereby bolstering external resilience.
The main contributors to the gain in BOP were an influx of foreign capital inflows and a manageable current account deficit.
The net foreign inflow of portfolio investment to domestic financial markets in the fourth quarter of 2019 stood at US$6.36 billion, up from US$4.88 billion in the third quarter of 2019.
Meanwhile, Bank Indonesia expects a manageable current account deficit in line with the sharp plummet in the trade deficit to US$0.03 billion, from US$1.39 billion a month earlier.
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Consequently, the current account deficit in 2019 is projected at 2.7 percent of the gross domestic product (GDP) and to lie in the 2.5-3.0 percent of the GDP range in 2020.
Furthermore, the position of reserve assets at the end of December 2019 increased to US$129.2 billion, equivalent to 7.6 months of imports or 7.3 months of imports and servicing government external debt, which is well above the international adequacy standard of three months.
Going forward, Bank Indonesia will continue to strengthen policy synergy with the government and other relevant authorities to reinforce external stability while attracting more FDI.
In addition, the rupiah continues to appreciate, supported by improving BOP performance. As of January 22, 2020, the rupiah strengthened by 1.74 percent (ptp) at the December 2019 level, thus maintaining the appreciatory trend recorded in 2019 at 3.58 percent (ptp), or by an average of 0.76 percent.
The strong rupiah is supported by the supply of foreign exchange from exporters and maintained foreign capital inflows due to the promising national economic outlook, highly attractive domestic financial markets, and less uncertainty in the global financial markets, Executive Director of the BI Communication Department Onny Widjanarko remarked.
Furthermore, the structure of the foreign exchange market is improving, characterized by an uptick of transaction volume and more efficient quotations as well as further development of the DNDF market, which will increase foreign exchange market efficiency.
Bank Indonesia is confident that rupiah exchange rate appreciation is in line with the currency’s fundamental value and improving market mechanisms, coupled with growing market confidence in the policies instituted by Bank Indonesia and the government.
Overall, the rupiah’s appreciation is having a positive impact on the economic growth momentum and macroeconomic stability.
Looking ahead, Bank Indonesia has forecast rupiah stability in line with the currency’s fundamental value and maintained market mechanisms.
Low and stable inflation was maintained in 2019, thereby supporting economic stability.
The CPI inflation in 2019 was recorded at 2.72 percent (yoy), down from 3.13 percent in 2018 and remaining in the target corridor of 3.5 percent, give or take one percent.
As a result, inflation has remained consistently within the target corridor for the past five consecutive years, Widjanarko stated.
Lower and controlled inflation within the target range has been influenced by various structural improvements, such as the growing contribution of rational inflation expectations anchored to the target corridor, coupled with an impact of exchange rates and import prices as well as a milder knock-on effect of higher VF and AP inflation to core inflation.
Less intense volatile food inflationary pressures also stem from policy synergy between Bank Indonesia and the government through the National and Regional Inflation Task Forces (TPIP and TPID), which has effectively lowered the impact of food price shocks during episodes of heightened demand and/or lower supply.
In the meantime, inflationary pressures on administered prices have remained low. Bank Indonesia remains fully committed to maintaining price stability, with CPI inflation in 2020 forecast in the target corridor of three percent, give or take one percent.
Effective transmission of the looser monetary policy stance has been strengthened by adequate liquidity in the banking industry.
Liquidity in the money market and banking industry remains adequate, as mirrored by the high average daily transaction volume in the interbank money market in December 2019 at Rp17.60 trillion, along with a ratio of liquid assets to deposits of 21.10 percent recorded in November 2019.
Monetary policy transmission through the interest rate channel to the money market remains effective, as reflected by a 111-bps drop in the interbank rate on 1-week tenors to 5.06 percent and a 117-bps decline in the 1-week JIBOR to 5.07 percent since the end of June 2019, he stated.
In addition, transmission to the banking industry yet remains suboptimal.
The weighted average deposit rate in December 2019 was recorded at 6.31 percent, plunging 52 bps since the end of June 2019 before Bank Indonesia began to lower the BI 7-Day (Reverse) Repo Rate in July 2019.
The banking industry has also confirmed that interest rates on working capital loans have fallen 33 bps since the end of June 2019, or 47bps since January 2019 to 10.09 percent in December 2019.
In addition, financial system stability has been maintained despite the bank intermediation function still requiring attention.
Financial system stability was reflected by a high Capital Adequacy Ratio (CAR) of 23.66 percent recorded in November 2019 along with a low level of non-performing loans (NPL) at 2.77 percent (gross) or 1.24 percent (net).
Credit growth remains sluggish despite accelerating, from 6.53 percent (yoy) in October 2019 to 7.05 percent (yoy) in November 2019, spurred by seasonal demand for loans towards the year-end, Widjanarko stated.
On the other hand, deposit growth recorded a moderate rise, from 6.29 percent (yoy) in October 2019 to 6.72 percent (yoy) in November 2019.
Based on the latest dynamics, Bank Indonesia has forecast growth of outstanding loans disbursed by the banking industry in 2019 at 6.08 percent, with deposit growth of 6.54 percent.
Despite languishing credit growth, other sources of economic financing, such as new corporate bond issuances and FinTech, achieved solid growth, at 7.6 percent and 141.5 percent respectively.
In 2020, various financing sources are expected to gain momentum in line with the favorable economic growth outlook, including credit growth and deposit growth in the range of 10-12 percent and 8-10 percent respectively.
Bank Indonesia will maintain an accommodative macroprudential policy stance and strengthen coordination with other relevant authorities in order to maintain financial system stability and stimulate the bank intermediation function.
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