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