Investors’ Conference Call,
Investors’ Conference Call,
Investors’ Conference Call,
Investors’ Conference Call, 9
9
9
9 November
November
November 2006
November
2006
2006
2006
Bp. Hartadi A. Sarwono Bp. Hartadi A. Sarwono Bp. Hartadi A. Sarwono Bp. Hartadi A. Sarwono
I will start the discussion with some background behind our latest monetary policy, and then I will kindly invite Anggito Abimanyu of Ministry of Finance to update you with the latest fiscal policy and also Mahendra Siregar of Coordinating Ministry of Economic Affairs with the latest development on our efforts to improve investment climate in Indonesia.
Following the latest decision by BI’s board meeting in November 7 to cut the benchmark policy rate by 50 bps to 10.25%, the foundation for a more sustainable economic recovery appears to be more concrete. During the year, the policy rate reduction was the sixth, resulting a 250 bps in total. It should be noted here, that the loosening of monetary policy has been done in an environment of relatively tight monetary policy abroad. It is therefore an encouraging development that market reaction has been so far indicating a positive manner. In view of the latest figure of inflation, we believe that the impact of the fuel price hikes in 2005 has been contained and monetary policy has successfully mitigated the second-round effects on public inflation expectations.
Based on our assessment, the economy is expected to reach a better than expected growth in the 3rd quarter this year around 5.4%, an improvement from around 5.2 in the 2nd
quarter and 4.7% in the 1st
quarter. This improvement has been driven by continued expansion in net exports and consumption. BI’s latest surveys confirmed the trend, where growing optimism has been seen among producers and consumers. No significant improvement, however, has been observed in investment outside the construction sector. Initial macroeconomic indicators for Q4/2006 also pointed to a more rising economic growth, and accordingly we expect the overall GDP growth for 2006 to be around 5.5%.
Higher than expected exports clearly shaped the balance of payments. During the first three quarter of 2006 current account recorded a surplus of around US$6.5 billion, supported primarily by strong export performance of around US$74 billion, driven by high world commodity prices and continued robust growth in the world economy. The capital and financial account also recorded a continued surplus, supported by positive market perceptions, bringing capital inflows of around US$28.7 billion in the form of direct and portfolio investments. These factors have in turn strengthened Indonesia's international reserves to about US$42.4 billion at the end of 3rd quarter. This encouraging development has enabled us to repay all the remaining loan from the IMF in mid October, equivalent to US$3.2 billion.
US$, representing a 5.5% appreciation annually. Besides balance of payment, the key to the exchange rate stability was the improvement in overall macroeconomic indicators, the attractive yields on Rupiah placements, subdued risks and reduced pressure from upward movement in global interest rates.
Inflation remained subdued with a downward trend. Headline CPI inflation slightly increased in September (0.38%) and October (0.86%) due to religious festivities of Ramadhan and Iedul Fitri. However, we see a sharp plunge in October year on year inflation to 6.29% as the statistical impact from 2005’s steep hike in fuel prices dissipates. The downward inflationary trend benefited not only from macroeconomic stability and restrained domestic demand, but also the minimum impact from hikes in administered prices and low volatile foods inflation, while pressure from external factors and the output gap remained minimal. We expect inflation will reach below 7% by the end of this year.
The intermediary function of banking sector, despite hampered performance in the first semester this year, showed major improvement in the last 3 months as the growth of new loan began to catch up. Credit expansion is projected to reach around 11-13% by the end of this year. Accompanying this latest progress was improvement in credit risk, with the non-performing loans (NPLs) ratio easing to less than 5.0% (net). Falling interest rates have also stirred renewed price in the capital market, reflected in the new record of Jakarta Composite Index to 1,646 and drop in Government Securities yield to less than 11%.
Nevertheless, we are mindful of some economic concerns calling for vigilance in the months ahead. Expansion in production capacity is reportedly moving slowly, despite some improvement. As a result, the overall supply side in the economy remains below the desired level. At the same time, there are indications of a downward trend in world commodity prices and a mounting trend in consumer goods imports that could affect Indonesia's balance of payments. In regard to financing, reductions in bank lending rates in response to the lower BI Rate are customarily marked by a time lag and related to resolution of NPLs and internal processes at individual banks.
Some indications also point to initial inflationary pressure in 2007. Reflecting this is core inflation, the persistent component of CPI inflation that remains high in the absence of significant decline from the historical post-crisis level. The predicted source of inflation pressure is domestic demand inadequately balanced by expansion in supply, even though the overall economy has entered the expansion phase.
helping hand. It is hard to imagine Indonesia not benefiting from the rising global appetite for commodities especially since the country is rich in primary resources. Our recent economic indicator showed that the economy has been cushioned by a combination of healthy exports and a pickup in agricultural output. The latter factor is critical as the agriculture sector employs nearly 45% of the official labor force.
The overall balance of payments for 2007 is predicted to remain surplus, thus we expect the exchange reserves to reach around US$47 billion, more than enough to cover 5.5 month of imports and short term debt repayments.
Inflation is expected to remain under control mainly because Indonesia’s economy is still operating below its potential. Inflation for 2007 is expected to be around 5%-7% targeted range.
The easing stance of monetary policy was taken after in-depth discussion and evaluation of those macroeconomic outlooks, following careful examination of findings from the latest surveys and the outlook for monetary conditions in Indonesia and worldwide. Ahead, in view of the downside risks, we also comprehend the need for more measured, cautious operation of monetary policy to maintain macroeconomic stability in the medium and long-term and consolidate the momentum for sustainable economic recovery
Easing inflation, stabilizing exchange rate and finally the normalization of interest rate will remain a key driver behind Indonesia’s economic recovery. It should be noted, however, that the normalization in the interest rate structure alone may not be enough to lift an economy out of the pessimism. This clearly suggests that stronger efforts are needed to improve the investment climate. By that remark, I will now turn the discussion to Dr Abimanyu of Ministry of Finance.
Bp. Anggito Abim Bp. Anggito Abim Bp. Anggito Abim Bp. Anggito Abimaaaannnyunyuyu yu
The budget realization up to Oct 30th
, the figures is very much on track, and we believe that the overall deficit in 2006 will reach below 1,3% of GDP. We are optimistic about the achievement both in the revenue side and expenditure. We should not be worry about the financing needs to fulfill the deficit.
In 2007 Budget, we are aiming of deficit to be around 1,1% of GDP. It still on the downward trend, in term of deficit, and we are also targeting projection of debt to GDP in 2007 of around 38% – 39%. The current year, this figure will be around 41%. So in term of fiscal risk and the trend on deficit and debt burden, we are very much on track.
Regarding incentive for investment, we are now also in the stage of finalizing the tax incentive for new investment. The draft has already completed and now waiting for final approval.
The third element is within the government debt. This year we have been able to complete domestic issuance with the net amount of US$4 billion. External debt is around –US$2 billion. So we are able to maintain the downward trend of government debt of around 41%.
Fourth element is fiscal decentralization. We have just issue Ministry of Finance Decree regarding Capping the Consolidated Deficit for 2007. The MoF decide to cap the total of consolidated deficit for 2007 to around 1,6%. This will have an impact on the ability to manage the macro stability. So we will not allow region to issue or propose deficit higher then the central government cap.
Bp. Mahendra Siregar Bp. Mahendra Siregar Bp. Mahendra Siregar Bp. Mahendra Siregar
There are 3 main objectives/rationale behind the last infrastructure summit: 1. To present the regulatory reform that has been achieved in the last 1,5
year in the infrastructure sectors covering energy and power, road and toll road, water and sanitation, transportation and telecommunication. We have completed around 55 new regulations altogether in all of these sectors.
2. To present model project in various sectors. We presented 10 model projects, 2 in power plant, 2 in toll road, 2 in sea port and ferry terminal, 3 in water supply project and 1 in telecommunication project that will provide 30.000 kilometer of fiber optic network nationally. The 10 model projects covers total of US$4,5 billion in value, but behind this 10 model project there are 101 projects which covered in total US$12 billion. So in total we presented 111 model projects with the value of US$16,5 billion. 3. To attract or maintain the competitiveness and attention of investor to
participate in the public private partnership project in Indonesia. The message is very clear that we are need investor partnership in developing this project. In every infrastructure summit that we have conducted, we are able to attract/invite hundreds of potential investor to discuss about the detail project in every sector.
Q&A Q&A Q&A Q&A
Stephen Tarran Stephen Tarran Stephen Tarran Stephen Tarran Q:
Q: Q: Q:
Regarding the outlook for oil price, what is the impact on inflation and how sensitive to the budget forecast?
Har Har Har
Hartadi A. Sarwonotadi A. Sarwonotadi A. Sarwonotadi A. Sarwono
The impact of the declining global oil price will ease the inflationary pressure and also declining the need to import oil for domestic consumption. The lower import consumption will also reduce pressure on the exchange rate
Anggito Abimany Anggito Abimany Anggito Abimany Anggito Abimanyuuuu
With the current oil price and economic condition, the impact of oil price to the budget is minimal; in fact it is nearly zero. Any increase or decrease in the global oil price will not have significant impact to the budget.
Q: Q: Q: Q:
Is there a level of oil price that will have a significant impact to budget?
A: A: A: A:
Anggito Abimanyu Anggito Abimanyu Anggito Abimanyu Anggito Abimanyu
