Inve st or s Con fe r e n ce Ca ll, M a y 2007
Mr. Anggito Abimanyu (Ministry of Finance)
I and m y colleagues fr om Bank I ndonesia and Coor dinat ing Minist r y for Econom ic Affair s w elcom e you t o t he fir st confer ence call in 2007. I am ver y delight ed t o inform y ou about t he lat est developm ent of econom y. I w ould like to brief you the latest economic update regarding:
1. Economic growth and components particular related to the macro economic indicators for the first quarter of 2007
2. Monetary exchange rate and balance of payment.
3. Issue of fiscal policy including debt management and financing for 2007.
4. Investment outlook and investment policy
I will start with the economic performance in 2006 as follows:
1. Econom ic gr ow t h in 2006 w as 5.5% . Econom ic act ivit y w as slightly slow in t he fir st and second quar t er 2006 but t hen pick ing up in t he third and four t h quar t er 2006. The st r ong gr ow t h of 2006 w as m ainly supported by dom est ic consum pt ion, significant im pr ovem ent s in export performance and increased in consumer purchasing power. 2. Economic gr ow t h is pr oj ect ed t o r each 6. 3% in 2007. I t is higher t han
the gr ow t h in 2005 and 2006. For t he sour ce of gr ow t h, w e ar e aim ing of improving invest m ent gr ow t h, incr easing of gover nm ent spending and strong support from domestic consumption
3. From dem and side, I ndonesian econom ic per for m ance in fourth quarter 2006 has show n an im pr ovem ent t r end. We w ould lik e t o maint ain t hese im pr ovem ent s in 2007. Pr ivat e consum pt ion w ill st ill be an engine of economic activity.
4. On t he pr oduct ion side, w e expect a higher gr ow t h in line w it h expect at ion of st r ong dom est ic dem and. We w ill be seeing t he r obust growth in manufacturing sectors, streets, hotel and restaurants.
Monetary and Exchange Rate
I nflat ion in fir st quar t er of 2007 w as 6.52% ( y- o- y) . This is m uch low er t han fir st quar t er of 2006 t hat w as 15.74% . The key fact or s are t he st able exchange r at e w hich im pr oved inflat ion s expect at ion, m inim um im pact of adm inist er ed pr ices and volat ile food. The inflat ion r at e in Mar ch and Apr il 2007 w as particularly due t o lowering pr ice of r ice w hich w as high in Januar y and February 2007.
8.75% . The int er est r at e differ ent ial bet w een BI s r at e and Fed Fund r at e is getting lower. But there is still room for further declining of BI s r ate.
The exchange rate of rupiah maintains an appreciating trend with declining of rupiah volatility com par ed t o pr evious quar t er . Recent ly, t he level of rupiah stable at below than Rp. 9,000/ USD.
I n 2006 t he balance of paym ent exper ienced posit ive per for m ance. Strong Balance of paym ent per for m ance has cont r ibut ed t o a steady incr ease of official r eser ves. By t he end of Mar ch 2007, t he am ount of official r eser ves w as USD 47.2 billion. This t r end has continued t o upw ar d t oget her w it h the constant inflow of capital.
Fiscal management and Fiscal Policy Stance
I n or der t o st im ulat e econom ic gr ow t h, The gov er nm ent has decided t o com bine fiscal policy bet w een consolidation and stimulation. As you m ay have hear d, Indonesia continues t o hav e a substantial internal and ext er nal debt level. I t w ill need new financing and w e cont inue t o focus on fiscal consolidat ion. I n 2006, t he gov er nm ent has achieved a budget deficit about 1% of GDP. I n 2007, t he or iginal t ar get of t he budget deficit was 1.1% of GDP. We m ay end up having lar ger budget deficit in 2007 particularly due t o an addit ional government spending in 2007 r elat ed t o nat ur al disast er and ot her spending. Nev er t heless, w e believe t hat t his addit ional spending is still within our financing availabilit y par t icularly w it h t he developm ent of gover nm ent bonds w hich cer t ainly in favor able t r end at t he m om ent . Ther efor e w e should not be w or r ied about t he need of financing for budget 2007.
Key highlight of 2007 budget
1. To suppor t infrastructures financing m ainly t hr ough public spending as well as the establishment of PPP infrastructure scheme model.
2. To improve efficiency and effectiveness of government expenditures. 3. We ar e cur r ent ly under w ay a pr ocess for a m edium budget and
treasury r efor m including t he int r oduct ion of m ult iyear budget , t r easur y single account and m oving t o accr ual base account ing system.
4. On t he fiscal decent r alizat ion, in 2007 w e have included im pr ovem ent in fiscal balance and w e st ar t ed t o int r oduce t he r egional bor r ow ing and municipal bonds w it h pr udent ial m easur es in place t o incr ease t he compliance of financial information system from the regions.
Mr. Mahendra Siregar (Coordinating Ministry for Economic Affairs)
The im pr oving of m acr o econom ic pict ur e has allow ed t he gover nm ent t o t ur n m or e focus on t he r efor m agenda. The gov er nm ent r efor m im plem ent at ion has cont inued rapidly and t he gover nm ent w ill issue t he second phase of policy packages in invest m ent clim at e, infr ast r uct ur e and financial sect or shor t ly. The t hr ee policy packages r eflect t he gover nm ent pr ior it y r efor m m easur es and built on t he r efor m entailed in t he last year packages. I n addit ion t o t he t hr ee packages, t he new package on sm all and medium enterprises should also be finalized soon.
Brief progress of the packages and glance for the next phase
As y ou might know , last m ont h t he par liam ent passed a new invest m ent law t hat w e believe r epr esent a clear im pr ovem ent w it h t he ex ist ing sit uat ions. Am ong ot her t hing, w e pr ov ide a nat ional t r eat m ent for dom est ic and for eign firms, provide for lengthener land use rights close to 100 years and the right of for eign firms t o ask for m andat es binding int er nat ional ar bit r at ion in t he event of disputes between the government and foreign investors.
m ar ket ar e ver y cr it ical t o incr ease cor por at e bor r ow ing and long t er m infr ast r uct ur e finance. On t he infr ast r uct ur e package, m uch effort in t he last year have been focus on im pr oving t he fr am ew or k of public- private partnership. The progress t hat w e have been achieved am ong ot her s ar e w e have changed t he policy about gover nm ent par t ial r isk guar ant ees, est ablish a unit at t he Minist r y of Finance t o assess t he pr oj ect s and cont ingent r isk and w e have explicit ly put side fund in t he last year and t his y ear budget t o provide for land acquisition, guarantee and infrastructure funds.
Furthermore, t her e ar e also significant pr ogr esses on t he 10 m odel pr oj ect s t hat w e int r oduced at t he infr ast r uct ur e confer ence on Novem ber last year . 2 of 10 pr oj ect s have com plet ed t he pr equalification with t he r esult of 3- 5 of qualified bidder s. Anot her 4 pr oj ect s ar e in t he pr ocess of pr e- feasibility studies and 3 ot her ar e in t he pr ocess of em ploying advisor y ser vices fr om t he Wor ld Bank, I DB and I FC. I n addit ion t o t his 10 pr oj ect s w e ar e also preparing and start discussing the possibilities to offer 90 other infrastructure projects.
Mr. Made Sukada (Bank Indonesia)
The transcript was not read during the conference call
Inflation Rate:
High inflat ionar y pr essur es at t he beginning of 2006 have gr adually dissipat ed t hr oughout 2006. By t he end of 2006, t he inflat ion r at e w as r ecor ded at 6.6% ( y- o- y) ; below t he t ar get ed r at e of 8± 1% set by t he Gover nm ent . Success in cont r olling inflat ion in 2006 also r eveals t hat m onet ar y policy w as able t o m it igat e t he second r ound effect s of soar ing global oil pr ices at t he end of 2005 on inflat ion expect at ions. The m odest inflat ion cont inued in 2007, w her e t he r at e for Apr il w as r ecor ded a deflat ion of 0.16% in monthly basis or 6.29% in annual basis.
Exchange Rate:
I nflat ion st abilizat ion in 2006 and good per for m ance in t he balance of paym ent s, also cont r ibut ed t ow ar ds a st able r upiah exchange r at e t hr oughout 2006. The r upiah t o US dollar exchange r at e t ended t o be st able on t he aver age ar ound Rp9,165 per USD ( 5.9% appr eciat ion) in 2006 w it h r elat ively low er volat ilit y ( 3. 7% ) t han t he pr evious year ( 4.0% ) . The cont inued st able ex change r at e has also been m at er ializing in 2007 w it h t he lat est av er age r at e r ecor ded at Rp. 9096 at t he end of Apr il 2007. We w ill cont inue m aint aining flexible exchange r at e and fr ee capit al account r egim e, and let the market determines the level of exchange rate.
Interest Rate Policy:
cont inued in 2007, r eaching t he r at e of 8.75% . Such r educt ions w er e t aken to pr eser v e t he posit ive m ar ket per cept ions and suppor t a m or e conduciv e business clim at e, w hile safeguar ding st abilit y in t he financial m ar ket s am id capit al inflow s for por t folio placem ent s. I n t he last m ont hly Boar d Meet ing, how ever , t he ser ies of int er est r at e cut w as paused. A w eaker t han expect ed r esponse of supply side, com par ed t o t he st r ong r esponse of dem and side, was the main factor behind the decision.
Improved Economic Activities:
The r egained m acr oeconom ic st abilit y pr ov ided oppor t unit y for a br oad-based econom ic r ecover y. Econom ic gr ow t h dur ing 2006 ( 5.48% ) show ed an upw ar d t r end ( Q1: 4.98% , Q2: 4. 96% , Q3: 5.87% and Q4 6.11% ) , and expected to continue this year to reach the growth of 6.0%. During Q1 2007, econom ic gr ow t h w as r ecor ded at 6.0% . The leading sect or by cont r ibut ion t o econom ic gr ow t h in Q1/ 2007 w as m anufact ur ing follow ed by t r ade, hot els and r est aur ant s. This indicat es t hat m anufact ur ing has begun t o pr ov ide t he dr iv ing for ce for acceler at ed gr ow t h in t he I ndonesian econom y. Based on dat a for Q1/ 2007, econom ic gr ow t h w as gener ally ahead of t he aver age for 2000- 2005. I n 2006 and 2007, t he econom y has show n st r onger gr ow t h com par ed t o t he pr evious aver age.The im pr ovem ent has been dr iven pr im ar ily by r apidly expanding expor t s and t o som e ext ent consum pt ion supported by recovery in purchasing power.
Balance of Payments:
The significant im pr ovem ent in expor t s dur ing 2006 st r ongly r einfor ced t he balance of paym ent s, w hich r ecor ded a heft y sur plus. Cur r ent account r ecor ded a sur plus of ar ound US$9. 6 billion ( ar ound 2.6% GDP) , suppor t ed pr im ar ily by a st r ong expor t per for m ance ( 18. 1% ) dr iven by high w or ld com m odit y pr ices and cont inued r obust gr ow t h in t he w or ld econom y. At t he sam e t im e, im por t gr ow t h declined ( 5.3% ) due t o slow r ecover y in dom estic demand.
The capit al and financial account also ex pect ed t o have a cont inued sur plus, suppor t ed by posit ive m ar k et per cept ions, br inging capit al inflow s t o t he count r y in t he for m of dir ect ( FDI net inflow s US$7.5 billion) and por t folio investments (net inflows US$5.7 billion).
The subst ant ial balance of paym ent s sur plus enabled t he gover nm ent t o m ove for w ar d w it h ear ly r epay m ent of USD7.6 billion ow ed t o t he I MF. Even aft er t he ear ly r epaym ent , int er nat ional r eser v es w er e m aint ained at an acceptable level ar ound US$42.6 billion ( 5 m ont h of im por t s plus debt repayment) by the end of 2006.
Banking Performance:
The nat ional banking indust r y has achiev ed a gr adual m ar k ed im pr ovem ent over t he last t hr ee year s. Quant it at ively, t her e has been a significant upsw ing acr oss var ious financial per for m ance indicat or s and banking indust r y act ivit y. Bank ing sect or w as able t o dem onst r at e posit iv e per for m ance am idst econom ic agent s pessim ism t ow ar ds t he econom y. Ent er ing 2006, det er ior at ion in pur chasing pow er caused by fuel pr ice hikes in Oct ober 2005 and a slum p in business act ivit y due t o higher pr oduct ion cost s w er e addr essed by banking t hr ough caut ious disbur sem ent of cr edit . Banking cr edit disbur sem ent j ust began t o acceler at e post Sept em ber , w hich lead t o credit growth realization below actual credit growth in 2005.
Notwithstanding, ot her banking per for m ance indicat or s such as non-per for m ing loans ( NPL) , banking capit al, pr ofit abilit y and banking liquidit y gener ally im pr oved. Gr oss and net NPL bot h im pr ov ed in t er m s of lev el and r at io of t ot al cr edit in line w it h t he com plet ion of cr edit r est r uct ur ing by sever al st at e- ow ned bank s. Consequent ly, banking capit al r em ained m aint ained at a level deem ed m or e t han adequat e, as r eflect ed by t he Capit al Adequacy Rat io ( CAR) w hich w as m aint ained at t he r elat ively high level of of 20.5% in December 2006.
I n t he fir st quar t er of 2007, over all per for m ance point s t o st r onger gr ow t h, r eflect ed in t he expansion in cr edit , asset s and capit al. Dur ing Mar ch, cr edit expanded by Rp 16.7 t r illion t o Rp 843 t r illion, cont r ibut ing t o an im pr ovem ent in t he LDR fr om 6.47% in Decem ber 2006 t o 65.3% . .NPLs eased t o 6.6% ( gr oss) and 3.1% ( net ) in Mar ch 2007. Wit h t his expansion in lending, t ot al asset s m ount ed by Rp 11.5 t r illion ( m - t - m ) t o Rp 1,705 t r illion. The capit al adequacy r at io ( CAR) also r em ained st able at 20.7% . The cr edit expansion had positive impact on bank profitability. Net interest income (NII) im pr oved slight ly t o Rp 7.7 t r illion , w hile r et ur n on asset s ( ROA) held st eady at 2.7%.
Monetary Policy Direction:
Looking for w ar d, fr om t he m onet ar y policy side, t he im plem ent at ion of inflat ion t ar get ing fr am ew or k ( I TF) , w it hin t he w ider st r uct ur e of m acr oeconom ic policy, is a st r at egic st ep t hat w ill cont inually be t ak en by Bank I ndonesia t o m aint ain m ar ket confidence on m acr oeconom ic st abilit y and overall financial system stability.
Commitment in Financial Sector:
I n t er m s of financial sect or policy, w e w ill cont inue t o st r engt hen banking inst it ut ions in view of incr easing banks r ole in financing econom ic act iv it ies. The aim of strengthening banking institutions on the one side, and optimizing the bank ing int er m ediat ion funct ion on t he ot her ar e not t w o separ able issues. Only t hr ough st r ong banking, w hich is able t o execut e it s int er m ediar y r ole pr oper ly, w e can achieve financial syst em st abilit y and ensure the usefulness of banking to the general public.
Aw ar e of t he im por t ance of t he bank s' gr eat er r oles in financing for t he business w or ld, Bank I ndonesia has r ecent ly ( 30 Mar ch 2007) est ablished som e kind of policy r elaxat ion, by am ending t he pr ovision of t he Evaluation
of t h e Qu a lit y of Com m e r cia l Ba n k s' Asse t s. Fur t her , adj ust m ent of t he
r egulat ion is also follow ed by explanat ion of ot her ar r angem ent s t o avoid negat ive per cept ion in applying t he r egulat ions, for exam ple t he m iss-perception of textile product as a sun- set industry.
I n a m or e gener al level, banking policy w ill be guided t o t he pr inciples t hat have been announced in the beginning of the year:
To be m or e act ive in funct ioning as a cat alyst in t he pr ocess of incr easing bank intermediation function towards the real sector.
To r eor ganise t he nat ional banking t hr ough t he r evit alisat ion of exist ing banks and their role, especially state- owned banks.
To facilitate the merger process between banks. To facilitate a smooth banking intermediary function.
To pr ovide guidance t o for eign banks t o cont r ibut e m or e opt im ally t o t he development of the Indonesian economy.
To m or e pr oact iv ely develop t he financial m ar ket as w ell as financial instruments.
To accelerate the expansion of Indonesian Sharia banking.
To r edir ect t he r ole, funct ion and oper at ional design of r ur al banks t o serve the common people, particularly those in informal sectors.
I n addit ion, Bank I ndonesia acknow ledges t he im por t ance of bolst er ing t he capit al m ar ket developm ent t o enhance t he r ole of financial sect or t o finance m edium and long- t er m econom ic act ivit ies. To t his end, som e policies t o expand and deepen t he dom est ic financial sect or --suppor t ed by secur e and liquid capit al m ar ket -- w ill be inst it ut ed w it hout delay. This r equir es a coor dinat ed and collabor at iv e effor t involving Bank I ndonesia, t he gover nm ent , banking and capit al m ar k et , as w ell as non- bank financial institutions.
Question and Answer
1 . Q: My specific quest ions r elat ed t o t he oper at ion of BI r at e and t he plan
understanding on day t o day det ails of how t his is gonna oper at e. My under st anding r ight now is t hat t her e is a bit dilem m a faced by t he Cent r al Bank w it h t he BI r at e and cur r ent oper at ion because of so m uch excess liquidit y in t he banking syst em . Act ually, w hat w e had seen is that BI s auction had huge subscr ipt ion and t he sam e t im e bank also park m oney on t he over night FASBI . So, t her e is a lot of liquidit y that trap at the Bank Indonesia. Of Course Bank Indonesia would like the money to go t he econom y. Bank I ndonesia has t o keep a low er inflat ion t o encour age liquidit y t o finance t he r eal econom y t o st im ulat e long r un gr ow t h, but at t he sam e t im e, BI need t o keep it high enough t o BI s goal of r upiah stability and also to check on the inflation.
A: Bank I ndonesia has been pr epar ing and evaluat ing t he lat est
developm ent on t hese issues on daily basis. Wit h r egar d t o t he m onet ar y policy im plem ent at ion, Bank I ndonesia w ill st ick t o t he im plem ent at ion of inflat ion t ar get ing fr am ew or k ( I TF) of w hich w it hin w ide st r uct ur e of m acr o econom ic policy. We believe t he im plem ent at ion of I TF is a st r at egic st ep t hat w ill m aint ain m ar ket confident on m acr o econom ic st abilit y and over all financial st abilit y. You cor r ect ly point ed out t hat t her e is t he ex cess liquidit y and so far Bank I ndonesia w ill t ak e int o consider at ion going for w ar d bot h on demand and supply side. One w ay t o deal w it h t he supply side is t o encourage banks t o incr ease por t folio in t er m of t he lending. On supply side, w e hopefully can expect t o expand t he capacit y of t he econom y and lat er on will cer t ainly m it igat e excess liquidity in the market.
Fr om t he w ay Bank I ndonesia r un t he m onet ar y policy on t he BI s r at e, w e have been ev aluat ing and m onit or ing m ar ket ver y closely and w e believe t hat t he cur r ent lev el of int er est r at e is suit able t o achieve t he inflat ion t ar get w hich is m ent ioned earlier 6± 1% in 2007. And t he same t im e, it could facilit at e t he r eal sect or bot h in supply side and dem and side of the economy.
Going for w ar d, w e see t hat t her e ar e pot ent ial r isks on t he supply side, but it is boost ed by t he r elax ing in som e w ay of banking r egulat ions and cr edit issues w it hout com pr om ising t he bank r isk m anagem ent . Certainly w e expect st abilit y in financial m ar ket and inflat ion target as a w hole can be achieved.
2. Q: I w ould like t o ask about I ndonesia bor r ow ing pr ogr am for t he com ing
5 year s. How do you see t he com posit ion of t he gov er nm ent bor r ow ing in t er m of dist r ibut ion bet w een dom est ic m ar ket and for eign m ar ket ? What w ould be t he dist r ibut ion of for eign and dom est ic in t er m of per cent age of t he t ot al? What is t he im plicat ion of t he dist r ibut ion t o t he gover nm ent bor r ow ing in global bonds market? Would it be m uch change fr om recent pattern or you can see more or less frequent issuance.
A: We have int er nally published t he m edium t er m st r at egy t hat include
financing strategy and structure. In meeting the financing needs there are some principles that we have been discussing internally.
a. We m aint ain cer t ain pr opor t ion of net issuance in m edium t er m . Cur r ent ly, w e ar e t hinking about 1% net issuance of GDP. That is becom ing t o t he st andar d of m edium t er m pr oj ect ion for net issuance per year.
b. We w ould like t o focus our pr ior it y on Rupiah debt w hile w e ar e fr equent ly going t o int er nat ional m ar ket t o benchm ar k or t o engage in the dynamic of international capital global market.
c. We w ill diver sify our issuance. Last year w e int r oduced som e new issuances in the form of retail and short term and medium term bonds. We ar e now in t he pr ocess of discussing w it h t he par liam ent on the SUKUK and SYARI AH bonds and also t o diver sify t he gov er nm ent por t folio. Basically t he goal is t o diver sify t he gover nm ent bond issuance in t er m of m at ur it y, t enor , and cur r ency denom inat ion. The m ain obj ect ive is t o r educe cost s and r isks in issuing bonds. Besides that t he aim is t o m eet t he need for budget financing and for r efinancing of bond m at ur ed t o get a lengt hen m at ur it y. But , m or e importantly is t o pr ovide alt er nat ives t o invest m ent por t folio by providing more active and liquid secondary market.
3. Q: I n m y opinion cur r ent ly r upiah exper ienced w eakness r elat ively against
r egional cur r ency. On t he ot her side for eign holding of gover nm ent bond is quit e high given t he at t r act ive yield. I j ust w ant t o know The Cent r al Bank t hought , w het her r educing int er est r at e is one w ay t o ease fut ur e capit al inflow . I n our view it could lim it fut ur e volat ilit y on t he cur r ency given that you have strong current account.
A: We fully recognized the hot money that coming in to the country within
t he fr am ew or k of free for eign exchange sy st em . We believe t hat t he w ay of Bank I ndonesia r un m onet ar y policy im plem ent at ion has been v er y successful if w e see t he t r end of inflat ion t hat is on t he declining t r end. We believe t he inflat ion t ar get w ill be r eached as st at ed of 6± 1% for t his year . Wit h r egar d t o t he capit al inflow s, y ou cor r ect ly point ed out t hat hot m oney cam e in pot ent ially could r everse som et im e in t he fut ur e. But w e believe by m aint aining m onet ar y st abilit y and financial st abilit y, less likely a big r ever sal w ill occur pr ov ided t hat t he m onet ar y st abilit y as w ell as financial st abilit y can be m aint ained. Bank I ndonesia highly com m it t ed t o guar d t he inflat ion within t he t ar get for t his year . As I alr eady explained earlier, with t he full suppor t of t he gover nm ent policy t o im pr ove t he econom ic capacit y and Bank I ndonesia policy t o m anage liquidit y syst em , I m sur e t his w ill boost a m or e confidence for m onet ar y and financial stability.
4. Q: What do y ou see t hat has been t he m ain r isk t o t he inflat ion out look for t his y ear and next year in par t icular ly if you w ant t o m anage t he administered and monitored prices?
Basically, w e have been ver y happy w it h t he outlook of inflat ion at t his m om ent . The lat est inflat ion num ber w hich w as odd because of volat ilit y of the government administered prices, but we have been able to manage it par t icular ly the pr ice of r ice. We also w ould like t o m aint ain t he CPO pr ice, w hich also incr eased r ecent ly. I t hink at t his m om ent t he m ain r isk is t o m anage t he dem and for t hese t w o com m odit ies ( r ice and CPO) . The Government has committed t o st abilize these bot h pr ice and ot her food items that have big impact to the inflation in February and March 2007.
Additional explanation
