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Page 1: Jl.MH. Thamrin No.2 Jakarta 10110 - Indonesia …. Thamrin No.2 Jakarta 10110 - Indonesia BANK INDONESIA For further information. please contact: Economic Outlook & Policy Dissemination

Jl.MH. Thamrin No.2 Jakarta 10110 - Indonesiahttp://www.bi.go.id

Page 2: Jl.MH. Thamrin No.2 Jakarta 10110 - Indonesia …. Thamrin No.2 Jakarta 10110 - Indonesia BANK INDONESIA For further information. please contact: Economic Outlook & Policy Dissemination

BANK INDONESIAFor further information. please contact:Economic Outlook & Policy DisseminationBureau of Monetary Policy Directorate of Economic Research and Monetary Policy

Telephone : +62 61 3818163 +62 21 3818206Fax. : +62 21 3452489E-mail : [email protected] : http://www.bi.go.id

Page 3: Jl.MH. Thamrin No.2 Jakarta 10110 - Indonesia …. Thamrin No.2 Jakarta 10110 - Indonesia BANK INDONESIA For further information. please contact: Economic Outlook & Policy Dissemination

i

MONETARY POLICY REPORTBANk INdONEsIA

The Monetary Policy Report is published quarterly by Bank Indonesia after the Board

of Governors’ Meetings in January. April. July. and October. In addition to fulfilling the

mandate of article 58 of Act Number 23 of 1999 concerning Bank Indonesia. amended

by Act No. 3 of 2004. the report has two main purposes: (i) to function as a tangible

product of a forward-looking working framework in which formulation of monetary

policy is based on economic and inflation forecasts; and (ii) as a medium for the Board

of Governors of Bank Indonesia to present to the public the various policy considerations

underlying its monetary policy decisions.

The Board of Governors

Darmin Nasution Senior Deputy Governor

Hartadi A. Sarwono Deputy Governor

Siti Ch. Fadjrijah Deputy Governor

S. Budi Rochadi Deputy Governor

Muliaman D. Hadad Deputy Governor

Ardhayadi Mitroatmodjo Deputy Governor

Budi Mulya Deputy Governor

MONETARY POLICY REPORTQUARTER IV-2009

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MONETARY POLICY REPORTBANk INdONEsIA

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iii

MONETARY POLICY REPORTBANk INdONEsIA

Monetary Policy Strategy

Underlying Principles

Under the ITF. the inflation target is established as the overriding objective and nominal anchor for monetary policy. In this regard. Bank Indonesia has adopted a forward looking strategy by guiding the present monetary policy response for achievement of a medium-term inflation target.

The application of the ITF does not mean that monetary policy disregards economic growth. The basic monetary policy paradigm of striking the optimum balance between inflation and economic growth is retained in both setting the inflation target and in the monetary policy response by focusing on achievement of low. stable inflation in the medium to long-term.

The Inflation Target

After consultations with Bank Indonesia. the Government has determined and announced the CPI inflation target at 5%+1%. 4.5%+1% and 4%+1% for 2008. 2009 and 2010. The inflation target is consistent with the process of disinflation aimed at medium to long-term inflation competitive with other nations at about 3%.

Monetary Instruments and Operations

The BI Rate is the published policy rate reflecting the monetary policy stance adopted by Bank Indonesia. The BI Rate is a signal for achieving the medium to long-term inflation target and is announced periodically by Bank Indonesia for a specific period. To strengthen the operational framework for monetary policy. Bank Indonesia changed from use of the 1-month SBI rate as the operational target to the overnight interbank rate with effect from 9 June 2008. In monetary operations. the BI Rate is implemented through liquidity management on the money market to achieve the monetary policy operational target. reflected in movement in the overnight interbank money market rate. To enhance the effectiveness of liquidity management on the market. a set of standing facilities in combination with an interest rate corridor is employed in day-to-day monetary operations.

Policymaking Process

The BI Rate is determined by the Board of Governors in the Monthly Board of Governors’ Meeting. In unforeseen circumstances. the monetary policy stance may be adjusted in advance of the Monthly Board of Governors’ Meeting in a weekly Board of Governors’ Meeting. Changes in the BI Rate essentially depict the Bank Indonesia monetary policy response for guiding the forecasted level of inflation within the limits of the established inflation target.

Transparency

Monetary policy is regularly communicated to the public through customary media for communication. such as statements to the press and market actors. website postings and publication of the Monetary Policy Report (MPR). This transparency is aimed at building improved understanding and shaping public expectations of the economic and inflation outlook and the monetary response taken by Bank Indonesia.

Coordination with the Government

For the purpose of coordination in inflation targeting. monitoring and control. the Government and Bank Indonesia have established a team of officials representing the various relevant agencies. The task of the Team is to deliberate and recommend the necessary policy actions for the Government and Bank Indonesia in managing inflationary pressures for achievement of the established inflation target.

Steps for Reinforcing Monetary Policy with the Overriding Objective of Price Stability (Inflation Targeting Framework)

In July 2005. Bank Indonesia launched a reinforced monetary policy framework consistent with the Inflation Targeting Framework (ITF). encompassing four key elements: (1) use of the BI Rate as the policy reference rate. (2) anticipatory monetary policymaking process. (3) more transparent communications strategy and (4) closer policy coordination with the Government. These measures are intended to strengthen monetary policy effectiveness and governance in order to achieve the overriding objective of price stability in support of sustainable economic growth and greater public prosperity.

Enhanced Monetary Policy Measures Under Inflation Targeting Framework

In July 2005. Bank Indonesia implemented and enhanced monetary policy measures within the Inflation Targeting Framework (ITF) which encompasses four main areas: the use of the BI rate as an operational target. enhanced decision making process. more transparent communications strategy. and strengthened policy coordination with the Government. The measures is intended to strengthen the effectiveness and to provide good governance to its monetary policy making to achieve the price stability needed to support suistainable economic growth and attain social welfare.

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MONETARY POLICY REPORTBANk INdONEsIA

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v

MONETARY POLICY REPORTBANk INdONEsIA

Foreword

The global economic recovery has advanced further in Q4/2009, taking stronger hold across a broader

range of countries. The various policies pursued by central banks and fiscal authorities during 2009 have prevented

the world economy from further decline. The most visible recovery has taken place in Asia’s emerging markets, led

by China and India. Against this background, leading world economic powers such as the United States, Eurozone

and Japan resumed positive growth in Q3/2009. Despite this, the recovery in the world economy is overshadowed

by risks related to high rates of unemployment rates in advanced nations.

The improvements taking place in the world economy are also reflected in positive developments on global

financial markets. Early in the year, financial markets came under intense pressure, but towards the end of the

year, conditions began to ease. Bolstering this trend is optimism for continued progress in global economic recovery.

During Q4/2009, risk levels in advanced nations and emerging markets embarked on a downward trend.

At home, Indonesia’s economic growth shows positive signs in keeping with the recovery in the global

economy. GDP growth in Q4/2009 is projected to reach 4.4% (yoy). Preliminary figures point to more vigorous

consumption over the preceding quarter, explained by seasonal factors approaching year end and rising export

revenues. Investment performance shows signs of modest improvement driven mainly by more robust domestic and

external demand and the stable business climate in the wake of the presidential election. Externally, the ongoing

improvement in the global economy and strengthening condition of trading partner economies has bolstered

Q4/2009 export growth. In related developments, the pressure bearing down on economic performance is now

easing in response to mounting domestic and external demand. On the supply-side, the global economic downturn

has generally had greater impact on tradable sectors, such as agriculture, mining and manufacturing. However, the

impact of the downturn on agriculture and mining is comparatively minimal. The Bank Indonesia regional economic

assessment also confirms the upbeat trend in the domestic economy. Indonesia’s diversified regions, each with specific

characteristics to local economic activity, provide key support for domestic economic growth.

Concerning prices, inflationary pressure remains on a downward trend with Q4/2009 inflation projected

at 2.41% (yoy). The low inflationary pressure is explained primarily by renewed price correction for staple goods.

The Governor of Bank Indonesia

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MONETARY POLICY REPORTBANk INdONEsIA

On the non-fundamentals side, security of domestic supply, efficient distribution and continued low international

commodity prices have contributed to lower volatile foods inflation. In the area of fundamentals, lower trading

partner inflation, the appreciating trend in the exchange rate and softening public expectations of inflation have

eased inflationary pressures.

Conducive developments at the global level augur for more positive showing in Indonesia’s Q4/2009

balance of payments. Key to this improvement is the performance in the current account as the global economic

recovery gathers momentum. Rising prices for Indonesia’s export commodities have also contributed to a more robust

current account. Optimism for global economic recovery alongside improving perceptions of risk in emerging market

countries is expected to sustain the pace of foreign capital inflows. In response to the performance of the balance

of payments, international reserves at end-November 2009 stood at USD 65.84 billion, equivalent to 6.5 months of

imports and servicing of official foreign debt.

Indonesia’s balance of payments performance has been strengthened by the upbeat nature of developments

in the global and domestic economy. While the capital market sustained some correction in Q4/209, foreigners

have maintained keen interest in domestic portfolio instruments. The balance of trade is set for another hefty surplus

despite signs of growing demand for imports. Buoyed by these developments, the balance of payments is on track

for a Q4/2009 surplus.

Indonesia’s banking sector is in comfortably strong shape. Analysed on the micro level, conditions in the domestic

banking system remain stable as reflected in the robust capital adequacy ratio (CAR) and the low, subdued level of

non-performing loans (NPLs) gross and net. On the other hand, the interest rate response in the banking system has

improved as demonstrated by the fall in deposit rates that will eventually lead to further reductions in loan interest rates.

The downward response in loan interest rates is expected to pave the way for more optimum lending by the banking

system. In related developments, banking liquidity remains adequate for the financing needs of the economy.

Looking forward, the Indonesian economy has potential to surpass earlier growth projections in 2009 and

2010. The driving force for this performance will come from exports, which have maintained an upward growth trend

since March 2009, in addition to the brisk pace of household consumption growth. Key to the accelerated export growth

are Indonesia’s primary commodity-based exports, which have mounted a quick recovery in response to escalating

demand in trading partner nations. On the supply side, renewed growth momentum is forecasted across a range of

sectors, led by manufacturing. The outlook for more robust manufacturing performance is supported by rising imports

of raw materials and high electricity consumption by business and industry. Buoyed by this optimism, the Indonesian

economy is forecasted to post 4.3% growth in 2009 with performance rising to 5.0%-5.5% in 2010.

The balance of payments is projected to chart an even larger surplus for 2009. The balance of trade has

steadily improved with more vigorous recovery in the global economy taking hold across more regions in the second

half of 2009. Heavy demand from Indonesia’s trading partners in Asia has brought gradual improvement in export

performance. With exports on the rise, imports are also climbing in keeping with the expanding absorption capacity

of the economy. Optimism for the domestic economy is also reflected in positive level of capital inflows for portfolio

investments and corporate borrowing.

In the inflation outlook, the downward trend in 2009 is forecasted to continue but with potential for normal

inflation to resume in 2010. Inflation has fallen significantly in 2009 and is projected below the targeted range of

4.5%+1%. In 2010, CPI inflation is predicted to return to normal in the 5%+1% range in response to strengthening

domestic economic activity, rising imported inflation related to forecasts for improvement in the world economy and

mounting international commodity prices, most importantly oil.

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MONETARY POLICY REPORTBANk INdONEsIA

After factoring in these developments, the Bank Indonesia Board of Governors Meeting convened on

3 December 2009 decided to hold the BI Rate at 6.5%. This decision was taken after the Board of Governors

concluded that the BI Rate at 6.5% remains consistent with achievement of the 5%±1% inflation target for 2010.

This policy stance is also regarded as conducive to the economic recovery and banking intermediation processes.

Jakarta, December 2009

On behalf of

THE GOVERNOR OF BANK INDONESIA

Darmin Nasution

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MONETARY POLICY REPORTBANk INdONEsIA

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Monetary Policy Report - Quarter III-2009Contents

MONETARY POLICY REPORTBANk INdONEsIA

Contents

1. General Review ............................................................................ 1

2. Latest Macroeconomic Indicators ................................................ 5

Deveopments In The World Economy ............................................. 5

Economic Growth ........................................................................... 6

Balance of Payments ...................................................................... 14

3. Monetary Indicators and Policy, Quarter IV-2009 ...................... 16

Rupiah Exchange Rate ........................................................................................ 16

Inflation ................................................................................................................. 18

MonetaryPolicy ................................................................................................... 20

4. Outlook for the Indonesian Economy ......................................... 26

AssumptionsandScenarios ................................................................................ 26

EconomicGrowthOutlook ................................................................................... 28

Inflation Forecast ............................................................................. 34

Risk ................................................................................................. 36

5. Monetary Policy Response, Q4/2009 .......................................... 37

Statistics ............................................................................................ 38

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Monetary Policy Report - Quarter III-2009 Contents

MONETARY POLICY REPORTBANk INdONEsIA

Page 13: Jl.MH. Thamrin No.2 Jakarta 10110 - Indonesia …. Thamrin No.2 Jakarta 10110 - Indonesia BANK INDONESIA For further information. please contact: Economic Outlook & Policy Dissemination

General Review

1

1. General Review

In 2009. the Indonesian economy has demonstrated considerable resilience in the

face of the global economic crisis. Reflecting this is the brisk pace of economic growth

at above 4% in Q3/2009. For 2009 overall. Bank Indonesia predicts that economic growth

in Indonesia may reach 4.3%. Looking forward to 2010 and 2011. the economy is expected

to chart even higher growth on the back of stronger world recovery and more conducive

conditions on world financial and banking markets matched by prudently managed domestic

fundamentals. In 2010. Indonesia’s economic growth is forecasted in the range of 5.0%-

5.5% with the outlook for 2011 at 6.0%-6.5%.

Regarding the global economy. Bank Indonesia expects the recovery process to keep

moving forward. The recovery is now sensed to be taking stronger hold across a broader

range of countries and economic sectors. The various policies implemented by fiscal and

monetary authorities during 2009 have successfully prevented even steeper world economic

decline. The green shoots of recovery started to show in Q2/2009. The powerhouses of the

world economy that have maintained growth throughout the crisis are the dynamic economies

of Asia. such as China. Korea and India. The positive effect of the economic performance of

these nations has spilled over to other countries in the region. including Indonesia. through

expanding demand for exports. Furthermore. the stimulus packages launched by governments

in developed countries alongside improvement in financing from the banking system and

consumer confidence have underpinned rising consumption levels since the second half

of 2009. Even so. the world economic recovery process remains overshadowed by risks.

Among these are the stubbornly high unemployment and sizeable fiscal deficit outcome in

the United States that have triggered concerns among market actors over the sustainability

of US financial operations.

Improvement in the global economy is again reflected in the positive developments

on global financial markets. Intense pressures were bearing down on global financial

markets early in the year. but by the end of 2009 these pressures had begun to ease.

Supporting this was optimism fuelled by the ongoing recovery in the global economy

and strengthening performance in the financial institutions in advanced nations. These

developments fostered positive perceptions leading to renewed asset price gains on global

financial markets beginning in Q2/2009. This optimism for the global economy has provided

a lift for financial market performance around the world. Global stock market indices are

climbing. while risk perceptions for financial market assets in developed nations and emerging

markets has similarly improved as reflected in the decline in credit default swaps (CDS).

The multifaceted dynamics of the global economy in 2009 have brought their

influence to bear on developments in the Indonesian economy. The global economic

recovery. the rise of China and India and prudent macroeconomic policies at home have

worked to the advantage of the Indonesian economy. Within the region. Indonesia has

become the “flavour of the day” as a result of the economic resilience maintained throughout

2009. amid the global crisis. The growth in the Indonesian economy has been driven mainly

by strong domestic demand. The expansion in the domestic economy over this period

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Monetary Policy Report - Quarter IV-2009

2

is driven more by consumption spending. a result of election-related expenditures. low

inflation. various fiscal stimulus initiatives to boost public purchasing power and reductions

in taxes. Alongside this. Indonesia’s export performance is up in response to the ongoing

and more broad-based recovery process in the world economy and rising global commodity

prices. Against the background of these developments. economic growth for 2009 overall

is forecasted to reach 4.3%.

Further confirmation of renewed growth momentum in Indonesia during 2009 comes

from the regional economic assessments conducted by Bank Indonesia. For the most

part. local economies report brisk consumption and exports driven by rising demand for

primary products imported by China. India and South Korea. Export growth in the Sumatra and

the Kali-Sulampua (Kalimantan-Sulawesi-Maluku-Papua) regions is fuelled mainly by rubber.

nickel. coal and CPO. These regional economic gains are closely related to the continued

strength of domestic consumption. led by the Java-Bali-Nusa Tenggara (Jabalnustra) and

Jakarta regions. as well as recovery in exports of estate and mining commodities from Kali-

Sulampua and Sumatra driven by improving world economic conditions. Complementing

this is the fiscal stimulus outcome now at 36.2% and realised regional government capital

expenditures in the Kali-Sulampua and Jakarta regions. which have mounted over the same

period in 2008. The stimulus has brought some modest improvement in investment growth

in the regions. albeit minimal. Nevertheless. strong domestic consumption and expanding

volume of primary commodity exports has invigorated activity in key sectors in local regions.

namely agriculture in Jabalnustra and Sumatra. mining in Kali-Sulampua and tertiary sectors

in Jabalnustra and Jakarta. Throughout 2009. the combination of the domestic-oriented

economies in Jabalnustra and Jakarta and the export-oriented economies in Sumatra and

Kali-Sulampua has bolstered national economic growth in the face of the onslaught of the

global crisis.

Concerning prices. the Indonesian economy in 2009 was marked by low inflationary

pressure. November inflation was recorded at -0.03% (mtm). down from 0.19% in

the previous month. The deflation in November is linked mainly to the renewed correction

in prices for staple goods. Measured annually. CPI inflation eased from the previous month

to 2.41% (yoy). On the non-fundamentals side. security of domestic supplies. efficient

distribution and the still fairly low international commodity prices have eased volatile foods

inflation. Administered prices inflation has fallen sharply following the government decision

to lower fuel prices at the beginning of the year. Regarding fundamentals. inflationary

pressure has eased in response to the external factors of lower trading partner inflation.

appreciation in the exchange rate and softening public expectations of inflation. In view

of these developments. inflation at end-2009 could potentially come below the previous

forecasted 2.9% (yoy).

The balance of payments has charted more robust performance in 2009 in line with

conducive developments at the global level. Key to these gains is the improvement

the current account as the global economic recovery moves ahead. Further support for the

current account has come from the upward trend in prices for Indonesia’s exports. led by

resource-based commodities. The current account surplus is also projected to climb further

Page 15: Jl.MH. Thamrin No.2 Jakarta 10110 - Indonesia …. Thamrin No.2 Jakarta 10110 - Indonesia BANK INDONESIA For further information. please contact: Economic Outlook & Policy Dissemination

General Review

3

in spite of rising non-oil and gas imports. At the same time. optimism for global economic

recovery in tandem with improving perceptions of emerging market risks is expected to sustain

the pace of capital inflows. With the improvement in the balance of payments. Indonesia’s

international reserves position at end-November 2009 stood at USD65.84 billion. equivalent

to 6.5 months of imports and servicing of official debt.

The more robust performance in the balance of payments has contributed to

stability in the rupiah during 2009. Throughout the year. the rupiah has maintained

an appreciating trend. Positive global investor perceptions of the Indonesian economy

have stimulated investor risk appetite for domestic financial market assets. which has kept

capital inflows pouring into the Indonesian financial market. The rupiah exchange rate has

responded with steady appreciation since Q2/2009. reaching Rp 9.445 to the US dollar at

end-November. This represents a gain of 15.3% (ptp) from the end-2008 level recorded at

Rp 10.900 to the US dollar.

These economic developments have bolstered the domestic financial market.

Monetary policy transmission has also improved. as shown in the money market

and bank interest rate response to the BI Rate. On the bond market. monetary policy

transmission is reflected in declining yield on government securities across all tenors. with

the steepest reduction recorded for short-term maturities. However. policy transmission faces

greater resistance in the longer tenors. This is an indication of less favourable long-term

investor perceptions of inflation expectations and the fiscal sustainability outlook. On the

stock market. the index and prices are on the rise. Foreign investors have regained interest

in emerging market financial assets in response to the global economic recovery. With the

added support of Bank Indonesia monetary policy and healthy domestic macroeconomic

indicators. this has stimulated more vigorous growth in the Jakarta Composite Index.

The money market has seen steady improvement in interest rate transmission to interbank

transactions. The overnight rate on the interbank market has stayed around the level of the

BI Rate following the switch in the monetary policy operational target to the O/N interbank

rate in July 2008. The downward movement in O/N rates has been followed by interbank

rates in above O/N tenors. The BI Rate is also being transmitted more effectively to bank

deposit rates. The 337 bps fall in 1-month deposit rates during 2009 surpasses the 275 bps

reduction in the BI Rate over the same period. This represents markedly stronger response

when compared to the previous round of BI Rate cuts in 2006. However. lending rates have

responded to movement in the BI Rate with only slow. limited improvement. During 2009.

the aggregate lending rate (average for working capital. investment and consumption credit)

eased by 76 bps. The constrained response in lending rates is explained by a number of factors.

including persistently strong perceptions among banks of sustainability risk in the real sector.

Due to the tepid response in the banking system. there has been only sluggish growth in

bank sources of financing. As of October 2009. expansion in credit (including channelling)

had reached only 4.2% (ytd). well below the level for the same period one year earlier.

Looking forward. the domestic economy has potential to surpass earlier growth forecasts

for 2009 and 2010. This trend is expected to carry forward into 2011. Supporting factors

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Monetary Policy Report - Quarter IV-2009

4

include more conducive external conditions with faster than predicted recovery in the world

economy and securely managed domestic conditions buoyed by sustained vigorous household

consumption. The renewed export growth that began taking hold at end-Q1/2009 is set to

maintain pace in keeping with the recovery in the world economy. Besides the improvement in

the world economy. an important factor in the accelerated export growth is the comparatively

speedy recovery in Indonesia’s exports of resource-based commodities buoyed by rising

demand in trading partner nations. Within Indonesia. household consumption growth is

predicted to maintain comparatively strong momentum as a major contributor to the GDP.

although not as strong as during the 2009 election period. Key to this consumption growth

will be sustained consumer confidence. higher incomes on the back of strengthening exports

and low inflation. Against this background. Indonesia’s economic growth in 2010 is forecasted

at 5.0%-5.5% before climbing further in 2011 to 6.0%-6.5%.

The outlook for global economic recovery in 2010 will have positive benefits for

Indonesia’s balance of payments. Supporting this improvement will be gains in the current

account and the capital and financial account. The ongoing recovery in the world economy

coupled with steady improvement in world commodity prices will lift export performance to

new levels. Preliminary figures for non-oil and gas imports point to a turnaround in Q2/2009

in keeping with expanding activity in the domestic economy. In the capital and financial

account. performance will be bolstered by more favourable domestic and external conditions

compared earlier forecasts.

In regard to inflation. the trend in 2010 and 2011 is predicted to return to normal as the

wheels of the Indonesian economy gather renewed growth momentum. For these reasons.

inflation in 2010 and 2011 is predicted in the range of 5%±1%. Among the external

factors in the inflation forecast are escalating inflation in trading partner nations in keeping

with the predicted improvement in the global economy and rising international commodity

prices. At home. inflationary pressure is also likely to result from increases in administered

prices. Concerning volatile foods inflation. possible supply shocks from the expected El Nino

phenomenon are predicted to have only minimum effect in stoking inflationary pressure.

After careful consideration of the developments outlined above. the Bank Indonesia

Board of Governors Meeting convened on 3 December 2009 decided to hold the BI

Rate at the level of 6.50%. An added factor is that the current BI Rate level is consistent

with achievement of the 2010 inflation target of 5%+6%. This policy stance is also regarded

conducive to the economic recovery and banking intermediation processes.

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Latest Macroeconomic Indicators

5

2. Latest Macroeconomic Indicators

The ongoing recovery in the global economy has given added boost to domestic

economic performance. During Q4/2009. economic recovery spread to more corners of

the globe. buoyed by positive growth in advanced economies and the continued solid

economic performance in Asia. All this has positive influenced domestic economic

conditions. Consumption is estimated higher in Q4/2009 over the previous quarter in

keeping with the improving outlook for domestic and external demand and stable

conditions at home in the wake of the national elections. Realised investment is

also expected to show more vigorous growth in the quarter under review. while the

decline in imports will ease further in response to improved domestic demand on the

external sector. On the supply side. the slowdown in the world economy has impacted

performance in tradable sectors in contrast to the continued gains in non-tradable

sectors. The world economic slowdown has had little impact on agriculture and

trade. but has borne down significantly on manufacturing due to reduced demand

for Indonesian exports in trading partner nations. Alongside this. the transportation

and communications sector has maintained robust growth throughout 2009. mainly

on the strength of the communications subsector.

DEVELOPMENTS IN THE WORLD ECONOMY

The process of world economic recovery is predicted to see further gains in Q4/2009.

Economic recovery has been driven mainly by developments in leading world economies

(such as the US. Europe and Japan). which have emerged from recession as demonstrated by

positive growth figures for Q3/2009. Further impetus has come from the newly industrialised

economies of Asia. such as Singapore and Hong Kong. that resumed positive growth in

Q3/2009 following steep contraction in the first half of the year and are expected to post

even stronger growth in Q4/2009. The economies of China and India. the main pillars of

recovery in Asia. also maintained solid growth in the second half of 2009 as indicated by

sustained upward trends in production indices and consumption. However. stubbornly

high rates of unemployment continued to hamper recovery in consumption in advanced

economies. The outlook for faster than expected recovery in the global economy is seen as

conducive to accelerating improvement in the domestic economy.

In Q3/2009. the US economy reported positive growth at 3.5% (qtq). Recovery in

the US during Q3/2009 was bolstered by the Government fiscal stimulus programme that

held of the prospect of plummeting domestic consumption and infrastructure projects that

stimulated renewed activity in production sectors. Even so. the US economy is still dogged

by high unemployment figures. recorded last October at 10.2%. Pressure continues to bear

down on personal incomes in the US due to the high unemployment and comparatively tight

lending in the banking system. On the labour market. worker lay-offs continue. but have

begun easing as reflected in the drop in initial jobless claims to 519 thousand in Q4/2009

from the previous 560 thousand. Household consumption mounted in contrast falling

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Monetary Policy Report - Quarter IV-2009

6

personal incomes due to the effect of the cash for clunkers programme that has boosted

retail sales and spurred renewed consumer confidence in the outlook for the economy. In

Q4/2009. the US economy is predicted to chart 2.8% growth (qtq). In annualised figures.

this representing the lowest level of contraction at -0.3% (yoy).

Global financial markets continue to show an upward trend during Q4/2009. The easing

of the global liquidity crunch is reflected in the narrowing of the LIBOR to Overnight Index

Swap (OIS) spread that has fuelled a dollar carry trade profiting from low US dollar interest

rates. These funds are pouring into assets promising higher returns as more signs emerge of

improvement in the economic situation. Alongside this. expectations of more rapid policy

reversal in emerging market countries compared to advanced nations will widen the interest rate

spread and lead to stronger inflows of foreign capital in search of higher risk assets. including

stock markets and assets on emerging markets. Despite this. the financial market experienced

some significant upheaval in November due to risk aversion among market actors triggered

by the responses of some financial authorities and central banks attempting to restrict foreign

inflows and slow excessively rapid domestic currency appreciation. At end-November. financial

markets came under renewed pressure from reports of losses at Dubai World from tumbling

prices for underlying property assets and the onset of a debt crisis. As a result. investor risk

appetite plunged sending stock markets tumbling around the globe and triggering a steep rise

in emerging market risk indicators. Nevertheless. the contagion from the Dubai World crisis

proved short-lived. Positive sentiment from the continuation of the fiscal stimulus in China.

solid Q3/2009 economic growth in India and the quick response by the UAE government and

central bank in providing assurances of support to local and domestic banks and opening

liquidity facilities within the financial system helped to bring calm to troubled markets.

Asian economies are forecasted to maintain solid growth in Q4/2009 and provide

the main driving force for the world economy. Most Asian economies have rebounded

in the wake of steep losses in the first half of 2009 to embark on positive growth in the

second half of the year. Some export-dependent economies are now shifting to domestic

demand. as indicated by the present surge in domestic industry activity indicators in China

on the back of the government fiscal stimulus. The economy in China will continue to be a

source of export demand for products from Asian countries. with the effect felt in economies

in the region.

Inflationary pressure remains low despite a modest rise. According to composite data

on realised inflation. world inflation has begun to climb although remaining low. Inflation

last September mounted to 1.1% (yoy) from the July 2009 level recorded at 0.5%. Some

countries have emerged from the deflationary phase and with economic activity on the

mend. inflationary pressure is now on the rise.

ECONOMIC GROWTH

Aggregate Demand

Economic growth in Q4/2008 is predicted at 4.4% (yoy). up from the previous quarter.

This improved growth is confirmed by movement in leading indicators for the GDP. pointing

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to growth in the economy (Graph 2.1). Key to the more robust economic

growth in Q4/2009 was stronger performance in exports that has

stimulated household consumption and spurred investment growth. In

response to these developments. economic growth for 2009 as a whole

is set to reach about 4.3% (yoy. Table 2.1). down from one year earlier

mainly because of the impact of the global economic downturn.

Analysed by distribution. the most important share of 2009 GDP

consists of private consumption and exports. Private consumption

measured as share of GDP in 2009 is largely stable against 2008. while

the GDP share of exports has diminished. This is explained by the slump

in export growth while trading partner economies were struggling to

embark on recovery during the first half of 2009.

Household consumption is forecasted to chart increased growth

in Q4/2009 at 4.8% (yoy). The boost from seasonal factors with the

approaching end of the year and higher export revenues is expected to provide added lift to

household consumption growth in Q4/2009. Further indications of improvement in household

consumption are visible in the more rapid sales growth for durable goods in October 2009

and high retail sales figures for non-durable goods (food and clothing). Credit card and debit

card transactions similarly recorded more vigorous growth as of mid-Q3/2009. In a similar

vein. leading indicators for household consumption point to an expansionary trend in the

cycle. at least until the next quarter (Graph 2.2). Figures also point to a heftier contribution

from non-food consumption over the preceding year. explained by high sales growth in

durables. such as motor vehicles (Graph 2.3) and electronics. These sales are up partly in

response to higher incomes that have strengthened purchasing power among middle and

upper class consumers and the seasonal factor of religious festivities.

The buoyant household consumption in 2009 has been strongly influenced by

spending on the national elections and government policy expenditures. During the

first half of 2009. falling exports resulted in depressed purchasing power in export-oriented

sectors and rising numbers of worker dismissals. Even so. public purchasing power in January-

Graph 2.1

Leading GDP Indicators

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Table 2.1

Economic Growth - Demand Side

2007

* Bank Indonesia Projection Figures

Source : Statistics Indonesia

Total Consumption 5.0 4.9 5.5 5.5 6.3 6.4 5.9 7.3 6.3 5.4 4.3

Private Consumption 5.5 5.0 5.7 5.5 5.3 4.8 5.3 6.0 4.8 4.7 4.8

Government Consumption 2.0 3.9 3.6 5.3 14.1 16.4 10.4 19.2 17.0 10.2 1.7

Gross Domestic Fixed Capital Formation 12.4 9.4 13.7 12.0 12.2 9.1 11.7 3.5 2.6 4.0 4.6

Export of Goods and Services 7.9 8.5 13.6 12.4 10.6 1.8 9.5 -19.1 -15.7 -8.2 -5.4

Import of Goods and Services 13.9 9.0 18.0 16.1 11.0 -3.5 10.0 -24.1 -23.9 -18.3 -6.2

GDP 5.8 6.3 6.2 6.4 6.4 5.2 6.1 4.4 4.0 4.2 4.4

20072008

20082009

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June 2009 was sustained by several factors. most importantly the surge

in spending related to the national elections. Other factors boosting

household consumption included the operation of the government social

safety net through direct cash transfers. payment of a 13th month salary

and pay rise for civil servants and income tax reductions. Similarly. in

the second half of 2009. higher incomes derived from exports. lower

rate of job losses and the still robust consumption of the middle and

upper class population contributed to stronger household consumption.

Purchasing power gains in the second half of 2009 were evident in

higher real disposable incomes. which have maintained an upward

trend due to lower inflation. Other indicators. such as farmer terms of

trade and worker wages. also showed improvement in Q3/2009. Against

this background. household consumption growth for 2009 overall is

forecasted at 5.1%. a slower rate compared to one year before.

Investment growth (Gross Fixed Capital Formation) is expected

to gather momentum in Q4/2008. climbing from the previous

quarter to 4.6% (yoy). Reflecting this growth upturn are developments

in leading investment indicators pointing to an upswing in investment

growth during Q4/2009. The indications of stronger Q4/2009 investment

growth are linked primarily to strengthening domestic and external

demand and a stable business climate in the aftermath of the presidential

election. Supporting the renewed investment growth is improvement

in realised construction investment as indicated by increases in cement

consumption and growth in imports of capital goods. Added to this.

quarterly government capital expenditures are projected to boost

investment growth in Q4/2009. Investment growth for 2009 overall is

predicted to reach 3.7% (yoy). down from the previous year. This decline

is borne out in the business response to falling export demand during

the first half of 2009 and weakening business tendencies. Like before.

investment growth in 2009 was dominated by non-construction activity.

which was nevertheless down in comparison to 2008 (Graph 2.5).

Leading indicators for end-Q3/2009 confirm the slackening trend

in investment growth for 2009. This decline is explained mainly by

the slump in non-construction investment growth. reflected in the limp

growth in imports of capital goods compared to 2008 (Graph 2.6).

Nevertheless. cement consumption growth. which hit a low in the first

half of 2009. began to recover in Q3/2009 in line with the renewed

investment growth in construction and infrastructure and more positive

business confidence in the outlook for economic conditions. In addition.

cement demand in the regions is expected to rise as the reconstruction

work in earthquake-hit areas enters the implementation stage. In regard to

financing. investment financing support remains adequate as indicated by

Graph 2.2

Leading Indicators for Household Consumption

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Graph 2.3

Growth in Car and Motorcycle Sales and Household

Consumption GDP

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Leading Investment Indicators

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the quite high rate of growth in real foreign investment loans. However.

according to surveys by the Central Statistics Agency (BPS). business

tendencies have shown a downward trend in 2009 compared to the

preceding year. due to declining orders for input goods and foreign orders

accompanied by a drop in real selling prices (Graph 2.7). This decline is

borne out in the Bank Indonesia survey findings that point to falling value

of planned investment in 2009 compared to one year earlier. despite the

outlook for expanding business activity during the second half.

Exports are predicted to chart increased growth during Q4/2009.

bolstered by continued improvement in global economic

conditions. Key to the more robust export growth in Q4/2009 is the

escalation in international commodity prices alongside reinvigorated

export demand. with traditional markets in the lead. Added to this. the

improvement in production indices. the consumer confidence index

and business sentiment in the G3 nations and China augurs for added

export growth potential. Indications of improvement are reflected

the expanding volume of global trade in the Baltic Dry index. marked

by upward movement in early Q4/2009 (Graph 2.8). In response to

these developments. Q4/2009 export growth is estimated ahead of

the previous quarter at -5.4% (yoy). According to the latest BPS data.

October 2009 exports reached US$11.88 billion. down 10.12% (yoy)

from October 2008. Growth in non-oil and gas exports was again driven

by primary commodity exports led by coal and other mining products

and industrial products. such as palm oil.

With domestic and external demand on the rise. preliminary

figures point to healthier import growth during Q3/2009.

Indications of this are visible in the leading import indicators that offer

hope for more vigorous import growth. even though imports will remain

in the contractionary stage of the cycle for one quarter ahead (Graph 2.9).

Import growth is predicted to improve as household consumption gains

added momentum and demand picks up for raw materials and capital

goods for production. mainly in the manufacturing sector. Similarly.

confirmation of continued improvement in import growth is provided by

accelerated growth in import duties. In response to these developments.

the slowdown in imports is estimated to have eased in Q4/2009 to -6.2%

(y-o-y). The most important contribution to this improvement comes from

stronger growth in imports of raw materials and intermediate inputs.

Analysed by 2-digit HS commodity classification. import growth during

January-October 2009 was again dominated by raw materials and capital

goods intended for boosting production capacity. such as machines.

mechanical tools. electrical motors and other electrical equipment.

Graph 2.5

Construction and Non-Construction Investment Contributions

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Growth of Capital Goods Imports

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Business Sentiment - BPS

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Government Financial Operations

Revenues and expenditures in 2009 Government financial

operations are predicted to fall below the targeted levels in the

Revised 2009 Budget. Total state revenues in January-October 2009

reached 73.2% of the Revised Budget. below the equivalent 2008

outcome at 87.4%. In a similar vein. the outcome for state expenditures

came to only 68% of the Revised Budget. below the equivalent 2008

outcome of 74.2%. The global economic slowdown and oil price

development in 2009 have been the main factors in the depressed

revenue and expenditure performance. Given these conditions. the

deficit from Government financial operations is predicted to come below

target (2.4% of GDP).

State expenditures have declined further in Q4/2009 from the

impact of the global economic slowdown and current oil price

developments. In the taxation sector. the slackened pace of the

domestic and global economy has borne down significantly on VAT

and international tax revenues. Another tax sector reporting significant

reductions is Oil and Natural Gas Income Tax. due to the effect of lower

oil prices in 2009 compared to 2008. In the midst of these adverse

economic conditions. revenues from non-oil and gas income tax and

excise continued to expand as a result of taxation policy changes. Added

to this VAT revenues are expected to begin charting positive growth

despite limited coverage in keeping with the onset of improvement

in economic performance and growing trading activity in Q4/2009.

However. with revenues down in most taxation sectors. actual taxation

receipts in January-October 2009 came to only 75.1% of the Revised

Budget. or less than the 88.5% posted last year for the same period. In

the non-tax sector. the drop in oil prices from 2008 has led to significant

decline in non-tax revenues. led by oil and natural gas natural resource-based revenues.

Under these conditions. non-tax revenues stood at only 67.5% of the Revised Budget target

in October. below the outcome recorded in 2008 at 85.6%.

Absorption of state expenditures is down from last year. but with improvement in

quality. In October 2009. realised central government expenditures were up on the preceding

year by expenditure category. except for subsidies due to the effect of lower oil prices. In

related developments. expenditure outcomes by line ministries/statutory agencies. which

provide a direct stimulus for economic activity. showed visible improvement over 2008. During

January-October. improvements took place in the realised expenditures for personnel. capital

and goods with direct impact on the real sector. Despite this. the drastically reduced burden of

energy subsidies has resulted in lower actual central government spending compared to one

year before. Total state revenues in January-October 2009 reached no more than 63.2% of

the Revised Budget. below the equivalent 2008 outcome at 71.7%. However. the outcome

Graph 2.8

Baltic Dry Index

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Leading Import Indicators

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of the fiscal stimulus package offering tax savings. subsidised import duties and other non-

tax subsidies for business remains low. In October 2009. the expended portion of the fiscal

stimulus stood at only 44.9% of the total Rp 73.3 trillion budget allocation.

On the financing side. the more robust bond market in 2009 has paved the way

for achieving the deficit financing target. Improvement in government securities yield

has progressively lowered the average yield accepted by the government in each of the

auctions during 2009. This has not only lowered the cost of financing. but also enabled the

government to meet the targeted issuance of Government Securities in mid-November. The

improvement in the bond market also means that most of the available standby loan funds

remain untouched. During 2009. the only standby loan funds drawn by government are

from the 35 billion yen Samurai Bonds issued in August.

Aggregate Supply

Several economic sectors are expected to show improvement in Q4/2009 (Table

2.2). Growth in key sectors. such as trade and agriculture. is set to mount higher during the

quarter. In other sectors. and particularly manufacturing. growth is comparatively stable.

Gains are visible in the construction and electricity. gas and water utilities sectors. However.

the transport and communications sector slowed to some extent in Q4/2009. although

growth remains high. In analysis by structure. the dominant sectors of the economy. like

before. are manufacturing. the trade. hotels and restaurant sector and agriculture. However.

the most important contributors to growth were the transport and communications sector.

agriculture and the financial services leasing and corporate services sector.

Manufacturing growth in Q4/2009 has held at a relatively stable level. Analysed by

structure. the largest share of manufacturing is concentrated in the transportation equipment.

machinery and tools subsector. food. beverages and tobacco and the chemicals and rubber

% Y-o-Y. Base Year 2000

IV I II III IV I II III IV*Sectors

Table 2.2

Economic Growth - Supply Side

2007

* Bank Indonesia Projection Figures

Source : Statistics Indonesia

Agriculture 3.1 3.5 6.3 4.8 3.4 4.7 4.8 5.3 2.5 2.7 4.3

Mining and Quarrying -2.1 2.0 -1.7 -0.5 2.1 2.1 0.5 2.4 3.3 6.5 3.8

Manufacturing 3.8 4.7 4.3 4.2 4.3 1.8 3.7 1.5 1.5 1.3 1.2

Electricity. Gas and Water Supply 11.8 10.4 12.3 11.8 10.4 9.3 10.9 11.4 15.4 14.6 15.1

Construction 9.9 8.6 8.0 8.1 7.6 5.7 7.3 6.3 6.4 8.8 8.9

Trade. Hotels and Restaurants 9.1 8.5 6.9 8.1 8.4 5.6 7.2 0.5 -0.3 -0.6 1.2

Transportation and Communication 17.4 14.4 18.3 17.3 15.5 15.8 16.7 17.1 17.5 18.2 15.9

Financial. Rental and Business Services 8.6 8.0 8.3 8.7 8.6 7.4 8.2 6.3 5.3 4.9 4.8

Services 7.2 6.6 5.9 6.7 7.2 6.0 6.4 6.8 7.4 5.8 5.0

GDP 6.3 6.3 6.2 6.4 6.4 5.2 6.1 4.4 4.0 4.2 4.4

20072008

20082009

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products subsector. However. the major contributors to manufacturing growth are food.

beverages and tobacco. chemicals and rubber products and the paper and printed products

subsectors.

The relative stability in manufacturing growth is reflected in developments in leading

indicators. The car sales indicator has held stable since early 2009. but remains below the

average sales level for the preceding year. A similar trend is also evident in imports of industrial

raw materials and the results of the Bank Indonesia Production Survey for end-Q3/2009. On

the financing side. bank financing for the industry sector showed a slackening trend from

early in the year to the end of Q3/2009. The 100-day programme for industry is expected

to bring only limited benefits given that the only direct impact will be in revitalisation of the

People’s Business Credit (KUR) facility and revitalisation of sugar and fertiliser plants.

Following a period of slowdown. the key sectors. such as trade and agriculture.

is set to mount higher in Q4/2009. Preliminary figures for the quarter suggest that the

trade sector has embarked on positive growth. The improvement in the trade sector is

attributable to a number of factors. including the upswing in demand and largely stable levels

of public purchasing power. Confirmation of initial improvement in trade sector growth is

also provided by leading indicators for the trade. hotels and restaurants sector. which has

entered an expansionary phase set to carry forward into the coming quarter. Added to this

was the upswing in the BI retail sales index in early Q4/2009. At a more detailed level. sales

were up in almost all commodity categories. encompassing both durables and non-durable

goods. Non-oil and gas imports. used as the indicator for the wholesale trade subsector.

and average hotel occupancy in Bali. indicating performance in the hotels subsector. were

both up at end-Q3/2009. In regard to financing. credit channelled to the trade sector has

shown a declining trend since early 2009. with lending at end Q3/2009 below the average

growth for 2008.

Agriculture is on track for 4.3% growth (yoy) in Q4/2009. up from the preceding

quarter. This is explained primarily by reduced growth in the estates subsector related to

slack demand from trading partner nations in Q3/2009. Analysed by structure. the agriculture

sector is dominated by the food crops subsector. In the food crops subsector based on the

BPS Forecast Figures II (ARAM-II). rice production and harvested land is set to decline from

the second subround (May-August) to the third subround (September-December). due to

the passing of the harvest season. However. if the subround is transformed into quarterly

data. harvested area has maintained expansion while rice production is largely stable. In

contrast. the estate crops subsector is expanding in response to renewed growth in demand.

Regarding financing. banks expanded their lending to the agriculture sector throughout the

first half of 2009. However. slowing lending performance was visible in the second half as

of end-Q3/2009.

The mining and quarrying sector is predicted to chart more modest growth in

Q4/2008 compared to one quarter earlier at 3.8% (yoy). The slowdown in the world

economy has had minimum impact on mining. as reflected in steady improvement in mining

sector growth in 2009 compared to the preceding year. As of Q3/2009. exports of mining

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commodities such as coal. copper. nickel and ores. matte and concentrates maintained an

upward trend in response to strengthening demand and higher commodity prices. Despite

this. lending to the mining sector has declined in 2009. with growth slipping below the

average for 2008.

The transportation and communications sector is expected to chart reduced growth.

Performance in the communications subsector is reflected in the growing numbers of

cellular subscribers as of Q3/2009. Some leading cellular operators have seen remarkable

growth in numbers of customers. Similarly. strengthening performance in the transportation

subsector is indicated by growing air and rail passenger numbers and increased cargo traffic

at Indonesia’s five major seaports (Belawan. Tanjung Priok. Tanjung Perak. Balikapan and

Makassar) at end-Q3/2009. In regard to financing. credit channelled to transportation and

communications has tapered off since early 2009. with lending growth in early Q3/2009

below the average for 2008.

The construction sector is projected to chart fairly stable growth

in Q4/2008 relative to the preceding quarter at 8.9% (yoy). Some

leading indicators such as cement production and cement imports

have begun to climb. A survey of commercial properties in Q3/2009

also points to more bullish developments. This is visible in the upbeat

growth in commercial properties. encompassing offices. retail space and

apartments. and follows the completion of several construction projects

in and near Jakarta. Concerning levels of financing. banks reported

reduced lending growth for the construction sector at end-Q3/2008.

below the average rate of credit expansion in 2008.

Regional Economic Performance

At the regional level. economic growth is projected to improve

further in Q4/2009. The overall economy has been bolstered by more

rapidly improving growth in the Jabalnustra (Jakarta-Bali-Nusa Tenggara)

region compared to other regions and continued high growth levels

in Kali-Sulampua (Kalimantan-Sulawesi-Maluku-Papua). Given that

Jabalnustra accounts for the largest share of the national economy at

45.2%. the economic gains in this region indicate that economic growth

is returning to normal.

For the most part. local economies report brisk consumption and exports

consistent with the rising demand for primary products imported by

China. India and South Korea. Export growth in the Sumatra and the

Kali-Sulampua (Kalimantan-Sulawesi-Maluku-Papua) regions is fuelled

mainly by rubber. nickel. coal and CPO. The economic improvement in

this regions is closely linked to the conducive conditions of domestic

consumption in Jabalnustra and Jakarta and the ongoing recovery in

Graph 2.10

Consumer Confidence Index

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Graph 2.11

Cement Consumption Growth

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14

export activity. Household and government consumption in Jabalnustra

accounts for 52% of consumption nationwide. The buoyant consumption

in Jabalnustra is explained by the factors of strong purchasing power

and consumer optimism in the region (Graph 2.10). Indications point to

rising investment. as demonstrated by increases in capital expenditures

by regional governments (Jakarta. Kali-Sulampua and Sumatra) and

cement consumption (Graph 2.11). Alongside this. exports maintained

stable growth.

Potential for low national CPI inflation in 2009. now forecasted below

the 3.0% mark. is confirmed by the slowing trend in regional inflation

across almost all regions. The deflation recorded on a national scale in

November 2009 resulted primarily from price contraction in Sumatra.

Jakarta and parts of Jabalnustra driven by price corrections following a

round of escalating prices for staple goods. Annual inflation above the

national inflation figure was recorded across all zones in Kali-Sulampua.

the Southern Sumatra Zone and the Eastern Java Zone. Compounding this was an increase

in the number of cities in Jabalnustra and Kali-Sulampua reporting above national inflation.

This indicates that even though inflation is moving lower with healthier influence from

fundamentals. some regions are still hampered by constraints brought on by shocks that

have exacerbated inflation volatility on an individual city basis.

At the regional level. the economic growth outlook is predicted to improve in line with national

economic growth recorded in Q3/2009 at 4.2%. The higher growth figure is supported by

strengthening consumption and exports. Public purchasing power is estimated to be mounting

higher while farmer terms of trade are projected to improve in line with the steady climb in

international commodity prices and the proposed 15% hike in the government floor price for

unhusked dry rice. In analysis by sector. the planned investment expected for manufacturing

and mining will be complemented by increased output of leading agricultural commodities.

such as palm oil and rubber.

BALANCE OF PAYMENTS

Increasingly upbeat global and domestic economic developments have had a positive effect

on Indonesia’s balance of payments. The influence of the external sector on the goods market

is reflected in stronger exports. while demand in the domestic economy is spurring growth

in imports. The balance of trade continues to post a strong surplus despite rising demand

for imports. This surplus is buoyed by the estimated rise in export performance fuelled by the

faster and broader-based recovery in the global economy and the continued positive trend

predicted in international commodity prices. Concerning capital inflows. optimism for the

domestic economy and the still accommodative global monetary policy will help maintain

consistency in portfolio capital inflows in Indonesia. On the capital market. foreign investors

maintained steady interest in domestic portfolio instruments even though some adjustments

have taken place during Q4/2009. Taken together. the Q4/2009 balance of payments

is projected to chart a surplus.

Graph 2.12

Inflation at the Regional Level

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Latest Macroeconomic Indicators

15

The Current Account

The current account in Q4/2009 is expected to register a more modest surplus

compared to Q3/2009. The lower surplus from the previous quarter is predicted in relation

to the rising cost of transportation services caused by escalating oil prices. On the other hand.

the balance of trade continues to chart a strong surplus on the back of rising exports. Even

so. the stronger absorption capacity of the domestic economy has also stimulated activity

among domestic importers. The trade surplus is sufficient to offset the deficit in the services

transactions. income and current transfers account.

Exports have been bolstered by developments in commodity prices. In addition to

strengthening external demand. the upward trend in export commodity prices has also

provided a boost to exports in Q4/2009. Despite a lower annual increases over the preceding

year. export commodity prices steadily mounted throughout 2009 until reaching a peak in

Q4/2009. On the other hand. improvement in domestic economic activity. rising commodity

prices and accommodative level of the exchange rate resulted in higher value of imports in

Q4/2009. although growth remains in negative territory.

The Capital and Financial Account

The capital and financial account is on track for another surplus in Q4/2007. albeit

down slightly from the previous quarter. The comfortably secure condition of domestic

fundamentals combined with attractive yields on rupiah investment instruments has kept

capital inflows pouring into the domestic economy. Despite a downturn resulting in a

weakening of the rupiah. portfolio investments in October-November 2009 reflect continued

positive foreigner interest in domestic commercial assets (BI Certificates. government securities

and stocks). Concerning foreign direct investment inflows. expectations of rising oil prices

in Q4/2009 have prompted more aggressive exploration by oil and natural gas companies

and therefore larger than expected cash calls from overseas affiliates. Q4/2009 is expected

to chart higher inflows of equity and reinvested earnings for direct investment in the oil-gas

and non-oil and gas sectors.

International Reserves

Following the latest developments in the current account and the capital and financial account.

the international reserves position at end-November 2009 came to USD65.84 billion.

equivalent to 6.5 months of imports and servicing of official external debt.

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Monetary Policy Report - Quarter IV-2009

16

3. Monetary Indicators and Policy. Quarter IV-2009

In Q4/2009. global economic developments have seen steady improvement. The

faster than expected global economic recovery has reinvigorated investor optimism

for emerging markets. In addition. the solid condition of domestic economic

fundamentals has underpinned exchange rate movement throughout the quarter. In

Q4/2009. the rupiah has maintained an appreciating trend. Measured as an average

for the quarter (until November 2009). the rupiah has gained 5.39%. climbing to Rp

9.463 from Rp 9.973 in the past quarter. The sharp appreciation saw volatility mount

slightly from 0.69% in Q3/2009 to 0.74%. In regard to prices. inflationary pressure

has eased further during Q4/2009. CPI inflation in Q4/2009 is projected at about

only 3% (yoy). below the inflation targeting band established by the Government.

The low rate of inflation is primarily linked to modest inflation in volatile foods and

administered prices and improvement in improving expectations. Added to this.

external pressures have ameliorated from the effect of appreciation in the rupiah

and low imported inflation.

The loose bias monetary policy throughout 2009 has been adequately transmitted

through the interest rate channel and specifically through short-term interest rates

and deposit rates. However. the rapid decline in the policy rate and time deposit

rates has met with delayed. only partial response in lending rates. In the liquidity

channel. the fall in interest rates has been matched by health expansion in economic

liquidity and particularly M1. In regard to lending. the decline in the policy rate has

engendered inadequate response with persistent sluggish credit expansion as of

Q3/2009. The slow pace of economic activity and high rates for credit have sapped

demand for credit from the public. In the asset price channel. the loose bias stance

has met with positive response on the markets for stocks and Government bonds.

Despite this. financial markets have shown only limited response

to the policy rate due to the predominating influence from

external factors.

RUPIAH EXCHANGE RATE

The steady improvement in global economic conditions and

solid progress in domestic economic conditions augur for further

appreciation in the rupiah to the end of Q4/2009. Synergy of

economic recovery across different regions coupled with support from

domestic economic fundamentals has strengthened the investor risk

appetite for the Indonesian economy. In recognition of Indonesia’s

respectable domestic economic performance. the Standard & Poors

rating agency upgraded Indonesia’s credit outlook from stable to

Graph 3.1

Average Rupiah Exchange Rate

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17

positive. The combination of improving externals. domestic economic

performance and strengthened global investor risk appetite has kept

capital inflows pouring into the domestic economy.

At end-November 2009. rupiah had appreciated by an average 5.39%

to Rp 9.463/USD from Rp 9.973/USD on the preceding quarter (Graph

3.1). The rupiah closed November at Rp 9.455/USD. having gained 2.01%

over Rp 9.645/USD at the close of Q3/2009. This marked appreciation

saw volatility increase from 0.69% to 0.74% (Graph 3.2).

The conducive condition of externals is providing impetus for

appreciation in the exchange rate to the end of Q4/2009. Economic

indicators continue to improve with more broad-based recovery in various

regions. including the United States. Europe and Asia. This reinforces

indications that the global economy has entered a stabilisation phase. The

recovery in the US economy has become visible in improvement across

several sectors. including industry. the labour market and housing. In

Europe. industry has forged ahead with positive growth as the leading

sector driving economic recovery in that region. In non-China Asia.

economies such as Japan and Singapore have begun reporting positive

results. Rising optimism for the global economy has stimulated growing

expectations for business activity. and especially for higher corporate

earnings. Rising expectations of the business community and heightened

investor risk appetite for emerging market assets has prompted global

investors to return to stock markets. Despite a temporary dip prompted

by the Dubai foreign debt crisis. global stock markets continue to chart

gains.

Besides external factors. conducive conditions in the domestic

economy also contributed to rupiah appreciation. The domestic

economy with growth running at 4.2% (yoy) and the Q3/2009 balance

of payments charting a current account surplus have bolstered investor

confidence in the resilience of the domestic economy to external

pressures. The international reserves position at end-November 2009

reached USD65.84 billion. equivalent to 6.5 months of imports and

servicing of official debt. At this level. international reserves will

strengthen positive sentiment in Indonesia’s ability to service external

debt.

Risk perceptions have been managed within safe levels. During

Q4/2009. the majority of risk indicators for Indonesia reported modest

escalation triggered by negative sentiment related to rumours of new

restrictions on foreign capital in the BI Certificate (SBI) instrument and

the outbreak of the external debt crisis in Dubai. Like with CDS in other

parts of Asia. Indonesian CDS widened slightly from 183 bps in Q3/2009

Graph 3.2

Rupiah Exchange Rate Volatility

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Risk Perception Indicators

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Swap Premium in Various Tenors

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to 229 bps (Nov-09). Yield spread on Indonesia Global Bonds against

US T-Notes also saw modest expansion from 251 bps in Q3/2009 to

295 bps (Nov-09). At the same time. the EMBIG spread narrowed from

345 bps in Q3/2009 to 336 bps (Nov-09) (Graph 3.3). Nevertheless. the

swap premium indicator for Q4/2009 has maintained a comparatively

stable track. indicating safe levels of risk perceptions and liquidity (Graph

3.4).

Rupiah investment returns are still more attractive compared to

other countries in Asia. Uncovered interest parity (UIP) narrowed from

6.45% at end-Q3/2009 to 6.47% (November 2009). Despite having

eased. the UIP is still at a favourable level on a regional scale. The risk

adjusted interest rate differential or CIP also remains favourable despite

slipping from 3.94% in Q3/2009 to 3.52% (Nov-09) due to slight

escalation in risk indicators triggered by the Dubai debt crisis (Graph 3.5).

Otherwise. the yield spread between Indonesian domestic government

securities and US treasuries remains the highest in Asia (Graph 3.6).

Improvement in global investor confidence and high yields on

rupiah investments have stimulated inflows of foreign funds into

the domestic economy. In November 2009. foreign inflows placed in

SBIs and Government Securities reached USD680.56 million and USD1.04

billion. bringing the position of foreign holdings in SBIs and government

securities to USD5.29 billion and USD10.95 billion. On the stock market.

foreigners recorded a net purchase of USD55.18 million (Graph 3.7).

These developments helped to maintain relative supply-demand

equilibrium on the forex market (Graph 3.8).

INFLATION

In November 2009. the CPI recorded deflation. once again moving

below the historical trend. November inflation sank to -0.03% (mtm).

mainly from renewed correction in volatile food prices. Annual CPI

inflation slowed to 2.41% (yoy) from 2.83% (y-o-y) in Q3/2009 (Graph

3.9). In response to these developments. calendar year CPI inflation

reached 2.45%.

As 2009 draws to a close. inflation in the coming month is also

predicted below the historical trend. This is explained largely by the

deflation in December 2008 that resulted from the cut in fuel prices.

Accordingly. CPI inflation for 2009 is projected below the inflation

target. set at 4.5%±1%.

Analysed by influencing factors. the drop in annual inflation in November

2009 is attributable mainly to fundamentals. as reflected in core inflation.

Graph 3.5

CIP for Countries in the Region

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Yield Spread in the Asia Region

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Capital Inflows

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Core inflation in November 2009 reached 4.29% (yoy). having eased

from the previous quarter’s level of 4.86% (yoy). This indicates that

demand-side pressure remains weak despite indications of a renewed

increase amid relatively stable inflation expectations. Alongside this.

pressure from external factors is predicted to be minimal in view of

the past 8 months of exchange rate appreciation Regarding non-

fundamentals. volatile foods and administered prices inflation are stable

at about 4.71% (yoy) and -5.99% (yoy).

Analysed by category of goods. the drop in 2009 CPI inflation is explained

by falling prices in the transportation. foodstuffs and housing categories.

The lower inflation in the transportation category is linked mainly to the

10% cut in subsidised fuel prices and reductions in urban public transport

fares. Other categories of goods reporting sharply reduced inflation is

foodstuffs. a result of secured levels of supply. and the housing category.

mainly due to the brisk progress in the kerosene to LPG conversion

programme after difficulties experienced in 2008.

Annual core inflation continued to decline. During November

2009. core inflation reached only 4.29% (yoy). Given the low level

of core inflation in November and the core inflation projection for the

subsequent month. end-2009 core inflation is predicted below the 2008

level of 4.86%. The drop in core inflation is related to softened pressure

from external factors with inflation down in trading partner nations and

a stable. appreciating trend in the rupiah since Q2/2009 (Graph 3.11).

Similarly. pressure from the output gap was minimal due to slackened

growth in demand. In addition. inflation expectations maintained a

downward trend. given the absence of shocks and relative decline in

demand and external pressures (Graph 3.12).

Overall demand side pressure remains weak despite the recent onset of

an upward trend. Reflecting the renewed growth in demand is the rise

in the October real sales index to 27.2% (yoy) compared to the 2008

level of -5% (yoy). The steepest increases have taken place in sales of

food and tobacco. clothing and accessories. automotive spare parts

and construction. However. there are no indications of strong upward

pressure on prices as reflected in the continued low level of non-food

quotation inflation. On the other hand. supply-side indicators reflected

in the manufacturing production index have embarked on a rising trend

(Graph 3.13). This is consistent with the increase in manufacturing

capacity utilisation to 80.09% in August 2009 compared to the 2008

level of 78.2% (Graph 3.14). This expansion in production capacity is

related to the upswing in production activity in response to domestic and

foreign market demand and to replenish company inventories.

Graph 3.8

Forex Demand and Supply

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Graph 3.9

Inflation

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Inflation by Category

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With November deflation in volatile foods at -0.85% (mtm) or 4.71%

(yoy) and volatile foods inflation predicted to edge upwards in December

in line with the end-of-year seasonal trend. volatile foods inflation for

2009 overall is predicted to drop significantly from 16.48% in 2008 to

about 5% (yoy). The decline in volatile foods inflation is explained by a

range of government policy actions. smooth distribution and moderate

global food prices. Some major commodities (rice. chicken and eggs. beef

and cooking oil) have recorded quite low inflation during 2009.

Administered prices inflation at end-2009 is expected to be down

significantly compared to 2008. In annual terms. the drop in administered

prices inflation during 2009 is explained more by the first-round and

second-round effects of the January 2009 government decision to lower

prices for subsidised fuels (premium gasoline and automotive diesel).

The price cuts produced a first round effect of -0.5% on CPI inflation in

January and February 2009. followed by a second round effect of -0.44%

through cuts in urban transport fares during the months of January-

March 2009. As of end-2009. the largest deflationary contribution has

come from gasoline prices. due to price reductions for subsidised and

non-subsidised fuels.

In related developments. decisions concerning other. non-strategic

administered prices have had minimum impact on inflation. The

approximately 15% rise in toll charges on 11 toll road sections in

September 2009. the 1.7% hike in 12 kg bottled LPG prices in October

and increases in water billing rates in some regions had minimum impact

on inflation. Following the 7% hike in cigarette excise. prices went up

for various cigarette brands resulting in a contribution to inflation at

about 0.05% during the month. In addition. the kerosene to bottled

LPG conversion programme progressed smoothly. also contributing to

deflation in the household fuels category.

MONETARY POLICY

Interest Rates

The 275 bps fall in the BI Rate during 2009 was readily transmitted

to short-term interest rates due to sufficient availability of

liquidity on the money market. Reflecting this was overnight interbank

rate movement that tracked the BI Rate each month during 2009. The

average daily overnight interbank rate fell 308 bps from 9.38% at end-

2008 to 6.29% in November 2009. This is a stronger reflection of the

improving credibility of the RI Rate. and also conforms to best practice

in the band of movement in operational targets applied by various

ITF nations. The transmission through the interest rate channel has

Graph 3.11

Trading Partner Exchange Rates and Inflation

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Inflation Expectations - Consensus Forecast

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Manufacturing Production Index (SP)

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21

general improved with the commitment of Bank Indonesia to maintain

adequate liquidity on the money market. This commitment has been

operationalised by enriching the selection of instruments for bank

liquidity management (reverse repo government securities. FTE in 14.

28 and 91 day tenors) and adding a 3-month tenor repo window to the

previously available 14-day and 1-month tenors.1 Furthermore. since

June 2009. the fine tune contraction monetary operations have been

scaled back. producing an increase in the FASBI position and in turn

influenced movement in the overnight interbank rate on a path below

the BI Rate. The objective is to enable more rapid transmission of the BI

Rate to longer tenor interest rates.

Monetary transmission in short-term interest rates has been

followed transmission to rates in longer tenors. More abundant

liquidity on the overnight interbank market also led to improvement in

longer-term interbank liquidity across all tenors during 2009. Overall.

average interbank rates in above O/N tenors fell by 378 bps with the steepest decline recorded

in above 30 day tenors at 442 bps. In a further development beginning in October 2009.

banks engaged in interbank transactions in longer tenors compared to earlier months. with

maturities at 60. 90 and 365 days. This condition also indicates improving perceptions of

long-term liquidity risk and lower counterparty risk in the banking system. particularly for

foreign banks and some regional development banks. Despite this. interbank rates in 27-30

day tenors have mounted since September 2009 due to thin volume of transactions in this

tenor. As a result of these developments. the interbank rate structure for various tenors has

followed an irregular path. reflected in the still asymmetric perceptions of liquidity across

tenors. In November 2009. average interbank rates in > 30 day tenors mounted in line with

indications of tightening credit lines held by some small-scale banks.

The BI Rate is being transmitted more readily to bank deposit rates. During 2009

(figures as of October 2009). the 1-month deposit rate has come down by 337 bps. Deposit

rates in various tenors also came down in varying magnitude. except for the 24 month

rate. which remains resistant to change. When the series of BI Rate cuts came to a halt

(September to November 2009). the downward movement in deposit rates continued.

albeit on a lesser scale.

On the other hand. the BI Rate is not being adequately transmitted to loan interest

rates and especially consumption credit rates. During 2009. aggregate loan interest rates

(average for working capital credit. investment credit and consumption credit) fell by only

76 bps. representing far less decline than the 275 bps for the BI Rate and 337 bps drop in

1-month deposit rates. In analysis by categories of lending. the steepest drop took place in

rates for investment credit (128 bps) and working capital credit (113 bps). However. interest

rates for consumption in fact mounted by 13 bps in keeping with the inelastic nature of

demand for this type of credit to movement in interest rates. In analysis by category of bank.

the steepest drop in interest rates took place at foreign and joint venture banks at 165 bps. 1 From 7 September 2009.

Graph 3.14

Manufacturing Capacity Utilisation (SP)

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Monetary Policy Report - Quarter IV-2009

22

In regard to level. the top average rates for working capital credit and investment credit

were offered by private domestic commercial banks. while the highest rates for consumption

credit were again offered by foreign and joint venture banks.

Funds. Credit and the Money Supply

Throughout 2009. bank depositor funds maintained stable growth over the

preceding year. Depositor funds were up by Rp 110.2 trillion in October 2009 compared

to the previous year-end position of Rp 1.863 trillion. As a result. annual funding growth

as of October 2009 slowed to 11.3% (yoy) from the end of the preceding year when bank

funding growth was still as high as 16.1% (yoy) (Graph 3.15). The rising depositor funds

position is explained primarily by rupiah time deposits. most of which are held by individuals.

At the same time. personal savings deposits have been on a rising trend since Q3/2009 due

to the fall in time deposit rates. Countering this was a drop in the foreign currency deposit

position brought about by appreciation in the rupiah. At end-2009. funding held by banks

and especially rupiah depositor funds are projected to chart renewed growth in response to

more expansive liquidity flows from the central and regional governments and expected rise

in bank lending. This is confirmed by indications of rising levels of funds paid in by banks to

maintain the required level of statutory reserves.

Credit expansion has fallen short of expectations. During 2009 (January-September). credit

growth (including channelling) came to no more than Rp 56.8 trillion (4.2% ytd). with

outstanding credit at Rp 1.410.4 trillion. This was well below the credit growth (including

channelling) recorded for the same period in 2008 at Rp 241.7 trillion (23.1% ytd). In

response. annual credit expansion in October 2009 slowed to 5.0% (yoy) from 29.5% (yoy)

at end-2008 (Graph 3.15). The tapering off in credit growth is related to the slow pace of

added lending in rupiahs and foreign currencies. The weak credit expansion is consistent

with soft demand for personal credit. reflected in the stable relationship of credit to GDP. An

added factor holding back credit expansion is the current high level of loan interest rates.

Interest Rate (%) Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct

Quarter IV-2008 Quarter I-2009 Quarter II-2009 Quarter III-2009 Qtr IV

Table 3.1

Interest Rate Movements

BI Rate 9.50 9.50 9.25 8.75 8.25 7.75 7.50 7.25 7.00 6.75 6.50 6.50 6.50

Dep. Guarantee 10.00 10.00 10.00 9.50 9.00 8.25 7.75 7.75 7.50 7.25 7.00 7.00 7.00

1-month Dep. (Weighted Average) 10.14 10.40 10.75 10.52 9.88 9.42 9.04 8.77 8.52 8.31 7.94 7.43 7.38

Base Lending Rate 13.65 14.07 14.16 14.18 13.98 13.94 13.78 13.64 13.40 13.20 13.00 12.96 13.01

Working Capital Credit 14.67 15.13 15.22 15.23 15.08 14.99 14.82 14.68 14.52 14.45 14.30 14.17 14.09

Investment Credit 13.88 14.28 14.40 14.37 14.23 14.05 14.05 13.94 13.78 13.58 13.48 13.20 13.20

Consumption Credit 16.05 16.24 16.40 16.46 16.53 16.46 16.48 16.57 16.63 16.66 16.62 16.67 16.53

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23

Analysed by category of lending. the key factor in slow rate of credit

growth is the steep correction in working capital credit. In other

categories. significant growth took place in lending. led by consumption

credit. Working capital credit underwent contraction mainly in the

manufacturing sector. one of the largest borrowers of working capital

credit. as well as in business services. At end-2009. credit expansion is

predicted to mount significantly in line with the seasonal trend.

As of October 2009. economic liquidity was marked by sluggish

growth. particularly in M1. Average annual expansion in M1 economic

liquidity has fallen to 6.7% in 2009 from 17.1% in 2008. At the same

time. annual growth in M2 and Rupiah M2 economic liquidity averaged

16.7% and 16.3%. up from 16.1% and 15.1% one year previously

(Graph 3.16). M1 growth. while down from the preceding year. was

shored up by expansion in demand deposits. an early indicator of

economic activity among the population. On the other hand. accelerated

growth in M2 and Rupiah M2 is linked to the growth in quasi-money

held by the public fuelled by the relatively high level of deposit rates as

of Q3/2009. The conditions described above are reflected in the absence

of strong indications of renewed economic activity in society. as evident

from below historical levels of M1 growth.

Financial Markets

The relaxed monetary policy of 2009 has been transmitted to the

stock market. as reflected in the steep rise in share prices. which have

gained 78.2% during 2009. The strong influence of external factors on

the JSX Composite indicates that the ongoing recovery in the global

economy and world financial markets has contributed positively to

movements in domestic share prices. Besides the external factors. the

robust condition of domestic macroeconomic fundamentals is an added

factor fuelling the rise in the JSX Composite during 2009.

The renewed gains in the global economy and world financial

markets have led to a resurgence of capital inflows on the stock

market. Mounting global market confidence alongside more plentiful

global liquidity has prompted renewed expansion in investments on

global financial markets. Foreign capital is pouring back into emerging

market nations and driving up stock indices. In Indonesia. the inflows

on the stock market have bolstered positive sentiment and stock index

gains. With foreign capital pouring into the market. domestic investors

are also showing greater enthusiasm for stock trading.

On the domestic front. conducive developments in macroeconomic

and micro corporate indicators have also played a role in the

Graph 3.15

Funding and Credit Growth and the BI Rate

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Graph 3.16

Nominal Growth in M1 and M2

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Graph 3.17

JSX Composite Index and Trading Value

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Monetary Policy Report - Quarter IV-2009

24

stock index gains. Developments in indicators such as exchange rate

appreciation. adequate economic growth. subdued inflation and political

stability imbued the market with positive sentiment fuelling JSX index

gains. At the micro level. the ability of stock issuers to book net earnings

played a role in boosting market confidence. Indonesia’s stock market

performance outshines that of any other market in the region.

The surge of capital inflows into the stock market has helped to

shore up trading volume. Average volume of share trading in 2009

stands at Rp 4.06 trillion per day. a fairly stable level when compared

to Rp 4.41 trillion daily volume in the preceding year. With capital

flowing into the market. foreigners have booked a net purchase of Rp

10.07 trillion in 2009. down from the previous year’s level of Rp 18.65

trillion. The low net foreign purchase this year is related to a round of

profit taking in early Q4/2009. Early in the year. a sharp rise in buying

resulted in a technical condition of the JSX being overbought. leading

subsequently to correction and profit taking.

On the government securities market. monetary policy

transmission is reflected in the evenly distributed narrowing of

yield across all tenors. This is confirmed by testing results showing

that BI Rate movements exert greater influence on government securities

yield compared to movement in the JSX index. The 275 bps reduction

in the BI Rate during 2009 has been followed by an average 230 bps

fall in yield. Short tenor government securities were more responsive

to the cuts in the BI Rate. as reflected in the significant rate of decline.

Yield on Indonesian government securities in short. medium and long

tenors has fallen 359 bps. 221 bps and 119 bps. When compared to

the height of the crisis (October 2008). yield on short. medium and

long-term government securities has come down even more by 1198

bps. 965 bps and 914 bps.

Besides the factor of the declining BI Rate. yield on the

government securities market has also been influenced by global

financial market developments. The dominance of external factors is

reflected in the relative alignment between movement in government

securities yield and developments on the global financial market. Yield

on Indonesian government securities has narrowed in line with the

narrowing of the Indonesia CDS. Externally. the recovery in government

securities has been bolstered by keen foreign investor interest. With the

slashing of the Fed Funds rate to 0%-0.25% and global liquidity on

the rise. investors have begun shifting to high yielding assets. including

Indonesian government securities. The rush of foreign investment in

government securities has also been prompted by an upgrading in

Graph 3.18

JSX Composite Index and Net Foreign Purchase

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Graph 3.19

Government Securities Trading Volume and Yield (all tenors)

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Graph 3.20

Average Daily Frequency of Government Securities Trading

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Monetary Indicators and Policy, Quarter IV-2009

2525

Indonesia’s debt risk. Domestically. conducive macroeconomic indicators and fiscal risks

within comfortable limits have kept pressures from bearing down on market performance

for Indonesian government securities.

The rebound in foreign investor confidence will have significant impact on market liquidity

for these instruments. Foreigners have expanded their holdings of Indonesian government

securities by Rp 15.7 trillion. up from the previous period when equivalent holdings stood

at Rp 9.6 trillion. Despite this. daily average trading volume is down. Total 2009 trading

volume in government securities stands at Rp 3.44 trillion per day. down from the 2008

position of Rp 4.49 trillion per day (Graph 3.19). At the same time. average daily frequency

of government securities trading is up from 266.3 transactions per day in 2008 to 281.6

per day in 2009 (Graph 3.20).

On the mutual funds market. indications point to smooth monetary policy

transmission bolstered by macro stability. The further relaxation of monetary policy in

2009 and downward movement in bank deposit rates followed by improving performance

in underlying assets in Q3/2009 has led to an increase in NAV reported

by mutual funds. The improving performance of mutual funds is also

supported by a conducive level of macroeconomic stability. Fund

managers have responded to this by releasing new fund products

stimulating activity in mutual funds trading. These new products include

sharia-compliant funds and Collective Investment Contract funds. Other

policies likely to boost mutual funds NAV include the reduction in final

withholding tax to 0% to be applied to interest and discounts earned

on bonds in 2009-2010. Net Assets Value (NAV) for mutual funds

mounted to Rp 101.68 trillion in early August 2009 compared to only Rp

75.82 trillion at the start of the year (Graph 3.21). The most important

contributions to the increased NAV came from equity. fixed income and

mixed funds. In early August. NAV in these three categories reached Rp

35.69 trillion. Rp 14.16 trillion and Rp 12.5 trillion.

Graph 3.21

Mutual Funds NAV

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26

Monetary Policy Report - Quarter IV-2009

4. Outlook for the Indonesian Economy

In initial indications. the Indonesian economy has resumed a phase of accelerating

economic growth. Figures suggest that growth passed through a trough in Q2/2009

at 4.0% before picking up in the subsequent quarters. Key factors supporting this

improvement are: (i) economic growth and world trade volume. which bottomed

out in Q1/2009. and predictions of an accelerated upward trend; (ii) the continued

strength of household consumption in the aftermath of the election periods

owes much to low inflation and sustained levels of household confidence in the

performance of the domestic economy.

With the upbeat outlook for an accelerating economic growth trend to the end of

2011. growth in 2009 is projected at about 4.3% before climbing to about 5.0%-5.5%

in 2010 and 6.0%-6.5% in 2011. The primary engine of growth will be exports. which

have maintained an upward monthly growth trend since March 2009. The accelerated

export growth is supported by Indonesia’s primary commodity-based exports. which

have seen comparatively quick recovery in keeping with rising demand in trading

partner nations. On the domestic front. household consumption in second half 2009

and 2010-2011. while not reaching the levels of the 2009 election period. is forecasted

to remain strong and provide a leading contribution to GDP. The relatively high

rate of household consumption is not only backed by sustained levels of household

consumption and the income effect of rising exports. but also the controlled level

of inflation. Given the improvement in the domestic economy. economic liquidity is

also predicted to show more rapid expansion.

On the supply-side. a renewed upswing is predicted for the manufacturing sector.

Since Q4/2008. this sector has passed through difficult times due to the global

economic crisis that had begun to take its toll early in second half 2008. A key

indicator supporting the improving trend in manufacturing is the rise in imports of

raw materials and the relatively high levels of electricity use by business and industry.

The accelerated sectoral growth overall is not only explained by renewed domestic

and external demand. but also by the backward and forward linkages between the

tradable sectors and other sectors in the economy.

ASSUMPTIONS AND SCENARIOS

International Economic Conditions

The world economy. which underwent contraction during the first half of 2009. is forecasted

to chart more rapid recovery with positive growth in the second half of 2009. Global economic

growth is estimated to have passed through a trough in Q1/2009. before resuming an

upward track. Improving global economic conditions are supported by the strengthening

global economic recovery that is taking hold in more nations. Against the background of

these developments. economic growth for 2009 overall is forecasted to reach -1.1%.

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Outlook for the Indonesian Economy

In 2010. world economic growth is predicted in positive territory at 3.3%. Confidence in

the economic outlook will be strengthened with the support of fiscal stimulus policies.

low interest rates. government actions to bolster domestic demand and success in curbing

systemic risk. The economies in developed nations. such as the United States. Europe and

Japan. will chart steady improvement. The three economies embarked on positive economic

growth during the second half of 2009. and this trend is predicted to carry forward in 2010.

During the first quarter of 2010. world economic growth measured annually (year-on-year)

is expected to enter positive territory.

Developing nations will chart more solid growth. For the most part. Asia’s emerging markets

will resume a growth trajectory in their economies in response to recovery in external

conditions and mounting domestic demand. The impact of the government stimulus will

boost domestic demand. with multiplier effects on economic growth as a whole. This is

reflected in the strengthening of the production and consumer confidence indices. The main

engines of economic growth in Asia. namely China and India. are forecasted to chart about

9.0% and 6.4% growth (yoy) in 2010.

Fiscal Policy Scenario

In a parliamentary committee meeting in August 2009. the Revised 2009 Budget deficit was

set at Rp 129.8 trillion (2.4% of GDP). below the 2.5% Government-proposed deficit in

the stimulus document. This amendment factors in downgraded assumptions of economic

growth. the exchange rate and inflation. higher crude oil prices and more modest absorptions

of personnel expenditures. procurement expenditures. capital expenditures and other

expenditures. below the levels set out in the stimulus document. The fiscal sustainability

outlook remains sound with the official debt ratio set to ease from 33% of GDP in 2008 to

about 32% in 2009 while macroeconomic conditions remain conducive (economic growth

ahead of real interest rates).

In 2010. fiscal policy will target support for national economic recovery and maintaining levels

of public welfare. A plenary session convened by Parliament in September 2009 adopted the

2010 Budget Law with a deficit at Rp 98 trillion or 1.6% of GDP. Highlights of fiscal policy

in 2010 include the following: (a) the Government will retain some fiscal incentives put into

place in 2009 to revitalise industry and promote business recovery. Fewer tax incentives will

be provided in 2010 in comparison to 2009. (b) improvement in pay and allowances for civil

servants with a 5% increase in base pay and pensions and payment of a 13th month salary;

(c) continue social welfare programmes (including the National Community Empowerment

Block Grant Programme (PNPM). School Operational Assistance. Social Health Insurance. Rice

for the Poor. the Families with Hope Programme); (d) continue development of infrastructure;

(e) move forward with administrative reforms; (f) increase the budget for the Armed Forces;

and (g) maintain the education allocation ratio at 20% of the state budget.

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Monetary Policy Report - Quarter IV-2009

ECONOMIC GROWTH OUTLOOK

Current indications suggest the Indonesian economy has entered an expansionary

phase after reaching a low in Q2/2009. This recovery is buoyed by strengthening exports

and stable levels of household consumption. A key factor influencing export growth is the

accelerated recovery in the world economy and volume of world trade. Trade volume is

estimated to have reached a low in Q1/2009. and has subsequently had a beneficial effect

on Indonesia’s export recovery beginning in March 2009. On the domestic front. household

consumption is relatively stable. albeit not as high as during the period of the national elections

in Q1/2009. The stable level of household consumption owes much to the income effect from

export growth. low inflation and sustained levels of household confidence in the performance

of the domestic economy. On the supply side. growth is predicted to recover in all sectors and

particularly in manufacturing. Overall. economic growth is predicted to reach 4.26% in 2009

before climbing in 2010 to about 5.0%-5.5% and in 2011 to an estimated 5.5%-6.0%.

Outlook for Aggregate Demand

Household consumption is projected to chart 5.1% growth during 2009. a respectable

figure amid the turmoil of the global crisis. In the first half of the year. household

consumption maintained a stable trend. The extended process for elections of legislatures

and the president and vice president resulted in strong multiplier effects on household

consumption. Furthermore. household consumption is estimated to be maintaining stable

growth for the second half of 2009 as a leading contributor to economic growth.

Household consumption in 2010 is forecasted chart stable growth in the range

of 5.1%-5.3%. Key to the stable household consumption is solid consumer confidence.

the income effect from renewed export growth since Q2/2009 and low inflation. Stable

performance in household consumption is reflected in various indicators. Car sales and

imports of consumer goods are showing improved growth. Similarly. household power

consumption is climbing at an accelerated rate. Alongside this. retail sales have recovered

ground after sustaining decline at the end of 2008.

I II III IV I II III IV* I t e m

Table 4.1

Economic Growth Projection - Demand Side

2008

* Bank Indonesia Projection Figures

Total Consumption 5.5 5.5 6.3 6.4 5.9 7.3 6.3 5.4 4.3 5.8 5.1 - 5.3 6.3 - 6.5

Household Consumption 5.7 5.5 5.3 4.8 5.3 6.0 4.8 4.8 4.8 5.1 5.1 - 5.3 5.4 - 5.6

Total Investment 13.7 12.0 12.2 9.1 11.7 3.5 2.6 4.0 4.6 3.7 8.5 - 8.7 10.0 - 10.2

Domestic Demand 7.5 7.1 7.9 7.1 7.4 6.3 5.3 5.0 4.4 5.2 6.0 - 6.2 7.3 - 7.5

Export of Goods and Services 13.6 12.4 10.6 1.8 9.5 (-18.7) (-15.5) (-8.2) (-5.4) (-12.0) 8.1 - 9.0 9.6 - 10.5

Import of Goods and Services 18.0 16.1 11.0 (-3.5) 10.0 (-26.0) (-23.9) (-18.3) (-6.2) (-18.9) 10.8 - 11.1 14.4 - 14.7

GDP 6.2 6.4 6.4 5.2 6.1 4.4 4.0 4.2 4.4 4.3 5.0 - 5.5 6.0 - 6.5

20082009

2010* 2011*2009*

YOY, Base year 2000

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Outlook for the Indonesian Economy

The relatively buoyant level of consumption is supported by low interest rates. Historically.

low interest rates have a strong correlation with rising consumption. In the public mind.

lower interest rates diminish the opportunity cost of holding money in banks. It then becomes

preferable to boost consumption to prevent losing out to price increases. Reflecting this is

an upward shift in privately-held liquidity consistent with tendencies to engage in higher

consumption.

Due to the effect of slackened economic growth. investment is predicted to grow at

a more moderate 3.7% in 2009. The global economic downturn since the second half of

2008 has impacted export performance. which in turn has depressed the economic outlook.

The effect has been to erode public purchasing power. prompting investors to postpone

new investments with non-construction ventures especially affected. Reflecting investment

delays is the contraction in imports of raw materials and capital goods.

Optimism for improvement in the economy is expected to boost investment growth

to 8.5%-8.7% in 2010. Accelerated growth in household consumption and recovery in

exports will be followed by increases in production activity. although not significant enough

to support accelerated business expansion. This improving trend is forecasted to carry forward

into 2010 on the strength of the global economic recovery that began in Q2/2009. Evidence

of this is visible in several indicators. such as imports of raw materials and industrial electricity

consumption. The absence of significant acceleration in business expansion is reflected in

imports of capital goods.

Non-construction investment is predicted to climb significantly in 2010. driven in party

by the falling cost of credit. The downward trend in the BI Rate during the first half of

2009 augurs for reductions in loan interest rates during the second half. More affordable

lending rates have historically been followed by more rapid growth in non-construction

investment on the back of the expected surge in investment credit. This is confirmed by

signs of renewed increases in manufacturing capacity utilisation during Q3/2009. Besides

this. the positive outlook for the Indonesian economy will encourage foreign investors to

take up foreign direct investment in Indonesia. The positive outlook is evident from the

improvement in Indonesia’s credit rating. The higher rating is expected to have a beneficial

effect on capital inflows and cost of financing.

Construction investment is forecasted to expand more rapidly in 2010 compared to 2009.

responding to the government stimulus for infrastructure projects and the flurry of property

developments. Progress in infrastructure project construction is reflected in the rising trend in

construction investment growth since Q1/2009. In the second half. construction investment

is forecasted to expand at a faster rate compared to January-June 2009. Indications of this

are reflected in cement consumption growth and rising share prices for companies operating

in infrastructure.

The global economic contraction has resulted in significant decline in exports of

goods and services in 2009. projected to reach -12%. The downturn in the global

economy has led to a reduction in volume of world trade. a development that set in during

the second half of 2008. Furthermore. the declining of world trade will weaken demand for

goods exported from Indonesia.

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Monetary Policy Report - Quarter IV-2009

The global economic recovery will pave the way for renewed acceleration in

Indonesia’s exports in 2010. with growth in the range of 8.1%-9.0%. Exports appear

to be on the mend after reaching a low in Q1/2009. with confirmation provided by the

direction of world economic growth and movement in the Baltic Dry Index. The accelerated

recovery in the world economy will bolster future export performance. as reflected in the

increased pace of growth in export activity each month. Besides demand. an important

factor in the accelerated export growth is the resource-based nature of Indonesia’s export

commodities. which have bounced back fairly quickly in response to renewed demand in

trading partner nations.

Due to the effect of slackening domestic demand and falling

exports. imports are projected to contract by -18.9% in 2009.

Lower exports. weak consumption and delayed investment will sharply

reduce demand for imported goods. Imports have fallen in all categories.

including consumption goods. raw materials and capital goods. as

evident in the first half of 2009. when imports contracted -25%.

Nevertheless. improvements during the second half of 2009 are expected

to stimulate renewed demand for imported goods.

Improved domestic demand and exports in 2010 will generate

added demand for imported goods. with import growth

potentially reaching 10.8%-11.1%. Indications of import growth are

now visible in an upward trend in monthly imports that commenced

in Q2/2009. More robust exports. rising public purchasing power and

strengthening investment are expected to boost momentum in imports

of goods and services. Import growth is forecasted to overtake exports

in mid-2010 as a result of accelerating investment towards normal le

vels.

Demand-side growth in the economy will be driven in 2011

primarily by exports and investment. The strengthening recovery

in global and domestic economic conditions will pave the way for both

activities to chart more rapid growth.

Volume of world trade is forecasted to see even more vigorous growth

in 2011. ahead of 2010. This will spur optimism for more vigorous

export performance. Exports are playing an increasingly important role

in economic growth. In 2011. export growth is forecasted to reach

9.6%-10.5%.

On the other hand. the upbeat outlook for the economy. more conducive

conditions for business and better infrastructure will attract investment activity. In keeping

with this optimism. investment is forecasted to chart 10.0%-10.2% growth in 2011.

Household consumption is forecasted to maintain high growth in 2011. in line with

improvement in economic conditions. In 2011. household consumption growth will be

Graph 4.1

Real Imports and Current Prices

Graph 4.2

Real Exports and Imports

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31

Outlook for the Indonesian Economy

bolstered by rising incomes generated from expanding opportunities for economic activity.

The forecast for household consumption growth in 2011 is about 5.4%-5.6%.

The gathering pace of business activity will provide added reason for investment. When

investment growth accelerates toward the normal trend. import growth will surge ahead of

export growth. Accordingly. imports are projected to surge ahead of exports in 2011 with

growth in the range of 14.4%-14.7%.

Outlook for Aggregate Supply

Although beset by high unemployment. the process of global economic recovery is

moving forward. while fostering greater optimism for domestic economic activity. These

developments will take the Indonesian economy forward in an accelerated growth phase.

Agriculture sector growth in 2009 is projected to reach 3.6% (yoy). Agricultural

output during Q3/2009 was among the reasons for the correction to the agriculture sector

forecast for 2009 as a whole. Only mild impact is expected from El Nino in 2009. with little

significant effect on agricultural production. However. the El Nino phenomenon is predicted

to gather force in early 2010. The added intensity of El Nino may delay the onset of the

2010 planting season.

The predicted delay in the 2010 planting season due to the escalating intensity of

El Nino is expected to slow agriculture sector growth in 2010. The agriculture sector

is predicted to perform less vigorously than in 2009 with growth in the 3.1%-3.4% (yoy)

range. The slowdown is forecasted to take place in the food crops subsector and particularly

in rice output. Even with this slowdown. food resilience will remain strong. The excess food

production in 2009 will be used to cover food stuff needs in 2010.

To support the agricultural sector and protect food resilience and self-sufficiency of food crops.

the government intends to issue a government regulation on agrarian reform. This regulation

is planned for launching in 2010. Under the agrarian reform. the government envisages

expanding land under farmer cultivation to a minimum of 2 ha per family. Of the available

land for redistribution. 7.13 million hectares is set aside for expansion of food estates.

I II III IV I II III IV* I t e m

Table 4.2

Economic Growth Projection - Supply Side

2008

* Bank Indonesia Projection Figures

Agriculture 6.3 4.8 3.4 4.7 4.8 5.3 2.5 2.7 4.2 3.6 3.1 - 3.4 3.8 - 4.0

Mining & Quarrying (-1.7) (-0.5) 2.1 2.1 0.5 2.4 3.3 6.5 3.8 4.0 2.2 - 2.5 2.4 - 2.5

Manufacturing 4.3 4.2 4.3 1.8 3.7 1.5 1.5 1.3 1.2 1.4 2.8 - 3.4 4.0 - 4.4

Construction 8.0 8.1 7.6 5.7 7.3 6.3 6.4 8.8 8.9 7.6 8.0 - 8.3 8.8 - 8.9

Trade. Hotels & Restaurants 6.9 8.1 8.4 5.6 7.2 0.5 (-0.3) (-0.6) 1.2 0.2 4.0 - 4.5 5.9 - 6.2

Transportation & Communication 18.3 17.3 15.5 15.8 16.7 17.1 17.5 18.2 15.9 17.1 14.3 - 15.1 14.7 - 15.3

GDP 6.2 6.4 6.4 5.2 6.1 4.4 4.0 4.2 4.4 4.3 5.0 - 5.5 6.0 - 6.5

20082009

2010* 2011*2009*

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32

Monetary Policy Report - Quarter IV-2009

Mining sector growth in 2009 is projected to reach 4.0% (yoy) before slowing in

2010 to approximately 2.2%-2.5% (yoy). The positive growth in the mining sector will be

supported primarily by exploration for new mineral reserves. with focus on nickel. gold. bauxite

and coal. In a move to increase national oil and natural gas output. the Government signed

14 new contracts of work with contractors in November 2009 to strengthen exploration and

production in oil and natural gas and coal bed methane (CGM) working areas.

Looking forward. coal will play an increasing role. primarily in relation to power generation.

Foreign investors from India and China have begun to eye the mining sector in Indonesia.

For the two countries. the main reason driving the aggressive pursuit of mining activity in

Indonesia is the need to achieve energy security. The government also plans to develop coal

bed methane (CBM) within the broader framework of environmentally friendly. renewable

energy. This project has attracted widespread investor interest. reflected in the many

companies/consortia bidding directly for CBM projects. The government is tendering three

CBM Working Areas: CBM Barito. CBM Rengat and CBM Sanga-Sanga.

The manufacturing sector has not performed as expected for 2009. This is evident

from the sluggish trend in manufacturing growth as of Q3/2009. The flagging growth

in Indonesia’s industry is closely linked to investment levels. most importantly the lack

of improvement in non-construction investment. If analysed more deeply. the key issues

revolve around continued weak demand. This has also led to ineffective absorption of the

government fiscal incentives for assistance to the industry sector. Many businesspersons do

not avail this facility. due to persistent lack of demand.

In 2010. the manufacturing sector performance is set to improve. buoyed by the

strengthening domestic and global economy. Manufacturing growth in 2010 predicted

to reach 2.8%-3.4%. To build manufacturing performance in coming years. the government

plans to offer incentives to industries supplying raw material for domestic manufacturing.

This incentive package is expected to provide added attraction for foreigners to invest in

Indonesia and especially in the development of national downstream industries. The new

government also plans to revitalise a number of industry sectors. including but not limited

to cement. fertilisers. sugar and CPO. This revitalisation plan is intended to anticipate rising

demand for these industrial products.

Looking ahead. the industry sector will confront new challenges when the Asean-China Free

Trade Agreement (AC-FTA) comes into force in early 2010. Products from Asean nations and

China are set to become strong competitors on the domestic market. Most affected will be

the iron and steel industry. petrochemicals. yarn and fabric. horticultural products. food and

beverages. footwear. electronics. cable. synthetic fibre and toys. To mitigate negative impact

from the AC-FTA. the national industry standards (SNI) will be applied to a wider range of

commodities. Besides the supply of electricity itself. increases in gas prices and electricity

industrial billing rates pose increasingly complex challenges for industry.

Construction sector growth in 2009 is projected at 7.6%. The onset of renewed growth

in purchasing power in tandem with rising optimism for future improvement in economic

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33

Outlook for the Indonesian Economy

conditions and declining loan interest rates is expected to boost activity in the property

business. Cement producers have taken action to anticipate this condition by expanding

capacity. The property sector is the major consumer of cement. accounting for up to 70%

of cement supplied to the market. with infrastructure absorbing approximately a further

10%. Property expansion will take place mainly in residential developments for middle class

buyers and in office properties (mainly in the Jakarta CBD).

The construction sector is expected to pick up in 2010 with growth rising to 8.0%-

8.3%. Strong government support in infrastructure has boosted construction sector growth to

new levels. Concerning infrastructure development. the government has committed itself to

support infrastructure construction in order to accelerate the pace of economic development.

Infrastructure projects are included in the priority programmes of the Second Medium-Term

Development Plan (RPJM) for the 2010-2014 period. To this end. the government plans to

issue an economic stimulus package for national infrastructure development. The accelerated

power infrastructure programme for the stage II 10.000 MW power plant construction will

be launched in 2010.

The trade. hotels and restaurants sector has been the hardest hit in 2009. Growth in

this sector is estimated at only 0.2%. well below the 2008 growth recorded at 7.2%. The

steepest performance decline has taken place in the wholesale and retail subsector. The

downturn in the wholesale and retail subsector is closely related to deteriorating imports

and manufacturing.

The gathering momentum of global and domestic economic recovery in 2010 will

see more robust performance in the trade. hotels and restaurants sector. This sector

is predicted to grow 4.0%-4.5% during 2010. Improved performance in trade. hotels and

restaurants will be driven mainly by strengthened public purchasing power reflected in rising

household consumption. surging activity in industry and higher imports.

In recent years. transport and communications has been a relatively high growth

sector. even when weathering the global economic crisis. Growth in transport and

communications during 2009 is forecasted at 17.5%. The communications subsector

contributes significantly to the overall performance of the transport and communications

sector. Investment in development of communications technology is set to forge ahead.

primarily for enhancing communications services.

In the 100 day programme. the new government will launch the Universal Service Obligation

(USO) programme. This programme includes the 25.000 Telephone Connected Villages

programme and the Smart Village programme. part of which involves the procurement of

100 computers in 100 villages. This will bring computers into closer reach of more and more

Indonesians. Internet access will be offered over the telephone network. The President has

set a deadline of December 2009 for all villages in Indonesia to have telecommunications

network access.

Another major government project for development of telecommunications infrastructure

is the Palapa Ring project. Palapa Ring is a megaproject for construction of an international

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34

Monetary Policy Report - Quarter IV-2009

fibre optic backbone consisting of 7 rings covering 33 provinces and 460 districts. Work

on Palapa Ring commenced on 30 November 2009 and will focus on the strengthening of

communications infrastructure in Eastern Indonesia.

Looking forward. the high growth area of telecommunications development will be internet

expansion. A vast internet market remains untapped. Numbers of internet users are estimated

at only around 2.5 million. comparatively small compared to Indonesia’s total population.

The development of Broadband Wireless Access (BWA) supports this trend. Since July 2009.

a total of 8b WiMAX licences have been issued for a number of zones with services expected

to launch in early 2010.

Given the steady improvement in the economic outlook. the transportation subsector

is also predicted to see mounting activity. The increase in activity is related to the

mounting traffic of imports and exports. To anticipate the escalating pace of trading activity

(exports and imports) in response to improved economic conditions. the government plans to

launch 24-hour port services at 13 class 1 ports in Indonesia. Initially. this programme will be

launched at the 4 main ports of Tanjung Priok (Jakarta). Tanjung Perak (Surabaya). Belawan

(Medan) and Makassar. The 24-hour service will speed up incoming and outgoing cargo

movements and reduce waiting times for vessels berthed or loading and unloading cargo in

ports. This upgrading of port services will provide a valuable boost to exports and imports.

Concerning aviation. the ministry plans a restructuring of pioneer aviation routes and a

change in the contract system from 1 year to 3 years. The ministry will also increase the

subsidy for pioneer aviation services to Rp 249.95 in 2010. an increase of 29.7% over the

2009 level. This subsidy will support air services on 118 routes in 15 provinces. In response to

these developments. the transportation and communications sector is forecasted to maintain

relatively brisk growth in 2010 at 14.3%-15.1%.

Sectoral performance is generally expected to improve in 2011 in keeping with

recovery in external and internal external conditions. Economies in trading partner

nations will boost performance in export-oriented sectors. Strong government support for the

downstream industry development will increase the value added generated by industry. Rising

domestic consumption will stimulate growth in the trade sector. Similarly. the transportation

and communications sector will maintain high growth in tandem with the mounting pace of

economic activity in society. Passenger and cargo vehicle movements will be better supported

by improved transportation infrastructure. including 24 hour service at 13 of the class 1 ports

across the archipelago. The government commitment to food self-sufficiency will provide

valuable support for agriculture sector performance.

INFLATION FORECAST

The downward trend in inflation during 2009 is predicted to continue. Inflation has

fallen significantly in 2009 and is projected below the targeting range of 4.5%±1%. Key to

the reduced inflationary pressure in 2009 is low inflation in administered prices following

the government decision to lower fuel prices at the beginning of the year. The decline in

inflationary pressure is also explained by the downward trend in core inflation related to

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35

Outlook for the Indonesian Economy

low inflation in trading partner nations and improving inflation expectations. In the volatile

foods category. inflationary pressure is predicted to be minimal as a result of adequate

supply. efficient distribution and comparatively low food commodity prices. CPI inflation

measured year to date (ytd) in November 2009 reached no more than 2.45%. well below

the equivalent ytd figures in 2008 and 2007 recorded at 11.10% and 5.43%. Given the very

low ytd inflation outcome. the expected sources of inflationary pressure in the immediate

future are surging demand related to the Christmas festivities and more vigorous activity in

the domestic economy.

In 2010. CPI inflation is predicted to return to normal levels in the range of 5±1%. On

the external side. inflation will be spurred by escalating inflation in trading partner nations

in keeping with the predicted improvement in the global economy. rising international

commodity prices and especially world oil prices. At home. inflation is not only expected

from hikes in administered prices. but also from strengthened demand in line with forecasts

for improvement in the domestic economy. Concerning volatile foods inflation. the El Nino

phenomenon will result in only minimum inflationary pressure from price increases caused

by domestic production shortages and escalating international food commodity prices.

At home. stronger inflation in 2010 is expected in view of the improving condition of the

economy. which may outperform earlier predictions for that year. One indication of this is a

modest rise in total capacity utilisation. At the same time. inflation expectations remain on a

downward trend in 2010. despite modest improvement at the end of the quarter. This trend

is understood to be linked to low actual inflation during 2009. stability in the exchange rate

and the absence of hikes in strategic administered prices.

On the non-fundamentals side. heightened inflationary pressure is predicted from increases

in some non-strategic administered prices. Renewed increases in administered prices inflation

are expected in relation to the plans of the newly elected government to raise prices for

non-strategic goods and services (excluding subsidised fuels. electricity and LPG gas). At the

same time. volatile foods inflation will climb in relation to 2009. while remaining below the

historical average. The threat of El Nino. which is feared could drive up

international food commodity prices. is expected to have only minimal

impact on domestic food stuff prices. This prediction is confirmed by

the still sizeable spread between some domestic food stuff prices and

international commodity prices. indicating that prices for some domestic

commodities do not show much elasticity towards international price

movements. The low rate of volatile foods inflation is also supported

by secure levels of food supply and distribution. most importantly for

food staples.

In 2011. inflation is expected to remain within the range of

5.0%+1%. Measured against 2010. core inflation is predicted to

mount slightly in keeping with the steady rise in aggregate demand

and improving growth forecasts for the domestic and global economy.

However. volatile foods inflation is predicted to ease. The fall in volatile

Graph 4.3

GDP Fan Chart

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36

Monetary Policy Report - Quarter IV-2009

foods inflation will be largely attributable to the absence of adverse

climatic factors (El Nino) in 2011 that could impact food production and

prices. It is assumed that food production and distribution will operate

smoothly. In addition. a series of infrastructure-related government

programmes are expected to remove obstacles to distribution on the

ground. Administered prices inflation is also predicted to ease slightly

in the wake of expected hikes in administered prices following the

formation of the newly-elected government. Other than this. it is

assumed that during 2011. no increases will take place in administered

prices for strategic items. notably subsidised fuels. electricity billing rates.

transport fares and so on.

RISKS

Indonesia’s GDP growth in 2009 is forecasted at 4.3%. However. in

2010. GDP growth is predicted in the range of 5.0%-5.5%. ahead of

2009. Despite improvement. GDP growth nevertheless carries a number of downside risks.

most importantly if the accelerated growth in volume of world trade during 2010 disappoints

predictions. Key factors that may disrupt the accelerated trade growth are persistently high

unemployment and lack of significant improvement in financing in the developed economies.

However. should there be a modest weakening in the fundamentals in the rupiah exchange

rate. the competitiveness of Indonesia’s exports is expected to improve. pushing Indonesia’s

GDP growth to a slightly higher level. The GDP forecast and magnitude of risks for 2009

and 2010 are presented in the GDP fan chart (Graph 4.3).

The inflation outlook for 2010 is daunted by various risks. The main risks are related

to government plans to phase in higher electricity billing rates and LPG prices. The increase

in electricity billing rates is related to the still considerable gap between electricity selling

prices and cost of production and the substantial subsidy provided by the government. In

a similar vein. bottled LPG prices are set to rise to compensate for the marked difference

between LPG selling prices and the economical price of the fuel. Risks may also arise from the

impact of the El Nino phenomenon. if worse than predicted. Both factors could potentially

drive CPI inflation beyond the projected level. Besides the risks that may boost projected

inflation above the forecasted level. other factors may ease inflationary pressure as a result of

improved inflation expectations. The inflation forecast and magnitude of risks are presented

in the inflation fan chart (Graph 4.4).

Graph 4.4

Inflation Fan Chart

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Monetary Policy Response, Q4/2009

37

5. Monetary Policy Response. Q4/2009

In the Board of Governors’ Meeting convened on 3 December 2009. Bank Indonesia decided

to hold the BI Rate at 6.50%. This decision was taken after an evaluation of economic

performance in 209 and discussion of the future economic outlook. In the view of Bank

Indonesia. the monetary relaxation during 2009 with BI Rate lowered 300 bps to 6.50% has

provided ample support for the economic recovery and bank intermediation processes. At

6.50%. the BI Rate level is also regarded consistent with achievement of the 2010 inflation

target. set at 5% ± 1%. Global economic conditions in Q4/2009 point to strengthening

improvement with positive impact for developments in the domestic economy.

November 2009 recorded deflation at 0.03% (mtm). with annual inflation reaching 2.41%

(yoy). In view of these developments. inflation at end-2009 could potentially come below

the Bank Indonesia inflation target set at 4.5%+1%. Inflation in 2010 and 2011 is predicted

to resume a normal path in line with the growing pace of economic activity.

Conditions in the banking system are marked by relative stability. Aggregate banking liquidity

remains sufficient for the activities of banks in financing the economy. However. credit has

seen only limited expansion in 2009 with the projection running at about 7%. At the micro

level. the banking industry is in stable condition. reflected in the high CAR and NPLs gross

safely below 5%.

Bank Indonesia will consistently steer monetary policy to safeguard low inflation on track

with the 5%+1% inflation target. while taking careful account of the drive for more rapid

economic recovery. Various measures will be pursued to strengthen the effectiveness of

monetary policy transmission. including efficiency improvements in the banking system. Bank

Indonesia will also maintain close coordination with the Government in monitoring global.

regional and domestic economic developments and in taking necessary measures.

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Monetary Policy Report - Quarter IV-2009

38

Statistics

Table 1

Interest Rate of Money Market. Deposits. and Credit

(Percent per Annum)

PeriodInterbank

MoneyMarket*

SBIDiscount

Rate*

Time Deposit Interest Rate Credit Interest Rate

1month

3months

6months

12months

24months

4.24 7.34 6.23 6.31 6.36 7.68 9.31 14.10 14.64 4.13 7.39 6.31 6.61 6.89 7.27 8.94 13.80 14.33 3.76 7.43 6.43 6.71 7.12 7.07 8.12 13.41 14.05 5.95 7.44 6.50 6.93 7.35 8.04 9.42 13.31 13.78 6.95 8.25 6.98 7.19 7.11 7.11 8.05 13.36 13.65 6.92 10.00 9.16 8.51 8.01 8.65 8.82 14.51 14.47 9.44 12.75 11.98 11.75 10.17 10.95 12.39 16.23 15.66 10.28 12.73 11.61 12.19 12.10 12.02 12.64 16.35 15.90 10.23 12.50 11.34 11.70 12.09 12.28 12.61 16.15 15.94 8.90 11.25 10.47 11.05 11.52 12.36 12.47 15.82 15.66 5.97 9.75 8.96 9.71 10.70 11.63 11.84 15.07 15.10 7.52 9.00 8.13 8.52 9.29 10.17 11.73 14.49 14.53 5.58 8.75 7.46 7.87 8.40 9.54 11.73 13.88 13.99 6.83 8.25 7.13 7.44 7.80 8.91 11.24 13.31 13.45 4.33 8.00 7.19 7.42 7.65 8.24 10.83 13.00 13.01 8.01 7.96 6.88 7.26 7.57 7.79 10.06 12.88 12.59 8.43 8.73 7.19 7.49 7.79 7.78 9.91 12.99 12.51 9.37 9.71 9.26 9.45 9.14 9.34 9.83 13.93 13.32 9.40 10.83 10.75 11.16 10.34 10.43 8.62 15.22 14.40 8.04 8.21 9.42 10.65 10.45 11.31 8.33 14.99 14.05 6.96 6.95 8.52 9.25 9.75 11.37 9.03 14.52 13.78 6.30 6.48 7.94 8.73 9.11 11.24 9.14 14.30 13.48

WorkingCapital

Investment

2004Qtr. IIQtr. IIIQtr. IV

2005Qtr. IQtr. IIQtr. IIIQtr. IV

2006Qtr. IQtr. IIQtr. IIIQtr. IV

2007Qtr. IQtr. IIQtr. IIIQtr. IV

2008Qtr. IQtr. IIQtr. IIIQtr. IV

2009Qtr. IQtr. IIQtr. III

* July 2009

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Statistics

39

Table 2

Money Market Transactions

(Billions of Rupiah)

Bank Indonesia Certificate (SBI) 2)

Period Interbank Transaction1) Issuance Repayment Outstandng

2004

Qtr. II

Qtr. III

Qtr. IV

2005

Qtr. I

Qtr. II

Qtr. III

Qtr. IV

2006

Qtr. I

Qtr. II

Qtr. III

Qtr. IV

2007

Qtr. I

Qtr. II

Qtr. III

Qtr.IV

2008

Qtr. I

Qtr. II

Qtr. III

Qtr. IV

2009

Qtr. I

Qtr. II

Qtr. III

1) Morning Transaction2) Transaction between Bank Indonesia and Commercial Banks only. Since March 1994 includes Repo SBPU.

87.082 283.275 304.891 118.776

165.064 252.542 339.339 31.979

204.336 293.933 252.929 103.825

216.381 369.495 415.784 57.536

237.571 362.770 315.996 101.058

250.610 230.026 289.657 41.427

264.348 183.663 150.534 74.632

310.175 415.638 356.471 133.799

280.836 517.853 483.967 167.685

286.958 599.495 586.715 180.464

329.312 665.673 636.381 209.756

495.786 774.866 740.951 243.671

362.339 846.655 832.325 258.002

413.527 895.562 887.411 266.152

313.544 777.247 795.475 247.926

368.429 858.289 906.767 212.463

246.462 489.529 543.655 165.145

326.315 389.138 437.313 116.969

326.310 404.071 340.913 180.128

265.674 450.275 397.703 232.699

261.958 324.805 324.776 232.731

239.689 420.327 427.198 220.676

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Monetary Policy Report - Quarter IV-2009

40

III IV I II III IV I II III IV I II III

1) Excluded central government. non-resident. foreign counter part value. and managable credit.

Table 3

Outstanding of Credits in Rupiah and Foreign Currency of Commercial Banks by Group of Banks and Economic Sector1)

(Billions of Rupiah)

1 State Bank - Agriculture - Mining - Industry - Trade - Services - Others

2 Private National Foreign Bank - Agriculture - Mining - Industry - Trade - Services - Others 3 Regional Government Bank - Agriculture - Mining - Industry - Trade - Services - Others 4 Foreign and Joint Bank - Agriculture - Mining - Industry - Trade - Services - Othersn

5 Rurral Bank - Agriculture - Mining - Industry - Trade - Services - Others

6 Sub total (1 until 4) - Agriculture - Mining - Industry - Trade - Services - Others

264.735 282.784 282.633 301.186 314.427 348.973 350.232 394.065 432.850 461.877 466.605 495.440 504.649 23.012 25.816 24.222 26.805 28.433 30.281 30.711 32.381 35.153 37.409 38.367 42.041 41.313 3.485 4.771 7.414 9.006 6.556 10.647 13.371 14.922 14.778 13.807 13.363 11.923 14.205 64.265 71.165 71.600 69.959 69.450 72.810 72.706 81.038 88.181 96.838 98.660 99.825 92.634 61.031 61.431 63.561 68.172 75.722 85.601 79.209 92.719 98.865 102.017 103.408 113.130 118.580 39.269 43.481 39.477 44.868 47.465 55.587 55.271 64.182 77.295 87.505 83.540 88.540 91.532 73.673 76.120 76.359 82.376 86.801 94.047 98.964 108.823 118.578 124.301 129.267 139.981 146.385 313.651 334.943 335.998 367.168 394.451 432.595 451.967 500.718 534.599 552.617 530.642 529.687 549.349 10.316 11.430 11.312 12.053 12.467 15.533 15.571 18.298 18.169 19.150 18.722 19.353 19.112 3.775 6.460 5.409 7.321 7.076 10.678 9.621 10.137 10.850 11.137 8.979 9.697 10.861 58.125 61.525 59.826 63.319 68.670 73.840 77.952 84.610 90.896 97.042 93.414 84.488 86.575 78.679 85.628 86.783 95.549 100.883 108.726 111.756 123.057 125.908 130.687 120.114 121.956 124.949 74.729 78.963 80.252 90.497 98.503 110.144 115.400 131.115 143.486 148.332 144.072 145.936 151.281 88.027 90.937 92.416 98.429 106.852 113.674 121.667 133.501 145.290 146.269 145.341 148.257 156.571 55.009 55.959 58.851 65.123 70.937 71.921 75.065 85.339 93.991 96.440 100.817 110.968 119.552 1.922 2.030 2.090 2.130 2.248 2.274 2.379 2.710 3.067 3.182 3.143 3.289 3.749 54 58 58 58 55 43 53 182 187 270 312 388 615 476 457 487 520 543 631 710 770 787 814 829 943 1.082 8.312 8.239 8.386 8.762 9.295 9.617 10.191 11.504 12.042 12.055 12.638 14.006 14.898 7.531 6.915 6.776 7.747 9.850 8.879 8.615 10.831 13.456 13.356 13.153 15.716 18.790 36.714 38.260 41.054 45.906 48.946 50.477 53.117 59.342 64.452 66.763 70.742 76.626 80.418 107.692 113.450 117.232 121.509 127.445 141.622 151.908 161.998 178.061 189.245 184.654 168.614 168.509 4.727 5.727 5.395 5.460 5.933 7.817 7.449 6.425 6.505 6.419 7.020 6.669 5.535 2.369 2.607 2.287 2.540 2.629 3.972 4.591 3.910 4.478 5.327 6.081 4.712 6.235 49.682 49.285 50.219 51.029 51.259 56.527 60.265 65.896 68.739 74.458 71.358 61.420 58.833 6.663 7.098 7.691 9.035 10.379 11.726 11.383 13.022 14.256 13.246 15.113 13.598 13.364 24.726 28.279 30.709 31.540 34.679 37.831 43.878 46.763 56.523 60.766 57.418 53.919 55.326 19.525 20.454 20.931 21.905 22.566 23.749 24.342 25.982 27.560 29.029 27.664 28.296 29.216 107.692 113.450 117.232 121.509 20.334 20.469 21.592 23.856 25.706 25.413 25.333 26.382 27.434 4.727 5.727 5.395 5.460 1.294 1.339 1.498 1.672 1.769 1.733 1.774 1.915 1.934 2.369 2.607 2.287 2.540 0 0 0 0 0 0 0 0 0 49.682 49.285 50.219 51.029 324 333 367 391 436 426 433 456 486 6.663 7.098 7.691 9.035 7.831 7.664 7.973 8.866 9.516 9.307 8.998 9.368 9.746 24.726 28.279 30.709 31.540 2.084 2.093 2.185 2.433 2.684 2.672 2.705 2.861 2.935 19.525 20.454 20.931 21.905 8.801 9.040 9.569 10.494 11.301 11.275 11.423 11.782 12.333 741.087 787.136 794.714 854.986 913.158 1.004.178 1.038.912 1.148.891 1.249.970 1.313.873 1.308.051 1.331.091 1.369.493 39.977 45.003 43.019 46.448 49.654 57.203 57.562 61.413 64.623 67.828 69.026 73.267 71.643 9.683 13.896 15.168 18.925 16.310 25.336 27.634 29.151 30.293 30.541 28.735 26.720 31.916 172.548 182.432 182.132 184.827 190.242 204.141 212.000 232.705 249.039 269.578 264.694 247.132 239.610 154.685 162.396 166.421 181.518 192.985 214.804 211.719 235.898 249.762 259.953 260.271 272.058 281.537 146.255 157.638 157.214 174.652 188.838 210.561 221.123 249.700 286.740 306.141 300.888 306.972 319.864 217.939 225.771 230.760 248.616 275.129 292.133 308.874 340.024 369.513 379.832 384.437 404.942 424.923

2006 2007 2008 2009

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41

1) M1 plus Quasi Money2) Currency Outside Banks plus Demand Deposits3) Including Government Particular Account

Table 4

Money Supply and Its Affecting Factors

(Billion of Rupiah)

2004

Qtr. I

Qtr. II

Qtr. III

Qtr. IV

2005

Qtr. I

Qtr. II

Qtr. III

Qtr. IV

2006

Qtr. I

Qtr. II

Qtr. III

Qtr. IV

2007

Qtr. I

Qtr. II

Qtr. III

Qtr. IV

2008

Qtr. I

Qtr. II

Qtr. III

Qtr. IV

2009

Qtr. I

Qtr.II

Qtr.III

935.247 219.086 86.881 132.205 716.161 275.819 443.440 22.803 454.663 -261.518

975.166 233.726 97.574 136.152 741.440 280.070 468.907 27.806 522.161 -323.778

986.806 240.911 99.505 141.406 745.895 258.684 476.451 25.261 551.562 -325.152

1.033.528 253.818 109.265 144.553 779.710 263.647 498.019 26.919 588.885 -343.940

1.020.693 250.492 98.584 151.908 770.201 268.482 456.274 28.257 612.463 -344.783

1.073.746 267.635 106.125 161.510 806.111 256.058 468.004 28.237 659.129 -337.682

1.150.451 273.954 114.998 158.956 876.497 280.369 488.483 29.805 708.018 -356.224

1.203.215 281.905 124.316 157.589 921.310 313.082 498.901 28.059 710.783 -347.610

1.195.067 277.293 112.625 164.668 917.774 347.970 470.048 25.557 705.321 -353.829

1.253.757 313.153 123.761 189.392 940.604 345.457 481.654 29.746 729.609 -332.709

1.291.396 333.905 129.969 203.936 957.491 401.065 481.641 31.858 758.261 -381.429

1.382.074 361.073 151.009 210.064 1.021.001 413.265 506.488 38.946 798.125 -374.750

1.375.947 341.833 129.618 212.215 1.034.114 457.382 447.655 35.032 810.996 -375.118

1.451.974 381.376 146.715 234.661 1.070.598 496.522 430.956 44.185 865.144 -384.833

1.512.756 411.281 160.327 250.954 1.101.475 519.360 439.649 45.496 916.657 -408.406

1.643.203 460.842 183.419 277.423 1.182.361 524.703 497.478 56.152 984.844 -419.974

1.586.795 419.746 164.995 254.751 1.167.049 549.049 375.976 49.644 1.025.856 -413.730

1.699.480 466.708 189.453 277.255 1.232.772 562.636 359.645 57.304 1.131.796 -411.901

1.768.250 491.729 223.166 268.563 1.276.521 525.702 348.387 64.488 1.222.193 -392.520

1.883.851 466.379 209.378 257.001 1.417.472 602.347 379.217 66.571 1.282.257 -446.541

1.909.681 458.581 186.538 272.043 1.451.100 703.621 348.466 67.164 1.350.570 -492.977

1.967.776 493.384 203.838 289.546 1.474.392 655.130 375.946 71.044 1.380.575 -453.876

1.995.275 507.096 214.037 293.059 1.488.178 694.431 377.160 55.879 1.410.934 -487.250

M2 Affecting Factors

End ofPeriod

Total 1) Total 2)

M1

CurrencyOutside

BanksDemand

DepositsQuasi

MoneyNet Foreign

Assets

NetClaims On

CentralGovt.3)

Claims OnOfficial

Entities andState

Enterprises

Claims OnPrivate

Enterprisesand

Individuals

NetOtherItems

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Table 5

Base Money and Its Affecting Factors

(Billions of Rupiah)

257.843 297.080 272.239 289.727 310.265 379.582 325.044 349.649 392.136 344.688 304.718 322.994 354.297

0 0 0 0 0 0 0 0 0 0 0 0 0

153.569 178.572 155.498 173.888 189.221 220.785 198.940 224.342 270.243 264.391 226.672 244.634 273.744

129.969 151.009 129.618 146.715 160.327 183.419 164.995 189.453 223.166 209.378 186.538 203.838 210.810

23.600 27.563 25.880 27.173 28.894 37.366 33.945 34.889 47.077 55.013 40.134 40.796 62.935

104.061 118.417 116.558 115.524 120.740 158.452 125.705 124.811 121.302 79.648 77.404 77.744 79.920

213 91 183 315 304 345 399 496 591 650 642 616 633

255.182 274.694 305.744 330.295 337.523 356.883 351.874 351.561 355.967 338.692 354.727 356.930 376.681

2.661 22.386 -33.505 -40.569 -27.258 22.699 -26.830 -1.912 36.169 5.996 -50.009 -33.935 -22.383

219.538 265.919 200.460 187.081 184.961 249.069 128.907 117.614 123.797 172.012 105.571 136.202 144.747

18.226 18.196 18.186 18.136 18.136 8.847 8.838 8.800 8.800 8.711 8.715 8.715 8.715

11.035 10.832 10.598 10.366 10.206 9.994 9.751 9.353 9.227 9.009 8.783 8.622 8.458

5.494 5.352 5.366 5.389 5.357 3.074 3.089 3.295 3.155 3.815 2.545 2.473 2.415

-189.131 -242.001 -247.525 -264.280 -254.096 -281.164 -219.099 -191.525 -152.563 -233.866 -257.701 -267.412 -242.991

-180.382 -208.763 -239.977 -257.998 -265.034 -247.688 -212.463 -165.145 -116.967 -179.879 -232.700 -232.731 -220.676

-16.829 -41.568 -19.298 -21.615 -4.750 -48.933 -5.737 -4.989 -1.403 -4.223 -15.288 -28.277 -22.824

8.080 8.330 11.750 15.333 15.688 15.457 14.356 14.172 15.929 19.569 15.599 22.580 22.675

-62.501 -35.912 -20.590 2.739 8.178 32.879 41.684 50.551 43.752 46.316 82.078 77.465 56.274

2006 2007 2008 2009

III IV I II III IV I II III IV I II III*

I. Base Money

a. Statutory Reserve Shortfall

b. Currency

- Currency outside bank

- Cash in vaults

c. Commercial Banks Positive Balance

d. Private Sector Demand Deposits

I. Factor Affecting Base Money

a. Net International Reserve 1)

b. Net Domestic Assets

- Net Claims on Central Government

- Liquidity Support

- Liquidity Credits

- Others Claims

- Open Market

- SBI (net) 2)

- FASBI

- Others 3)

- Net Other Items

1) Before June 1997 : NFA. after June 1997 : NIR using constant rate Rp7.000/$ Since June 1998 up to March 1999 using constant rate Rp10.000/$ Since April 1999 using constant rate Rp7.500/$ Since 21 November 1999 using constant rate Rp7.000/$ Sejak 25 Mei 2000 for account NIR using IRFCL (Int’l Reserve and Foreign Currency Liquidity) concept2) Since March 2000 include SBI Syariah3) including Government Bonds and FTO (Fine Tune Operation)

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Table 6

Indonesia Current Account Payment 1)

(Millions of $)

2006 2007 2008* 2009**

IV Total I II III IV Total I II III IV Total I II III

I. Current Account

A. Goods. net (Trade Balance) Export f.o.b Import f.o.b

B. Services (net)

C. Income (net)

D. Current Transfers (net)

II. Capital and Financial Account

A. Capital Account B. Financial Account

1. Direct Investment Abroad (net) Domestic (FDI). (net) 2. Portfolio Investment Asset (net) Liability (net) 3. Other Investment Asset (net) Liabiliaty (net) 2)

III. Total (I + II)

IV. Errors and Omissions

V. Overall Balance (III + IV)

VI. Monetary Movements 3)

Changes in Reserves Assets 3)

a.l. Transaction

IMF: Purchases Repurchases

Memorandum: Reserve Assets Posistion 4)

Current Account (% GDP) Debt Service Ratio (%) 5)

a.1. Government Related & Monetary Authorities 6) * Temporary figures.** Very Temporary figures.1) New format since January 2004 publication.2) Not included IMF package3) Negative represents surplus and positive represents deficit4) Since1988. reserve assets position is based on Gross Foreign Asset Replacing Official Reserve. Since 2000 reserve assets position is based on International Reserve and Foreign Currency Liquidity (IRFCL).5) Ratio of external debt service payments to export of goods and services.6) Consists of Government. State Owned Enterprises Except Banks. and Bank Indonesia.

22.157 10.859 2.640 2.271 2.151 3.430 10.493 2.742 -1.013 -966 -637 125 2.722 2.907 1.739 7.386 29.660 7.712 8.107 7.487 9.448 32.754 7.536 5.443 5.771 4.166 22.916 6.908 8.410 7.796 27.178 103.528 26.626 29.202 30.009 32.177 118.014 34.412 37.345 38.081 29.768 139.606 24.204 28.175 31.735 -19.792 -73.868 -18.914 -21.095 -22.521 -22.729 -85.260 -26.876 -31.902 -32.309 -25.603 -116.690 -17.297 -19.765 -23.939 -2.829 -9.874 -3.163 -2.991 -2.764 -2.922 -11.841 -3.072 -3.387 -3.313 -3.227 -12.999 -2.620 -2.983 -3.162 -3.539 -13.790 -3.163 -4.023 -3.811 -4.527 -15.525 -3.093 -4.425 -4.756 -2.881 -15.155 -2.688 -3.720 -4.071 1.139 4.863 1.254 1.178 1.240 1.432 5.104 1.371 1.356 1.331 1.305 5.364 1.122 1.200 1.176 1.303 3.025 1.836 2.029 -935 660 3.591 -529 2.105 2.370 -5.822 -1.876 1.886 -2.230 2.966 132 350 43 127 255 122 546 17 62 187 29 294 19 29 34 1.170 2.675 1.793 1.902 -1.190 539 3.045 -546 2.043 2.184 -5.850 -2.170 1.867 -2.259 2.962 1.232 2.211 -246 1.426 764 309 2.253 630 197 1.871 720 3.419 843 228 -70 -204 -2.703 -1.282 392 -1.427 -2.358 -4.675 -1.730 -1.436 -1.517 -1.217 -5.900 -1.251 -1.047 -505 1.435 4.914 1.037 1.034 2.191 2.667 6.928 2.360 1.633 3.388 1.937 9.318 2.094 1.275 435 1.312 4.174 2.491 3.810 465 -1.200 5.566 1.984 4.188 -74 -4.377 1.721 1.859 1.959 3.403 -762 -1.933 -497 -1.897 -1.257 -764 -4.415 -823 60 -65 -467 -1.294 133 362 84 2.074 6.107 2.988 5.707 1.722 -437 9.981 2.807 4.128 -9 -3.910 3.015 1.726 1.597 3.319 -1.382 -3.791 -452 -3.334 -2.419 1.430 -4.775 -3.160 -2.342 387 -2.194 -7.309 -835 -4.455 -371 -1.707 -1.588 -105 -2.283 -2.360 262 -4.486 -2.672 -1.974 -1.610 -4.498 -10.755 -307 -2.571 -4.733 325 -2.204 -348 -1.051 -59 1.168 -289 -489 -367 1.998 2.304 3.446 -528 -1.874 4.362 3.459 13.885 4.476 4.300 1.217 4.091 14.805 2.213 1.092 1.404 -6.459 -1.750 4.608 677 4.735 -751 625 -97 -663 -37 -571 -1.368 -1180 233 -1493 2246 -194 -653 375 -1189 2.708 14.510 4.379 3.637 1.179 3.520 12.715 1.032 1.324 -89 -4.212 -1.945 3.955 1.052 3.546 -2.708 -14.510 -4.379 -3.637 -1.179 -3.520 -12.715 -1.032 -1.324 89 4.212 1.945 -3.955 -1.052 -3.546 292 -6.902 -4.379 -3.637 -1.179 -3.520 -12.715 -1.032 -1.324 89 4.212 1.945 -3.955 -1.052 -3.546 -3.001 -7.608 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 -3.001 -7.608 0 0 0 0 0 0 0 0 0 0 0 0 0 42.586 42.586 47.221 50.924 52.875 56.920 56.920 58.987 59.453 57.108 51.639 51.639 54.840 57.576 62.287 2.9 2.6 2.1 1.9 3.0 2.4 2.3 -0.8 -0.7 -0.5 0.0 2.4 2.2 1.2 33.2 24.8 19.8 21.4 15.2 21.2 19.4 16.2 17.8 15.2 24.2 18.1 23.3 24.3 21.9 18.6 14.2 5.6 9.4 5.1 9.0 7.3 4.4 7.7 4.7 9.2 6.4 6.0 10.0 5.4

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Notes :

1) Index quarterly changes.

CPI Calculated based on 2002 prices (2002 = 100).

* Started in 1 Juli 2008. CPI Calculated based on 2007 prices (2007 = 100). quarter II-2008 data is mtm inflation data (month to month) June 2008

Source : BPS-Statistic Indonesia (processed)

Table 7

Inflation Rate by Group of Goods and Services

(Percent)1

1.27 6.05 3.71 -1.21 4.00 4.43 5.91 1.28 4.75 0.60 1.44 -1.76 4.94 2.60 8.63 12.16 -6.50 0.69 3.48 2.59 2.11 0.60 0.91 2.76 -0.75 1.06 5.62 -0.25 -2.93 5.12 9.08 -2.04 4.14 0.29 13.94 -4.64 2.39 -0.26 6.47 3.66 1.46 1.37 -2.71 4.65 2.11 5.84 2.01 12.12 2.94 2.25 -2.52 4.63 2.72 1.64 0.35 0.39 3.06 0.73 7.87 1.84 8.04 4.32 2.24 -0.88 1.60 1.96 2.55 -1.02 4.05 11.46 0.26 6.88 -0.19 8.94 -2.51 -0.34 -0.54 1.57 1.00 11.87 -0.30 -1.04 2.17 7.39 2.42 1.68 3.79 6.60 2.59 -5.97 6.34 1.73 1.72 3.81 2.61 4.49 7.90 28.51 1.84 5.93 0.42 0.18 -2.59 1.18 0.50 4.46 2.21 1.39 2.87 1.79 1.38 0.89 7.30 1.68 0.71 3.11 8.14 -13.98 24.41 -3.70 -8.06 -0.43 25.17 2.85 -0.07 -10.49 8.28 1.66 -8.24 23.17 1.41 3.65 8.63 12.79 7.09 6.71 15.72 1.47 -1.65 -6.81 -0.81 0.12 -1.30 4.36 3.13 1.32 1.50 0.75 -1.47 2.02 1.00 3.57 1.20 1.62 0.61 2.37

0.80 2.24 1.89 1.19 1.33 1.85 4.02 1.33 2.62 2.43 2.40 1.18 2.12 0.96 2.25 1.67 1.00 1.35 2.36 5.50 1.63 2.83 2.35 1.59 1.03 1.46 0.31 1.95 1.75 0.20 0.46 -0.20 1.47 1.06 2.15 1.50 5.39 2.15 5.61 0.86 2.59 2.24 2.60 1.85 2.28 1.89 0.73 2.60 3.70 2.42 0.82 1.06 0.78 1.30 1.81 0.75 1.27 0.97 2.79 1.14 3.58 1.00 0.42 0.26 0.47 0.98 1.73 2.12 0.83 1.11 1.58 2.22 1.67 2.16 0.73 1.00 0.12 0.53 0.34 0.56 1.69 0.15 1.92 -0.45 4.69 -0.12 8.94 1.66 -1.48 0.29 0.55 0.67 0.78 1.20 0.52 0.57 1.05 1.45 0.97 1.66 1.10 0.95 0.68 0.75 0.99 0.99 1.70 1.79 1.61 1.30 2.71 0.86 1.71 1.08 1.00 0.53 -0.21 0.57 1.84 0.72 0.39 2.34 4.78 4.30 0.49 0.77 2.58 4.48 -1.88 1.06 0.80 1.81 0.37 0.29 1.29 1.70 0.81 0.27 3.02 0.35 0.38 0.55 2.49 0.69 1.41 0.10 0.71 0.94 1.45 0.68 0.46 2.15 0.30 0.44 0.29 1.24 1.00 1.35 0.50 0.32 1.34 0.86 0.56 0.64 2.13 0.23 0.26 0.39 1.67 -0.22 2.47 2.09 0.35 5.53 13.60 12.66 0.59 -2.46 7.26 13.49 -6.30 -0.37 le 0.70 1.76 1.39 0.71 1.03 1.12 3.00 0.83 1.64 1.10 1.27 1.20 0.77 0.94 3.70 1.92 0.45 0.32 0.44 5.12 0.47 1.07 0.69 1.60 1.72 0.85 -0.19 0.18 1.32 0.82 1.08 1.46 1.96 1.31 2.19 1.60 1.14 1.39 0.42 0.84 0.80 1.16 1.85 0.61 0.73 1.15 1.10 2.36 1.61 1.39 0.73 1.38 0.77 0.72 1.46 0.80 1.56 1.52 2.32 0.90 1.76 1.26 1.01 0.42 0.83 7.44 0.20 0.36 0.01 7.97 0.43 0.14 0.44 3.77 0.82 0.22 0.22 2.94 11.41 0.12 0.46 0.03 12.73 0.36 0.09 0.18 6.76 0.70 0.04 0.06 4.86 2.31 0.23 1.04 0.26 0.87 0.48 0.72 0.45 4.95 0.32 0.59 0.46 1.27 3.61 0.27 0.36 0.36 1.58 0.66 0.30 0.72 1.14 1.11 0.37 0.16 0.74 0.06 0.28 0.13 -0.23 0.01 0.64 0.20 0.92 0.51 1.02 0.48 0.55 0.74 1.19 0.88 0.79 0.36 0.35 2.23 0.47 0.20 0.91 0.49 0.51 0.33 0.52 0.08 0.35 0.22 0.46 0.15 0.42 0.37 8.72 0.92 -2.94 -4.66 0.32 1.16 0.02 0.33 0.24 0.60 0.00 0.49 0.27 12.98 1.03 -4.46 -6.95 0.54 1.70 -0.01 -0.01 0.05 0.01 -0.02 0.00 0.01 -0.12 0.02 0.20 -0.07 -0.31 -0.32 1.26 1.56 0.50 0.24 2.43 1.27 1.40 0.84 1.34 1.64 1.38 0.34 0.87 0.05 0.01 0.01 0.01 0.00 0.00 4.90 0.01 3.89 0.00 0.00 0.00 0.65 1.16 2.44 1.91 0.17 2.28 2.09 3.41 2.46 2.88 0.54 0.36 -0.15 2.07

Sub Group 2006 2007 2008 2009 III IV I II III IV I II* III IV I II III

I. Food A. Cereal and Product B. Meat and Meat Product C. Fresh Fish D. Dried Fish E. Egg and Milk F. Vegetables G. Beans and Nuts H. Fruits I. Species J. Fat and Oil K. Others

II. Prepared Food. Beverage. Cigarettes and Cloves A. Prepared Food B. Non-alcoholic-Beverage C. Cigarettes. Cloves. and Alcoholic BeverageIII. Housing A. Home Owner Cost B. Fuel. Electricity. and Water C. Household Equipment D. Household Operation IV. Clothing A. Clothing for Men B. Clothing for Women C. Clothing for Children D. Personal Effect and Other Clothing

V. Health A. Medical Care and Medicine B. Medicine C. Personal Care D. Personal Care and Cosmetics

VI. Education. Culture. Sport. and Entertainment A. Education B. Courses and Training C. Education Equipment D. Recreation E. Sport

VII. Transportation and Communication A. Transportation B. Communication and Delivery C. Transport Facility D. Financial Service

GENERAL

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Table 8

Inflation Rate Contribution in 44 Cities (cont.)

(Percent)1

1.09 4.45 2.16 -2.16 5.34 -1.05 4.84 4.38 2.92 2.97 -0.56 -0.37 4.37 2.64 2.81 4.61 -1.67 5.85 1.94 3.49 2.75 1.36 1.39 0.35 0.14 4.12 2.74 4.93 1.92 -2.34 3.76 2.51 4.65 2.53 1.27 1.56 -0.03 -1.07 2.66 1.90 1.07 6.92 -0.29 1.15 2.69 4.63 2.31 3.06 2.22 -0.52 -0.01 3.45 1.68 4.01 2.98 -0.55 3.78 1.97 3.07 2.88 1.37 1.33 -0.20 0.10 3.26 0.85 3.31 1.63 -0.51 1.96 3.23 2.19 2.07 1.21 2.26 -0.84 -0.17 3.35 0.93 5.07 3.68 -1.96 2.06 3.05 4.35 4.09 2.04 2.07 0.04 -1.34 2.79 1.21 3.36 3.67 -1.49 1.92 3.31 4.15 2.46 3.17 0.55 0.48 -0.54 1.70 2.30 1.97 1.40 -0.34 2.15 1.56 2.91 2.29 1.72 0.58 0.64 -0.43 1.76 1.61 6.14 3.17 -1.22 2.57 2.75 2.16 4.19 1.76 -0.19 0.26 -0.72 2.37 0.96 4.27 0.64 0.85 3.23 3.28 3.11 3.41 3.20 -0.29 -0.06 0.09 1.57 1.23 3.76 1.36 -0.88 3.10 1.37 4.09 4.14 3.61 0.34 0.09 -0.74 4.06 0.69 2.31 0.71 0.12 3.40 2.22 3.29 2.93 4.95 0.74 0.92 -1.29 4.85 2.16 0.93 2.62 -0.98 0.67 0.33 6.53 4.20 4.26 0.13 -0.78 -0.74 3.16 - - - - - - - 3.80 3.04 1.22 -0.74 -0.77 3.52 - - - - - - - 2.45 3.33 1.19 0.32 -0.73 1.29 1.21 2.07 1.95 0.51 1.85 1.61 3.51 1.94 2.54 - - - 2.23 3.53 3.73 -0.04 1.65 2.20 2.57 2.54 3.64 - - - - - - - - - - 2.21 4.50 - - - - - - - - - - 3.04 3.21 0.00 0.32 -0.06 2.03 - - - - - - - 2.11 0.88 1.57 0.63 0.36 1.89 - - - - - - - 1.15 2.38 0.46 0.79 -0.27 1.72 - - - - - - - 2.80 3.42 1.32 1.67 0.35 1.25 - - - - - - - 1.24 3.82 0.03 0.01 -0.26 1.76 - - - - - - - 2.45 3.49 0.18 -0.87 -0.20 2.43 1.26 1.87 1.13 -0.26 2.48 1.82 2.81 2.76 2.28 -0.07 0.11 -0.14 1.64 0.63 4.23 3.24 0.15 2.22 2.06 3.52 3.33 4.04 0.19 0.91 0.04 2.49 2.21 2.48 2.22 1.33 2.21 0.26 3.60 2.75 3.53 1.16 0.78 0.11 1.17 0.36 2.41 1.19 -0.34 0.99 1.42 2.74 2.13 1.74 0.13 1.06 0.19 1.21 1.48 1.57 2.37 0.52 1.98 1.72 4.18 2.40 2.83 0.18 0.72 0.06 1.96 1.48 3.19 1.66 1.24 2.84 2.88 2.72 1.82 2.36 0.45 1.05 1.05 3.15 2.52 2.42 1.86 0.18 3.17 2.59 2.85 2.51 3.16 - - - 0.70 2.68 1.26 0.78 2.13 2.91 2.73 3.46 2.77 - - - - - - - - - - 1.62 2.83 1.05 0.25 0.14 1.90 0.80 3.11 2.50 -0.11 1.55 2.76 2.94 2.11 3.10 -0.35 0.90 0.02 2.04 0.60 1.76 1.30 0.13 2.12 2.28 4.06 2.77 2.93 0.38 1.28 0.16 1.38 - - - - - - - 1.81 3.85 0.00 0.60 0.07 1.84 - - - - - - - 4.05 2.27 -0.32 1.02 0.00 1.52 0.81 2.61 1.09 0.90 2.02 2.12 3.59 2.00 2.56 0.14 1.06 -0.41 1.97 -0.12 1.37 2.19 0.29 1.36 1.95 3.35 1.78 3.14 - - - -0.05 1.93 3.59 1.00 1.14 2.78 3.23 3.21 3.23 - - - - - - - - - - 4.94 3.16 0.77 2.41 -1.12 2.06 - - - - - - - 2.24 6.66 -2.44 0.39 1.10 3.47 0.86 3.32 5.29 -0.39 0.90 2.47 3.33 2.31 0.46 - - - 1.72 1.29 2.56 1.14 2.12 2.49 4.21 2.27 3.21 - - - - - - - - - - 2.94 2.73 0.02 0.38 -0.90 2.44 0.30 1.74 0.81 0.39 1.84 4.38 1.60 2.87 1.72 - - - -0.52 3.94 0.62 -0.14 2.38 4.95 4.48 2.22 3.62 - - - 0.10 3.14 3.29 -0.66 2.60 2.39 4.12 2.48 2.23 - - - -0.06 1.05 0.81 0.39 4.54 1.40 3.75 2.88 1.84 - - - 2.44 0.61 1.72 0.52 4.84 1.85 3.97 3.32 2.96 - - -

C i t i e s 2006 2007 2008 2009

III IV I II III IV I II* III IV I II III*

1. Lhokseumawe2. Banda Aceh3. Padang Sidempuan4. Sibolga5. Pematang Siantar6. M e d a n7. Padang8. Pekanbaru9. Batam10. Jambi11. Palembang12. Bengkulu13. Bandar Lampung14. Pangkal Pinang15. Dumai16. Tanjung Pinang17. Jakarta18. Tasikmalaya19. Serang20. Tangerang21. Cilegon22. Bogor23. Sukabumi24. Bekasi25. Depok26. Bandung27. Cirebon28. Purwokerto29. Surakarta30. Semarang31. Tegal32. Yogyakarta33. Jember34. Sumenep35. Kediri36. Malang37. Probolinggo38. Madiun39. Surabaya40. Denpasar41. Mataram42. Bima43. Maumere44. Kupang45. Pontianak46. Singkawang47. Sampit48. Palangka Raya49. Banjarmasin50. Balikpapan51. Samarinda

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Monetary Policy Report - Quarter IV-2009

46

Notes :

1) Index quarterly changes.

CPI Calculated based on 2002 prices (2002 = 100).

* Started in 1 Juli 2008. CPI Calculated based on 2007 prices (2007 = 100) with total 66 cities. quarter II-2008 data is mtm inflation data (month to month) June 2008

Source : BPS-Statistic Indonesia (processed))

Table 8

Inflation Rate Contribution in 44 Cities (cont.)

(Percent)1

- - - - - - - 2.48 5.54 0.82 0.53 1.34 3.52 2.15 1.29 3.34 -0.43 3.45 3.46 1.04 3.63 3.02 0.17 1.18 -2.08 0.74 1.23 1.74 0.60 1.87 1.60 3.84 1.49 2.44 5.01 -0.63 1.78 -0.36 3.35 - - - - - - - 6.26 3.62 0.27 2.14 0.84 2.85 1.58 0.66 2.28 0.51 3.38 -0.54 4.45 3.39 3.50 - - - - - - - - - 2.76 4.21 0.43 0.40 -0.53 1.85 - - - - - - - 3.15 3.50 1.16 1.14 -0.12 2.00 2.29 2.97 1.94 2.20 0.15 2.94 2.91 6.49 3.30 0.74 2.99 -0.34 2.20 2.34 3.48 -1.24 0.46 3.22 4.51 -0.04 2.59 4.01 0.16 2.33 0.59 0.85 - - - - - - - 3.04 5.86 -0.29 -0.35 0.06 1.45 -0.47 1.25 1.77 0.51 2.38 1.07 2.92 1.76 5.06 -4.80 2.26 -2.43 1.82 0.82 1.72 2.39 2.06 0.44 5.21 4.71 1.17 4.30 -0.92 1.25 -0.27 1.32 - - - - - - - 5.78 8.31 0.62 3.52 0.36 2.39 - - - - - - - 5.72 7.29 -1.86 0.77 0.52 0.42 1.57 2.31 4.93 0.15 0.52 4.45 6.49 5.86 2.88 0.31 -0.06 -0.36 1.55 1.16 2.44 1.91 0.17 2.28 2.09 3.41 2.46 2.88 0.54 0.36 -0.15 2.07

C i t i e s 2006 2007 2008 2009

II III IV I II III IV I II* III IV I II*

52. Tarakan53. Manado54. P a l u55. Watampone56. Makassar57. Parepare58. Palopo59. Kendari60. Gorontalo61. Mamuju62. Ambon63. Ternate64. Manokwari65. Sorong66. Jayapura

NATIONAL

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Statistics

47

Notes :1) Index quarterly changes. Wholesale Price Index (WPI) calculated based on 2000prices (2000 = 100).

Source : BPS-Statistic (processed)

Table 9

Changes of Wholesale Price Index

(Percent) 1

1.26 9.77 1.18 3.10 3.91 2.90 6.75 2.35

3.20 1.55 2.34 6.67 7.32 2.26 21.16 4.37

-1.29 0.35 0.60 3.41 4.68 0.89 13.39 1.80

1.84 1.02 0.52 0.34 -1.48 2.42 -9.47 0.18

3.80 3.00 8.04 9.11 10.73 4.61 24.20 8.02

0.00 0.70 1.34 0.69 1.43 0.00 5.13 1.38

2.76 0.70 1.32 6.85 9.15 3.28 20.49 4.08

4.03 13.19 22.22 0.64 -3.87 2.38 -13.77 9.15

3.87 0.61 1.60 -0.64 -1.34 -4.65 3.29 -1.20

4.97 1.83 2.11 5.13 8.84 6.50 13.64 4.85

5.33 2.40 2.58 0.61 0.00 2.29 -3.60 2.31

6.74 3.51 1.51 1.82 -5.00 1.49 -16.18 0.56

6.32 3.39 3.47 3.57 2.63 3.68 1.49 3.93

2.97 1.64 3.35 5.75 7.05 2.84 14.63 4.32

7.69 1.61 3.70 3.26 1.80 -0.69 6.38 3.63

7.59 3.70 5.80 11.05 10.00 2.08 24.40 8.50

7.05 4.08 7.17 6.64 5.88 5.44 6.43 6.45

7.75 10.78 12.60 15.56 14.14 5.16 28.10 12.55

4.32 3.54 1.40 -9.23 -5.31 2.45 -15.09 -1.92

0.00 4.27 -4.14 -11.86 -13.55 9.58 -47.22 -6.67

-31.27 -15.57 -41.37 -24.52 -25.95 -17.49 -50.53 -32.35

3.31 -0.64 1.12 0.43 -0.65 -5.30 21.28 1.27

5.19 1.22 1.13 -0.37 -2.86 -4.20 2.63 0.79

End of Agriculture Mining Industry Import Export General

Period Total Non Oil/Gas Oil/Gas

2004

Qtr.I

Qtr.II

Qtr.III

Qtr.IV

2005

Qtr.I

Qtr.II

Qtr.III

Qtr.IV

2006

Qtr.I

Qtr.II

Qtr.III

Qtr.IV

2007

Qtr.I

Qtr.II

Qtr.III

Qtr.IV

2008

Qtr.I

Qtr.II

Qtr.III

Qtr.IV

2009

Qtr.I

Qtr.II

Qtr.III*