Indonesian Economy: Prospects and Challenges in the Current Cycles

Indonesian Economy: Prospects and Challenges in the Current Cycles Juda Agung, PhD Executive Director Department of Economic and Monetary Policy Pres...
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Indonesian Economy: Prospects and Challenges in the Current Cycles Juda Agung, PhD

Executive Director Department of Economic and Monetary Policy Presented at International Seminar Befriending with the “Boom-Bust“ Cycle Jakarta, 23 September 2014

Outline

2

1

2

Recent Global & Domestic Cycles

Characteristics of Indonesia’ Business and Financial Cycle

3

4

Prospects, Risks and Policy Responses

Closing

Global Business Cycle: Changing global landscape…

3

Global recovery continues with a shift in economic landscape…  Growth in AE is projected to improve and be above its long term trend. On the other hand, growth in EM is forecast to be lower than its long term trend due to a number of structural challenges in the EM economies. Long Term Global Growth, AE, and EM

US GDP Potential vs Actual

Source: Congressional Budget Office

US Output Gap

Realisasi 2013 -3.8

IMF Article IV July 2014

2014 -4

2015 -2.9

Proyeksi 2016 2017 -2 -1.1

2018 -0.6

2019 0

Global Commodity Cycle: End of Supercycle?

4

Global commodity prices continues to decline …  The rapid rise of commodity prices starting in 2002 has boosted economic growth in commodity producing countries but the expansionary phase of the commodity price supercycle may have come to an end.

 Sustained decline in commodity prices is confirming the end of commodity price “supercycle”.

International Commodities Price Trend 600

400

500 300 400

300

200

200

100 100

0

0 2002

2004

2006

2008

All commodities All commodities (in euros) Minerals, ores and metals Crude petroleum

2010

2012

2013

2002

2004

2006

2008

Food Tropical beverages Vegetable oilseeds and oils Agricultural raw materials

2010

2012

2013

Commodity Cycles and Indonesia trade balance

5

In line with the end of commodity supercycles, Indonesia trade balance become deficit since then… 

Manufacturing exports has been improving, but the trade balance deficit in oil-gas sector has been persistently high.

Trade balance

Trade Balance 2012- 2014 : Cumulative YTD

Sumber: Buletin Exim DSta September 2014, Data Trade Balance BP

Domestic Business Cycle: Deceleration Phase…

6

Domestic economy is still in decelerating trend....

Indonesia Business Cycle 9

9 %

8

8

2004-Q4

2010-Q4

2007-Q3

7

7

2002-Q3

6

6

5

5 2006-Q2

4

4 2009-Q2

2004-Q1 3

3

2

2

1

1

2001-Q4

0

0 01

02

03

04

05

06

07

08

09

10

11

12

13

14

Global Cycle and Indonesia Business Cycle

7

Indonesia business cycle is highly correlated with regional and world business cycles..  The concordance indexes between Indonesia’s business cycle and its main trading partners are above 60%, except Japan.  Compared with World’s GDP cycle, Indonesia’s business cycle has the same length which is 11 quarters. World Real GDP

China Real GDP

8

8

16

%

16 2007-Q2

%y-o-y

6

2006-Q1

2004-Q1

2010-Q2

2007-Q3

2013-Q4

4

2006-Q3

6

14

4

12

2

10

0

8

14

2010-Q1

2

2013-Q1

10

2001-Q4 0

12

2003-Q1

2004-Q4

2013-Q3

2004-Q3

8

2009-Q1 2012-Q3

-2

-2

6

-4

4

6

2001-Q4

2009-Q1 -4 01

02

03

04

Sample: 2001Q1-2014Q2 Real GDP (%y-o-y) Indonesia India Japan Thailand Malaysia Singapore China EU US World

05

06

07

08

09

10

11

12

13

14

Average duration (quarters)

4 01

02

03

04

05

06

07

08

Average amplitude (%)

Deceleration Acceleration Cycle Deceleration Acceleration 6.3 4.3 10.6 -2.1 2.9 6.0 6.0 12.0 -7.4 9.1 4.5 6.3 10.8 -6.7 7.0 4.8 4.3 9.0 -10.2 12.9 6.0 3.2 9.2 -5.3 6.2 4.8 4.0 8.8 -11.9 11.8 7.7 6.0 13.7 -4.9 4.0 6.0 5.0 11.0 -4.3 3.8 6.3 4.6 10.9 -3.0 3.0 5.5 5.2 10.7 -2.9 2.7

09

10

11

12

13

Concordance Index (%) 39.6 48.1 48.1 60.4 64.8 64.8 64.2 63.0 61.1

14

Non-Oil and Gas Export Share (%) 8.7 10.7 3.5 4.9 6.9 14.2 11.1 10.1 100.0

Domestic Business Cycle: Nowcasting…

8

GDP Nowcasting

Q1

Q2

Q3

Note: F-FM=forecast factor model, MCS=motor cycle sales, CEM=cement consumption, EXP=exports (FOB), IPI=industrial production index

Domestic Cycles: Business vs Financial Cycles

9

Currently, business cycle and financial cycle are in the same phase (of contraction) …  Business cycle represented by GDP growth has been in a “contraction” phase since 2010 Q4. Financial cycle represented by real credit and credit-to-GDP ratio is also in the same phase.  Other financial indicators such as real equity price and residential property price show declining trend. Real GDP Growth

Real Credit Growth and Credit-to-GDP ratio

9

9

30

30 %

%

8

8

2004-Q4

2010-Q4

2007-Q3

7

7

2002-Q3

6

25

25

20

5 2006-Q2

4

15

15

10

10 2004-Q1

5

4

0

3

3

-5

2

2

-10

5 0

2009-Q2

2004-Q1

2009-Q3

1 2001-Q4

1

0

0 03

04

05

06

07

08

09

10

11

12

13

14

-5 -10

2006-Q3

2002-Q2

02

20

2012-Q2

6

5

01

2008-Q3

2003-Q2 2004-Q4

-15

-15

-20

-20 01

02

03

04

05

06

07

08

09

10

11

12

13

14

Characteristics of Indonesia’s Cycle: Procyclicality of Credit

10

The procyclical behaviour of the financial sector ..... Correlation coefficient between credit and output growth is a notably high among south east Asian countries.... The Procyclicality of Bank Loans 60.0

% (yoy)

% (yoy)

15.0

40.0

10.0

20.0

5.0 -

-

(20.0)

(5.0)

(40.0)

(10.0)

(60.0) Source : Bank Indonesia

Real GDP Growth (RHS)

Q1:90 Q1:91 Q1:92 Q1:93 Q1:94 Q1:95 Q1:96 Q1:97 Q1:98 Q1:99 Q1:00 Q1:01 Q1:02 Q1:03 Q1:04 Q1:05 Q1:06 Q1:07 Q1:08 Q1:09 Q1:10 Q1:11 Q1:12

(80.0)

Real Credit Growth

(15.0) (20.0)

-5

23 9 6.4

16 8 6.2

9 7

2 6 5.6

Per Juli 2014

5 31/07/2014*

10

31/01/2014

30

31/07/2013

11

31/01/2013

37

31/07/2012

BI Rate (RHS)

31/01/2012

KK

29/07/2011

KI

31/01/2011

Credit growth (%yoy)

30/07/2010

KMK

29/01/2010

Total

31/07/2009

% yoy

30/01/2009

44

Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14

Credit Cycle: Slowing down, due to demand constraint...

% 12 7.2

11

Credit: Supply vs Demand

0.2

7 0.15

6.8 0.1

6.6 0.05

0

Net Demand

-0.05

6 Supply Kredit (Ln)

-0.1

5.8 Demand Kredit (Ln)

-0.15

-0.2

Credit cycle: No indication of strong supply constraint

12

Banking survey shows that no strong indication of supply constraint. Only small banks (BUKU 1 and 2) increase rejection of credit application. Perhaps due to their liquidity condition… Banking survey: Credit rejection (%)

LDR (%)

Rejection of credit application

Liquidity slightly tightened in H1, but ample in H-2 2014... Liquidity is slightly tightened in July due to seasonal and government contraction. But, it will be ample in the H2-2014, in line with the government expansion… Government Finance Operation

Growth of M2 (%yoy)

25

Rp T

M2

20

300

Kum. Operasi Keuangan Pemerintah (NCG) 2014 ytd

2013

2012

250 200

15

M1

10

150 100 50

Pertumbuhan M2 (%yoy)

5

Uang Kuasi

0 -50 -100

Jul-14

Apr-14

Jan-14

Oct-13

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

0

-150

24,70

2011

13

Mandiri

3 BNI BCA

4 2 Jul-14

Jun-14

May-14

Apr-14

Mar-14

BRI

5 LPS Rate

Feb-14

LPS Rate

5

Jan-14

7

Dec-13

8

Nov-13

BUKU 3

Oct-13

9 Jul-14

Jun-14

May-14

Apr-14

Mar-14

Feb-14

Jan-14

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

4

Sep-13

3 Jul-13

BUKU 1

Aug-13

5

Jun-13

BI Rate

Jul-13

4

May-13

5

Jun-13

7

Apr-13

7

May-13

8

Mar-13

8

Apr-13

9

Mar-13

6

Jan-13

9

Feb-13

10

Feb-13

Jul-14

Jun-14

May-14

Apr-14

Mar-14

Feb-14

Jan-14

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

12

Jan-13

Jul-14

Jun-14

May-14

BI Rate

4

BI Rate

Apr-14

Mar-14

Feb-14

Jan-14

6

Dec-13

Nov-13

Oct-13

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

BI Rate

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

11

Mar-13

Feb-13

Jan-13

Interest Rates 14

Deposit rates of banks are higher than LPS rates….downward adjustment as the liquidity is ample in H2-2014… BUKU 2

LPS Rate

11

10 LPS Rate

6

BUKU 4

11

10 9

8

7

6

Global Financial Cycle and Inflows

15

Foreign capital inflows remain strong this year, but slows down next year…. • Influx of foreign capital remains quite large, bolstered by positive perception of investors concerning an increasingly sound domestic economic outlook. Foreign portfolio inflows from January to August has reached USD14,4 billions (ytd). • Portfolio inflows to EM shows downward trend recently… Monthly Portfolio Flows

Portfolio Inflows to EM (up to Aug 2014) - IIF

Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 YTD2014 Stock SUN SBI Total

192 656 1,268 758 701 568 1,402 1,476 1,140 1,624 15 241 -30 302 726 774 2,298 2,714 2,200 3,051

230 1,119 -112 4,811 593 1,156 1,532 9,489 -326 -576 -253 100 497 1,698 1,166 14,400

Source: IIF EM PortfolioTracker, Agustus 2014

Outline

16

1

2

Recent Global & Domestic Cycles

Characteristics of Indonesia’ Business and Financial Cycle

3

4

Prospects, Risks and Policy Responses

Closing

Global Economic Cycle and Growth Prospects

17

The global economic recovery continues with different speed of recovery …

Global Economic Growth 2013

Proyeksi 2014

2015

W orld G DP

3,1

3,4

3,8

Advanced Countries

1,4

2,0

2,4

2,2

2,1

3,0

-0,4

1,1

1,5

1,5

1,6

1,1

4,7

4,6

5,0

China

7.7

7,4

7,1

India

4,6

5,4

6.4

O therEm erging M arket Countries

3.1

3.1

3.6

United States Euro Zone Japan Em erging and Developing Econom ies

Bank Indonesia’s projection

Indonesia’s Cycle: Prospect for 2014 & 2015

18

Given the latest projection of global economy in 2014 and 2015 and characteristics of Indonesia’s business and financial cycles, Indonesian economy will be moderated in 2014 and start to improve (accelerate) in 2015 ….

Immediate Challenges: Be prepared for the headwind Vol Diesel Consm reach Quota

28-29/10 QE stop

Political Event Fuel Price Events

New President

New Parliament

2015 Budget

Agt 14

Sep 14

Fed Event

Revised 2014 Budget?

Proposed Revised 2014 Budget?

Volume of Gasoline Cons reach Quota

Fuel price Hike? (if no increase in 2014)

Fed Fund Normalization2014

Fuel Price Hike?

Okt 14

Nov 14

Des 14

Jan 15

Feb 15

Mar 15

Tw II-15

Tw III-15

19

Risk: Inflation Hike, Growth Gain from Fuel Prices Hike Inflation risks stems from potential increase in administered prices adjustments on subsidized fuel price. But if the government reallocate the subsidies into infrastructure, there will be a positive gain in GDP growth.

Scenario on Fuel Prices Hike

Inflation: additional 2,11 ppt

Increase Rp 2000/liter

GDP: additional 0,06 ppt Vol subsidised fuel 46,1 jt kl Inflation: additional 3,16 ppt

Increase Rp 3000/liter

GDP: additional 0,15 ppt Vol subsidised fuel 45 jt kl

20

21

Risk: Fed Exit Policy… There is a convergent view that the Fed exit will be in Q2/Q3….  Going forward, Fed Fund Rate (FFR) is predicted to be increased gradually.  The Federal Reserve may move to normalization sooner than previously expected (Q2 or Q3 2015)

 In medium term, IMF expected the fed funds rate to increase by mid-2015, with a gradual path upward toward a 3.75% at the end of 2018 Fed Fund Rate Survey: Bloomberg Fed Funds Target Rate

Fed Fund Survey: IMF & Market

Q3 14

Q4 14

Q1 15

Q2 15

Q3 15

Q4 15

Bloomberg Wgt Avg

0.25

0.25

0.25

0.38

0.63

1

Median Forecast

0.25

0.25

0.25

0.25

Average Forecast

0.25

0.25

0.27

0.39

0.5 0.65

1 0.98

High Forecast

0.25

0.5

0.75

1

1.5

2

Low Forecast

0.25

0.25

0.25

0.25

0.25

0.25

Responses

76

76

75

74

74

67

Aug. Survey Median

0.25

0.25

0.25

0.25

Jul. Survey Median

0.25

0.25

0.25

0.25

0.5 0.5

1 1

Change in Medians

0

0

0

0

0

0

Survey @ Aug 14, 2014. Next survey: Sep 2014

Risk: Two Scenario of Normalization of The Fed Tightening Cycle of Fed Fund Rate

“Gradual”

“Aggressive” (2004-2006)

137.5 bps/tahun; 3.75% end-point.

200 bps/year, 4-5% end-point

Gradual Fed Fund adjustment, given the slack in the labor market and low inflation

Aggressive adjustment, if the inflation in US is above 2% and no slack in labor market.

Impact on the global financial market is moderate, as expected by the market.

Possible significant shock in the global financial market

Impact on the capital reversal is minimal, especially if domestic econ. is conducive

Impact on the capital reversal could be significant

22

23

Risk: Lesson Learnt from global shock Lesson learnt from the history of financial turbulence: “Keep your house tidy..”

Capital flows during turbulence episode (% flows over non-resident ownership in prev month) %

Downgrade AS and European crisis Global Crisis

Fiscal issues and FFR increase

Fiscal issues

CA Deficit & Tapering

Risk: China’s Economy Slowdown China’s economy is in decelerating trend …. Property Price in China

24

Closing Remarks

25

 Trends in global business cycle has been characterized by:  Shift in global economic landscape  End of commodity price “super cycle”  Indonesia’s business and financial cycle are highly procyclical. Indonesia business cycle is also highly correlated with regional and world business cycles.  Indonesia’s economy is in decelerating trend. It is projected to accelerate in 2015 yet overshadowed by several risks.  Bank Indonesia continues to pursue policy mix (monetary and macroprudential policy mix) and reinforce its policy responses with close coordination with other government agencies.  The lessons learnt from the global financial turbulence is that we need to make our house tidy. This include the efforts to reduce fiscal, financial, and external imbalances.

Thank You

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