chapter 4 inflation and the exchange rate · demand. for the first three quarters of 2018, non-oil...

ECONOMIC REPORT ON INDONESIA 2018

CHAPTER 4

During a period of heightened global uncertainty in 2018, pressure on rupiah remained manageable. Anticipative monetary policy responses by Bank Indonesia and close coordination with the Government and other authorities, have contributed to this outcome. These policy responses together with structural improvements in inflation structure, have been able to keep inflation in 2018 low and stable within the 3.5±1% target range.

Inflation and the Exchange Rate

CHAPTER 4 | ECONOMIC REPORT ON INDONESIA 201852 |

The heightened global uncertainties that put pressure on the Indonesia balance of payments (BoP) also strongly influenced rupiah exchange

rate movement in 2018. This uncertainty was triggered by a series of increases in the Federal Funds Rate (FFR) and uncertainty on global financial markets. These conditions led to a lower foreign capital inflows in emerging economies, including Indonesia. As a result, until October 2018 the rupiah came under downward pressure, which peaked in July. Rupiah depreciation was in line with the weakening of most emerging market currencies, as global uncertainty escalated.

Bank Indonesia took anticipative measures to maintain macroeconomic stability, focusing on rupiah stability. As presented in Chapter 5, Bank Indonesia took preemptive, front-loading and ahead-of-the-curve monetary policy to maintain the attractiveness of Indonesian financial assets and keep current account deficit at a sound level. Over the course of 2018, the Bank Indonesia 7-Day (Reverse) Repo Rate (BI7DRR), Indonesia’s policy rate, was raised by 175 basis points. Indonesia sought to maintain exchange rate stability aligned with fundamentals, without interfering with market mechanisms. Added support for the exchange rate stability also came from initiatives on financial market deepening. This included the introduction of domestic non-deliverable forward (DNDF) transactions on 1 November 2018, which indirectly influenced rupiah movement and kept the currency stable. Exchange rate policy was also reinforced by measures to ensure adequate liquidity on the domestic forex market and thus minimize further risks to rupiah. Furthermore, Bank Indonesia worked consistently to strengthen coordination with the Government and relevant authorities, and provided support for a series of government and Financial Services Authority (OJK) policies designed to contain the current account deficit by boosting exports and curbing imports.

Bank Indonesia’s policy responses throughout the year have contributed to rupiah stability during the fourth quarter of 2018. Foreign capital inflows resumed in this quarter, drawn by the continued attractiveness of the interest rate differential and the stable outlook for the domestic economy. Imports also started to slow due to

the impact of economic adjustments on the exchange rate. These developments have contributed to a balance of payments surplus in the fourth quarter of 2018 and ultimately prompted renewed appreciation of the rupiah. Over the course of 2018, the rupiah weakened by an average of 6.05% versus 2017, less than the depreciation sustained in other currencies, and also with less volatility.

Amid pressure on the rupiah, inflation in 2018 remained low and stable within the 3.5±1% target range. At the end of 2018, the consumer price index (CPI) arrived at 3.13% year-on-year (yoy), remained within the target range for the fourth consecutive year. Cyclical factors – such as falling global food prices and contained demand – also reduced inflationary pressure (Diagram 4.1). But structural improvements in inflation also helped to dampen inflationary pressure. These structural improvements included a consistent monetary policy, more competitive market structures, more seamless goods distribution, as well as more efficient logistics. Closer coordination between the central and regional governments also contributed to the improvement. These structural-level changes influenced inflation behavior: inflation expectations were lower; second-round effects of increase in volatile food (VF) and administered prices (AP) on inflation diminished gradually; and the impact of exchange rate depreciation on inflation was also reduced.

4.1. Pressure on Exchange Rate Remained Contained

In 2018, pressure on the rupiah exchange rate was triggered to a large extent by escalating global uncertainties due to increases in the FFR and heightened uncertainty on global financial markets. This resulted in global appreciation of the US dollar, as seen in rising dollar index (DXY) to an average of 95.5 in August 2018 from 93.4 in December 2017. These adverse developments have led to increased risk-averse behavior with regard to capital flows to emerging markets, reflected by a rise in the volatility index (VIX) (Chart 4.1).1 Composite indexes for emerging market risk premium, such as the J.P. Morgan Emerging Market Bond Index Plus (JP EMBI+),

1 The VIX measures volatility expectations among market actors trading in S&P 500 stocks.

Chapter 4Inflation and the Exchange Rate

ECONOMIC REPORT ON INDONESIA 2018 | CHAPTER 4 | 53

and credit default swaps (CDS) for emerging markets, including Indonesia CDS (Chart 4.2), also went up. As a result, foreign capital inflows into emerging economies fell significantly during 2018. Data from the Institute of International Finance shows foreign capital flows to emerging markets plunged to USD8 trillion in 2018 from USD102 trillion in 2017.

Pressure on the rupiah exchange rate was also driven by a decline in Indonesia’s net exports in 2018. High demand for foreign currency resulted from a surge in imports for the first three quarters of 2018 driven by solid domestic demand. For the first three quarters of 2018, non-oil gas imports grew 22.5% on average, well above the 13.9% growth in the previous year. However, supply of foreign currency from exports declined in the second half of 2018,

due to weakening global economic growth and falling commodity prices. In addition, non-oil and gas exports grew by 4.0% in the second half of 2018, well below the 16.7% growth in the full year 2017.

These global and domestic developments strengthened net forex demand and put downward pressure on the rupiah from February to the end of October 2018. During this period, the rupiah depreciated 12.5%, reached the lowest level at IDR15,235 to the US dollar. Rupiah volatility in this period also climbed to 8.1% from 7.0% recorded in January 2018.

From February to the end of October 2018, pressure on the rupiah was mainly triggered by rising expectations of faster pace of FFR hike. These expectations were fueled,

Source: Bloomberg

Grafik 4.1. CDS dan VIX

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Chart 4.1. VIX and DXY

Gambar 5.1. Lorem Ipsum

BANK INDONESIA POLICY:1. Taking a consistency of monetary policy with the inflation target2. Maintaining the stability of the exchange rate based on its fundamental value3. Strengthening the effectiveness of monetary policy transmission and liquidity management5. Taking further steps to deepen financial markets6. Strengthening the inflation control and boosting the real sector from the supply side

4KGOVERNMENT POLICY

1. Affordability price2. Availability of Supply3. Seamless distribution4. Effective communication

CPI 3.13%

3.5+1%-

Core 3.07%

Coordination with The Government (Central and Regional)through the Inflation Controlling Team (TPI)

and their regional counterparts (TPID)

Minimum Administered Price Policy:• The land transport fares and cigarettes were decreased• Limited impact of increasing word oil prices through non-subsidized fuel oil• The impact of the 2017 increase in electricity inflation that already passed (base effect)

External Factor:• Lower global food commodity prices• Iron, steel, gold inflation getting slow• The rise in oil and cotton inflation• Exchange rate depreciation was increased

Domestic Factor:• Demand pressure could be responded by the production side• Anchored inflation expectations were in the inflation target• Low exchange rate pass-through (ERPT) to inflation

Favorable Supply Conditions:• Commodities supply from domestic and abroad • Lower global food commodity prices• Distribution monitoring and supervision

AP3.36%

VF3.39%

Diagram 4.1. Determinants of Inflations in 2018

Grafik 4.2. CDS Indonesia dan Peer

Source: Bloomberg

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2017 20181 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12

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Chart 4.2. Indonesia’s Credit Default Swaps (CDS) and Other Developing Countries


in part, by better-than-expected non-farm payroll data for paid workers in the US labor market. In addition, FFR hike expectations were also triggered by waning uncertainty over US fiscal policy after US Congress approved an additional fiscal stimulus, in the form of tax cuts, mainly for US corporations, and elimination of the US debt ceiling.

Pressure on the rupiah also came from the escalating trade tensions between the US and China, which prompted higher risk premiums in emerging markets. was China took retaliatory action by imposing tariffs on 106 products imported from the US after US decision to impose a 25% tariff on imports from China in April 2018.

Besides China, trade tensions also escalated between the US and its other trading partners. The US announced plans to double the import tariffs on steel and aluminum, which has major consequences for the countries exporting those products, particularly Turkey. The lira exchange rate weakened dramatically, and on 15 August 2018 – depreciated by as much as 7.02%. These conditions ultimately led to higher risk premiums and contributed directly to exchange rate depreciation in emerging markets, including Indonesia.

Geopolitical risks triggered higher risk premiums in emerging marketand also put pressure on the rupiah between February and October 2018. Geopolitical issues included those related to escalating tensions on the Korean peninsula and in the Middle East, the dynamics of the Brexit negotiations between the United Kingdom and the European Union, and economic problems in Italy. The crises in Turkey and Argentina also led to heightened perceptions of risk in other emerging economies.

Rising geopolitical tensions in the Middle East, and other factors, also prompted oil price hike and higher inflation expectations in the US. In early 2018, world oil prices rose in response to production cuts by the Organization of Petroleum Exporting Countries (OPEC) and some non-OPEC countries, and production outages in Venezuela and Libya. Further upward pressure on oil prices came in the second and third quarters of 2018, triggered mainly by concerns over supply from Iran due to the imposition of US sanctions.

Pressure on the rupiah eased in November and December 2018 following the apropriate monetary policy response to stabilize the rupiah, as presented in Chapter 5 on Monetary Policy. The preemptive, front-loading and

ahead-of-the-curve monetary policy response bolstered the attractiveness of domestic financial assets and invited foreign capital inflows. Another factor influencing foreign capital inflows was the robust outlook for the Indonesian economy. These developments led to 4.7% appreciation in the rupiah in November and December 2018.

The upward trend in the rupiah in November and December 2018 was also prompted by easing global uncertainties. Positive global developments during this period included the outcome of the midterm elections in the US, which was in line with market expectation. Furthermore, the policies of the US President are expected to remain aligned with the agendas of the elected parties in both the House of Representatives and the Senate. In addition, the easing of global uncertainty was also due to an easing in US trade tensions with China in December 2018 following an agreement that neither party would impose additional tariffs for 90 days. The less hawkish policy signaled by the Fed in December 2018 also reduced investor interest in the US dollar and prompted renewed flows of funds to emerging markets. This also contributed to rupiah appreciation.

Amid these dynamics, the rupiah recorded average depreciation of 6.05% in 2018, at IDR14,246 to the US dollar from the 2017 of IDR13,385. Point to point (end-2018 versus end-2017), the rupiah weakened 5.65% to close 2018 at a level of IDR14,380 to the US dollar. However, the rupiah depreciated less than other currencies, including the Indian rupee, South African rand, Brazilian real and Turkish lira (Chart 4.3). In 2018, rupiah volatility rose to 8.5% from 3.0% in 2017. Rupiah volatility was also lower compared to that of other currencies, with

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Grafik 4.3. Perubahan Nilai Tukar Rata-Rata Rupiah dan Peer

EOP Average

Percent

Source: Reuters and Bloomberg, calculated

Chart 4.3. Exchange Rate Changes


the Turkish lira recording the highest volatility at 30.4% (Chart 4.4).

4.2. Renewed Improvement in the Forex Market

The dynamics of the rupiah were reflected in net demand for forex on the domestic market. Forex demand was recorded mainly in the second and third quarters of 2018, spurred by outflows of capital from domestic assets. In the second and third quarters, the forex market recorded net demand of USD6.6 billion and USD4.4 billion, which resulted in downward pressure on the rupiah. Nevertheless, the forex market improved in the fourth quarter of 2018 and posted a net supply, as foreign capital flowed back to Indonesia. In response to these developments, the forex market in 2018 recorded a net demand of USD13.2 billion, in contrast to the USD14.5 billion net supply in 2017.

Analyzing by transacting party, the pressure on the domestic forex market was a result of reduced net supply from non-residents. The second quarter of 2018 saw a period of net demand from non-residents that reached USD3.9 billion. This came in response to heightened global uncertainty that prompted non-residents to unwind their assets from emerging markets. During this period, non-residents also demand foreign currency for. dividends and coupons payment. In the fourth quarter of 2018, net forex supply from non-residents resumed to USD4.5 billion, the highest level recorded for 2018. For the full year 2018, net forex supply from non-residents came

to USD2.9 billion, below the USD16.7 billion recorded in 2017.

The contraction in non-resident supply was seen in reduced inflows in financial instruments. In 2018, inflows into financial instruments was USD248 million, down from USD9.7 billion in 2017 (Chart 4.5). Inflows peaked at USD3.0 billion in the fourth quarter of 2018, in line with the non-resident forex selling trends.

Most capital inflows went to government debt securities, which accounted for USD4.1 billion dollars, driven by attractive yields. Non-resident holdings of government bonds picked up by USD4.1 billion, while treasury bills instruments recorded an outflow of funds throughout 2018. At the same time, non-residents recorded inflows of USD62 million for placements in Bank Indonesia Certificates (SBI).

Amid declining forex supply from non-residents, forex demand from residents remained strong in 2018. Residents accounted for USD16.1 billion in net forex demand, went up significantly from the previous year’s level of USD2.1 billion. The increased forex demand from residents was caused in part by rising oil prices, particularly during the first half of 2018. In addition, forex demand for imports was also driven by robust domestic demand. The strong domestic demand kept forex demand strong during rupiah appreciation period. In November 2018, residents recorded net forex demand of USD3.5 billion.

Source: Bank Indonesia

Grafik 4.4. Volatilitas Rupiah dan Peer

TRY

ZAR

BRL

KRW

IDR

INR

THB

SGD

MYR

PHP

0 5 10 15 20 25 30 35

2017 2018

Percent

Chart 4.4. Exchange Rate Volatility

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IDR/USD (rhs)


USD billion IDR/USD

SBI SUN Stocks

Grafik 4.8. Aliran Dana Masuk SBI. SUN, SBSN, dan Saham

1 2 3 4 5 6 7 8 9 1011122016

1 2 3 4 5 6 7 8 9 1011122017

1 2 3 4 5 6 7 8 9 1011122018

Chart 4.5. Inflow of BI Certificate (SBI), Government Debt Securities (SUN), and Stocks


4.3. Efficient Forex Market Structure

Efficient forex market has contributed to contained pressure on Rupiah during heightened global uncertaintiest. Reflecting this efficiency was low bid-ask spread in rupiah spot transactions, despite a modest increase. The mean bid-ask spread in 2018 came to 7 rupiah per US dollar, little changed from the mean spread in 2017 of 5 rupiah per US dollar (Chart 4.6). The market efficiency in turn contributed to an increase in the value of spot market transactions to USD3.59 billion per day in 2018 from USD3.36 billion per day in 2017 (Chart 4.7).

Market risk was also kept under control from better hedging and liquidity ratios reported by corporates, as well as improved compliance under Bank Indonesia’s prudential principles for non-bank corporate external debt. Data for the third quarter of 2018 indicates that foreign debt owed by companies required to report prudential activity compliance accounted for 85.5% of the overall foreign debt position. At the same time, corporate also improved their mitigation of exchange rate risk (currency mismatch). Reflecting this was the increase in the hedging compliance ratio for 0-3 months to 90.2% in the third quarter of 2018, following an increase to 89.3% in the second quarter. Also in the third quarter of 2018, highs were reached by the hedging compliance ratio for 3-6 months (95.2%) and the corporate liquidity compliance ratio (88.3%).

With better compliance in Bank Indonesia’s prudential principles, transaction volume on the forex derivatives market rose in almost all types of derivative instrument. Volume of derivatives picked up mainly during June 2018, with growth went up 3.04% versus the end-May position, with non-bank corporates were the most active parties engaged in hedging. Average daily volume of forward transactions grew by 23% to USD302 million in 2018, while option transactions recorded 30% growth to USD27 million (Chart 4.8).

On the call spread option (CSO) market, daily average volume of CSO transactions climbed sevenfold to USD14 million per day in 2018 from USD2 million per day in

Grafik 4.10. Bid-Ask Spread Transaksi Spot Rupiah/Dolar

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2014 2015 2016 2017 2018

IDR/USD

Source: Bloomberg

Average 10.08

Chart 4.6. Bid-Ask Spread in US Dollar/Rupiah Spot Transactions

1 2 3 4 5 6 7 8 9 10 11 122017

1 2 3 4 5 6 7 8 9 10 11 122018

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Grafik 4.9. Perkembangan Volume Transaksi Spot

USD billion


2018 = 3.592017 = 3.36

Chart 4.7. Spot Transaction Volume

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1 2 3 4 5 6 7 8 9 10 11 122016

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Grafik 4.11. Perkembangan Volume Transaksi Derivatif

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Forward Option Cross Currency Swap

swap (rhs)

CSO

Chart 4.8. Derivative Transaction Volume


2017. This resulted in an increase in the CSO position to approximately USD1.4 billion at end-2018 from about USD309 million at end-2017.2 The significant rise in CSO transactions is explained by greater cost efficiency compared to other instruments. Average daily transaction volume for cross-currency swaps also grew by 7.9% to USD68 million. However, transaction volume in another instrument, foreign exchange swaps, fell 4% to USD1.62 billion. Taken together, derivative transactions accounted for a 36.4% share of total forex transactions in 2018.

In 2018, growth in the volume of forward transactions on the derivatives market was also supported by the domestic non-deliverable forward transaction (DNDF), an additional hedging instrument for the forex derivatives market. Starting 1 November 2018, market can participate in DNDFs, following the issuance of Bank Indonesia Regulation No. 20/10/PBI/2018 concerning Domestic Non-Deliverable Forward Transactions. Sustained activity in the DNDF market resulted in steady growth in the DNDF position to about USD637 million at end-2018. DNDF auctions held by Bank Indonesia – as part of its monetary operations – also contributed to the rising DNDF liquidity. The increasing liquidity of this instrument shows that Bank Indonesia has been successful in efforts to meet the market’s wide-ranging hedging needs.

The sound structure of the forex market was further strengthened by measures to reduce domestic demand for the US dollar. This was achieved through the use of local currency settlement (LCS) scheme by corporates, in which trading transactions with some countries are settled in local currency. After the LCS operational framework became effective, corporates made use of this ability to pay in local currencies – in this case, the Thai baht and Malaysian ringgit for settlement of trading transactions.3 This is demonstrated by growth in Thai baht and Malaysian ringgit purchasing transactions conducted through seven cross-currency dealer banks (Chart 4.9). Data on the Thai baht and Malaysian ringgit purchasing volumes in 2018 indicates that the LCS scheme is now well established as an alternative for corporates in settling trading transactions. Use of local currencies under the LCS scheme is expected to bring about a gradual reduction in use of the US dollar in export and import transactions.

2 CSO data has been adjusted to accommodate changes in 2017 numbers reported by banks.

3 On 11 December 2017, Bank Indonesia, Bank of Thailand and Bank Negara Malaysia agreed the LCS deal for local currency settlement of trading transactions. It came into effect on 2 January 2018.

4.4. Stable Low Inflation

In 2018, inflation remained at a low, subdued level within the 3.5±1% target range despite the rupiah depreciation over this period. At the end of 2018, December CPI inflation was 3.13%, marking the fourth consecutive year that inflation remained on target (Chart 4.10). Inflation was low in 2018 both in comparison to the 2017 level (3.61%) and the combined average for the preceding four years (4.59%).

The low inflation can be explained in part by global and domestic cyclical factors. Global food prices fell, helped

Grafik 4.14. Perkembangan Penggunaan THB dan MYRdalam mekanisme LCS ACCD

USD thousand

THB MYR

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Chart 4.9. Developments of THB and MYR in the Mechanism of The Local Currency Swap Cross Currency Dealer

CPI

Administered Prices

Source: BPS

Grafik 4.15. Realisasi Inflasi IHK dan Sasaran Inflasi

Percent, yoy

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1 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 101112

2015 2016 2017 2018

Volatile Food

Inflation Target RangeCore

Chart 4.10. Consumer Price Index and Its Targets


to keep domestic food prices under control. And, at home, controlled demand levels also led to steady decline in inflationary pressure. Low VF inflation and the minimal AP inflation also contributed to low overall inflation in 2018.

More importantly, however, the low inflation could not have been achieved without the structural improvements of inflation characteristics in recent years. Bank Indonesia has implemented consistent monetary policy that has anchored the inflation expectations of economic actors. This more competitive market structure is also aligned to the increasingly competitive structure of retail market competition amid rapid growth in e-commerce. Furthermore, improvements in the transparency of food pricing at the consumer level contributed to the downward trend in inflation. Information is provided by institutions such as the Strategic Foods Price Information Center.

Another structural improvement contributing to reduced inflation was the more seamless goods distribution and more efficient logistics networks. This achievement was the result of close coordination between Bank Indonesia and the central and regional governments via the Central Inflation Control Team (TPIP) and Regional Inflation Control Teams (TPID). This coordination influenced inflation behavior through the smooth supply of goods especially foods. In addition, the energy subsidies reform held since 2015 has influenced the reduction of the second-round effects of increases in AP on overall inflation.

These structural improvements has a positive effect on inflation behavior. Bank Indonesia’s consistent monetary policy successfully anchored inflation expectations to the inflation target. Bank Indonesia estimated that the contribution of forward-looking expectations in the formation of inflation has increased. This has led to a reduction in inflation persistence and in sensitivity of exchange rate pass-through to inflation. Lastly, there was steady decline in the second-round effects of increases in VF inflation and AP inflation on core and overall inflation. The reduction in second-round effects of AP inflation has also influenced by the positive effects of energy subsidy reforms in early 2015.

The positive cyclical developments and beneficial structural changes led to reduction in various components of CPI inflation in 2018. Core inflation remained low in 2018 at 3.07% . VF inflation was also low at 3.39%, below the combined three-year average for the preceding three years, while AP inflation came to 3.36%, well below the 2017 level.

Core Inflation

In 2018, the low 3.07% core inflation was attributable to several positive developments. Rising demand in 2018 in line with stronger economic growth was countered by adequate supply-side responses. Knock-on effects from rupiah depreciation on inflation were also minimal. In addition, the more solid anchored inflation expectations and minimal second-round effects of AP policy decisions also helped maintain low core inflation. As a result, core inflation in 2018 remained low, following a modest increase over the inflation recorded one year earlier (2.95%).4 Low pressure on core inflation was also reflected in monthly core inflation figures, which remained subdued and below the combined monthly average for the past four years (Chart 4.11).

Various indicators demonstrate that increases in demand were matched by supply. On one hand, demand continued upward, as shown by several demand indicators that recorded increases from the second quarter of 2018 (Chart 4.12).5 Increased demand was

4 Core inflation at rates below the historical average began in 2016 when average core inflation stood at 3.28%. See the 2017 Economic Report on Indonesia, Box 5.1 Low Core Inflation Regime, pp. 79-80.

5 The demand indicators are composite indexes formulated using the principal component analysis method with variables that include the consumer confidence index, 10-year government bond yields and broad money (M2).

Grafik 4.17. Perkembangan Inflasi Inti

2018 Historical Average 2014 -2017

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Percent, mtm

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Source: BPS, calculated

Chart 4.11. Core Inflation


also reflected in the upward movement in the demand-sensitive-to-inflation components of core inflation.6 This movement began in April 2018. On the other hand, however, supply indicators also rose, meaning that rising demand did not create excessive upward inflationary pressure.

Stable growth in demand during 2018 was also visible in core inflation of goods. Core inflation in the goods category came to 3.16%, fueled mainly by higher inflation in durable goods starting in the second quarter of 2018 (Chart 4.13). Furthermore, a modest increase took place in core inflation in non-durable goods consist of processed foods and clothing. This modest increase is explained by higher production costs associated with exchange rate depreciation, and price movements in domestic vital food commodities.

Other categories of core inflation also reflected moderate growth in demand. Core inflation in services came to 2.92%, lower than in 2017, with the reduction explained by lower inflation in telecommunications services linked to cellphone calling rates (Chart 4.14). This helped to offset price increase in services with an upward trend, such as housing sector. Increase in housing sector was due to a rising price in short-term and long-term housing rentals, and increase in wages of housing-sector workers (Chart 4.15). Furthermore, prices for short-term and

6 The demand-sensitive-to-inflation indicator consists of core non-food commodities in the CPI basket, including clothing, processed foods, beverages, cigarettes and tobacco, and housing, water, electricity, gas and fuel.

long-term housing rentals steadily climbed since second quarter of 2018 in line with growing domestic demand. Another factor that boosted services inflation in 2018 was rising inflation in wages of housing-sector workers , due to the introduction of a new formula for the provincial minimum wage and vigorous growth in the construction sector.7

Depreciation in the rupiah had only limited impact on core inflation, as demonstrated by a number of indicators. For the full year 2018, core inflation averaged 2.81%,

7 The new formula for calculating the provincial minimum wage in the formal sector, set out in Government Regulation No. 78 of 2015 concerning Wages, is reported to have driven up wages in the informal sector, including for domestic and childcare workers.

Percent, yoy Percent, yoy

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Grafik 4.18. Indikator Permintaan, Inflasi Inti BarangDurable dan Demand Sensitive To Inflation

Demand Indicators

Core Inflation ofDurable Goods

Core Inflation of NonDurable Goods

Demand Sensitive to Inflation(rhs)


Chart 4.12. Demand Pull Indicators

Contribution to Core Inflation of Goods, yoy Percent, yoy

2015 2016 2017 2018

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Grafik 4.20. Inflasi Tarif Angkutan Udara

Core of Non-Durable Goods Core of Durable Goods

Core Goods

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112

Non-Durable (rhs)

Durable (rhs)


Chart 4.13. Contribution Core Inflation of Goods

1 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 101112

2015 2016 2017 2018

Percent, yoy

Grafik 4.21. Sumbangan Inflasi Kelompok Jasa

Health Services Housing Services Telecommunications ServicesEducation Services Banking Services Other Services

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Chart 4.14. Contribution of Core Services Inflation


below the average rupiah depreciation of 6.34% (Chart 4.16).8 The effects of rupiah weakening were visible mainly at the wholesale level, as seen in the rise in the wholesale price index for imports (Chart 4.17). Wholesale price index inflation rose in line with the increases in production costs, which were also driven by price increases for oil and steel. Even so, the impact of rupiah depreciation was not fully transmitted to consumers. Inflation was lower than the rate of rupiah depreciation. Positive effect of the various structural improvements explained the limited transmission.

8 Average movement in the rupiah exchange rate in January to December 2018.

The role of inflation expectations, which were anchored within the inflation target range, was also reflected in several indicators. Inflation expectation from financial market and real sector, reflected in the consensus forecast, had eased to 3.3% by the end of 2018 from 3.6% in early 2018 (Chart 4.18). The expectation indicator of a Bank Indonesia consumer survey, also declined. The well anchored inflation expectation was closely linked to the consistency of Bank Indonesia’s monetary policy to keep inflation on target and to several structural changes as mentioned.

Wholesale PriceIndex for Imports

Core Traded Inflation (rhs)

IDR Apreciation(-)/Depreciation(+) Price Index for Imports

Grafik 4.23. Inflasi Inti Traded, Nilai Tukar, danHarga Komoditas Global


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Source: BPS, Bank Indonesia

Chart 4.16. Core Traded Inflation, Exchange Rate and Global Commodity Price

Wholesale Price Index for Imports

Grafik 4.24. Inflasi Pedagang Besar dan Inflasi Inti


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2015 2016 20182017


Wholesale PriceIndex for ImportsCore (rhs)

Core Traded (rhs)

Chart 4.17. Wholesale Inflation and Core Inflation

Grafik 4.25. Ekspektasi Inflasi 2018

2

3

4

5

6

7

8

Percent, yoy

Inflation Expectations24 Months Inflation Expectations

12 Months

Average Inflation Jan - Dec

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Range Inflation Target

Source: Bank Indonesia, Consensus Forecast

Chart 4.18. Inflation Expectations

1 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 101112

2015 2016 2017 2018

Percent, yoy

Grafik 4.22. Komponen Inflasi Jasa Perumahan

Housing Services

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1

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3

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7

8

9

10

Long TermHome Rentals

Short TermHome Rentals

Wages forHouse Worker

Wages on SectorConstruction

Workers


Chart 4.15. Component of Housing Services


Volatile Food Inflation

Various factors contributed to the significantly low VF inflation in 2018 of 3.39%, below the historical average for the past three years of 5.58% (Chart 4.19).9 The low, stable VF inflation was closely linked to improved availability of supplies from domestic and foreign sources, and improvements in food distribution. In addition, VF inflation also benefited from the inflation coordination put in place by Bank Indonesia and the Government at the central and regional government levels. This coordination succeeded in curbing the mounting pressure in VF inflation that occurred from January to March 2018, and during the national religious holiday period. An added factor in the low pressure on VF inflation was the decline in global food prices since March 2018.

VF inflation was kept in check by the steady availability of food supplies. In general, the downward correction in food prices in the aftermath of the national religious holiday were one factor that kept VF inflation low to the end of 2018. Prices of chicken and eggs in August fell back to previous levels following a sharp increase in July 2018 affected the low VF (Chart 4.20).10 Furthermore, the correction in chicken and egg prices resulted from production surplus and government coordination in production centers. Supply of vital food commodities, including shallots, chili peppers and rice, was also higher in the full year 2018 compared to 2017.

9 Average VF inflation for the January 2015 to December 2017 period.

10 The steep rise in prices of eggs and chicken in July 2018 was driven by a number of factors: (i) increased public demand spurred by national religious holidays and the implementation of non-cash food aid in the form of food packages that included eggs; (ii) increased animal feed prices in response to rising global prices for corn and rupiah depreciation; and (iii) a ban on antibiotic growth promoters, thus lengthening the time to harvest to 35 days from 30 days, and increasing the death rate of day-old chickens to 10% from 6%.

The decline in global food prices in 2018 also pushed down prices for domestic food commodities, and eased inflationary pressure on cooking oil, granulated sugar and garlic. However, the downward trend in domestic food prices was not as steep as the drop in global food prices due to rupiah depreciation (Chart 4.21).

Subdued VF inflation was also closely associated with the positive impact of Indonesia’s food stability policy, and with strong inflation policy coordination among central and regional governments. One of the policy implemented was market operations for rice. The amount of government rice stock used for the market operations reached 544,124 metric tons. This large

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Historical in the last 3 years

Grafik 4.27. Inflasi VF Bulanan

Percent, mtm

-2.5

-2.0

-1.5

-1.0

-0.5

0

0.5

1.0

1.5

2.0

2.5

3.0 2017 2018


Chart 4.19. Volatile Food Inflation

Grafik 4.29. Perkembangan Harga Daging Ayam Rasdan Telur Ayam Ras

Monthly Inflation of Purebred Chicken MeatMonthly Inflation of Purebred Chicken Egg

1 2 3 4 5 6 7 8 9 10 11 12

Percent

-10

-5

0

5

10

15

Average in the last 4 years- Purebred Chicken Meat

Average in the last 4 years- Purebred Chicken Egg

2018


Chart 4.20. Inflation of Chicken and Eggs

Grafik 4.26. Kelompok Penyumbang Inflasi VF Pada 2018

Contribution of VF

Grains FishsSpices Fruits

-6

-4

-2

0

2

4

6

8

10

12 Meats Eggs and MilkCooking Oil

Vegetables

Historical Average in last 3 years 5.58

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112

2015 2016 2017 2018

Source: BPS

Chart 4.21. Contribution of Volatile Food Inflation


volume was needed because the rice harvest was lower than expected. Rice stocks at Bulog, the national logistics agency, were maintained at 2.17 million metric tons following the market operations, supplied by imports and domestic procurement. The intensive market operations carried out by Bulog from March helped keep monthly rice inflation below the historical average seen from 2012 to 2016 (Chart 4.22).

At the national level, government policy for controlling food inflation was pursued in four ways. First, the Government introduced stronger regulation.11 Second, the central government strengthened coordination with regional governments, relevant agencies and business to discuss provision of adequate stocks, food prices and policies to control prices. Third, the Government monitored and controlled the stabilization measures for staple goods throughout Indonesia, preventing speculation. This action was taken to ensure availability of supply and stabilization of prices, and smooth distribution of staple goods. Fourth, opening discount markets in the run-up to periods of religious festivities (Table 4.1).

11 Regulation was strengthened in five areas: (i) registration certificates for distribution businesses to optimize control and distribution of staple goods; (ii) increasing available supply of food commodities; (iii) price stabilization policies involving setting maximum retail prices and special prices for the national religious festive seasons; (iv) setup and guidance for warehouses to monitor food supply and prevent hoarding; and (v) appeals to regional government to refrain from imposing restrictions on trade, thereby avoiding major price disparities between regions.

The low VF inflation during 2018 as a whole was also reflected in monthly dynamics. The monthly levels of VF inflation remained below historical averages, particularly from the halfway point in the first half of 2018 until to the end of the year, consistent with the decline in the food import price index (Chart 4.23) .12 A significant increase in VF inflation was recorded only in the first quarter of 2018, when rice prices rose as supplies were cut following a

12 The food import price index (IHIM) components are sugar, corn, soya beans, wheat, CPO, chicken, beef and cloves.

Grafik 4.33. Inflasi Beras Bulanan

2017 2018

1 2 3 4 5 6 7 8 9 10 11 12

Percent, mtm

-3

-2

-1

0

1

2

3

4

5

6

7

Historical in last 5 years


Chart 4.22. Monthly Rice Inflation

Table 4.1. Supply and Price Stabilization Policy

Commodity Supply and Price Stabilization Policy

Rice

• Minister of Trade Regulation Number 59 of 2018 about Rice Packaging Labels Inclusion Obligation. This Minister of Trade Regulation was authorized on May 25th, 2018 and went into effect three months after.• Some of the things listed on the packaging label are brand, type, broken rice, menir/groove (pounded rice fragments), rice’s fineness degree (sosoh), mix, net, packaging date, name and the address of the packaging unit importer.

Sugar• Increased supervision on the implementation of the highest retail price policy (HET) which is IDR 12,500 / kg• Regulation of sugar commodity distribution well before Religious National Holidays (HBKN)

Cooking Oil• All cooking oil producers must allocate 20% of the total national cooking oil production produced in simple packaged cooking oil in HET rate which are IDR 11,000 / l and bulk cooking oil in IDR 10,500 / l• The obligation of modern retailers to provide simple packaged cooking oil

Cow Meat• Frozen meat with HET rate (IDR 80,000 / kg) must be available as an option for consumers.• The realization of imports from the granted permits will be checked.

Chicken Meat

• Specified Special Prices of chicken meat during the Religious National Holidays (HBKN) period:1. Jakarta, Banten and West Java : IDR 31,500 for suppliers and IDR 33,000 for retailers;2. East Java and Central Java : IDR 30,000 for suppliers and IDR 31,500 for retailers;3. Other provinces amounting to IDR 32,500 for suppliers and IDR 34,000 for retailers.

Garlic• Guaranteeing the availability of garlic in the market through the distribution of imported garlic to regions.• The importer and distributor must distribute garlic at a retail price of IDR 25,000 / kg.


shift in the harvest season. In addition, some horticultural production was hit by heavy rains at the beginning of the year, which trimmed supply. VF inflationary pressure also remained well under control during the Idul Fitri and Christmas festivities, as supplies were maintained and central and regional inflation control teams worked closely together. Downwards price corrections in August and September, after the Idul Fitri festivities, were smaller than those recorded for the same period in the preceding year and the average for the preceding four years. Overall VF inflation during the religious festivities in 2018 was

lower than the historical average for the Idul Fitri period in each of the previous four years (Chart 4.24).

Administered Prices Inflation

In 2018, the low AP inflation of 3.36% was generally attributable to the minimal effects of decisions to raise government-regulated prices for goods and services (Chart 4.25). The Government raised prices for non-subsidized fuels only twice in 2018, first in July and then in October 2018.13 Other AP policy decisions announced by the Government in 2018, such as the increase in cigarette excise early in the year and fare increase during the religious festive season, had relatively little impact on overall CPI inflation.

Monthly levels for AP inflation in 2018 were low. AP inflation during the Idul Fitri religious festivities was below the historical average for the Idul Fitri period in the preceding four years, mainly due to lower inflation in intercity transport compared to previous years. Airfares in 2018 were also below historical levels. Key to this was the steep deflation in airfares following the religious festive season (Chart 4.26). The fall in airfares was also attributable to increased aviation capacity and the opening of new routes in 2018.14 The low level of AP inflation was also a result of reduced inflation in cigarette prices. Cigarette inflation reached 6.55% in 2018, below

13 In July 2018, the Government raised prices for specialty fuels: Pertamax went up IDR600/liter, Pertamax Turbo rose IDR550/liter, Pertamina Dex rose IDR400/liter and Dexlite IDR900/liter. Subsequently in October 2018, the Government again raised prices for specialty fuels: Pertamax went up IDR900/liter, Pertamax Turbo by IDR1,550/liter, Pertamina Dex by IDR1,350/liter and Dexlite by IDR1,500/liter.

14 Between 2014 and 2018, ten new airports were built, and 408 airports in flood-prone, isolated and border areas were refurbished or expanded.


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Grafik 4.31. Harga Pangan Global dan Inflasi VF

Food Import Price Index (IHIM)

VF Inflation (rhs)

1 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 101112

2015 2016 2017 2018

Source: World Bank dan BPS, calculated

Chart 4.23. Global Food Prices and VF Inflation

Grafik 4.28. Inflasi VF Periode HBKN tahun 2018

Percent, mtm

2015

2016

2014

2017

2018

2015

2016

2014

2017

2018

2015

2016

2014

2017

2018

2015

2016

2014

2017

2018

2015

2016

2014

2017

2018

t-2 t-1 (Ramadhan) t+0 (Idul Fitri) t+1 t+2

Ramadhan, Idul Fitri, Idul Adha:

2014: 29/6 - 28/7-5/10

2015: 18/6 - 17/7-24/9

2016: 6/6 - 7/7-12/9

2017: 27/5 - 25/6-1/9

2018: 15/5 - 15/6-22/8

Average 2014-2017


Chart 4.24. VF inflation during the Religious Festivities in 2018

Grafik 4.34. Sumbangan Inflasi AP

-1.0

-0.5

0

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1.0

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2.0

2.5

3.0Fuel Electricity TariffTransport Fare Cigarettes Others

Contribution of CPI Inflation

1 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 1011121 2 3 4 5 6 7 8 9 101112

2015 2016 2017 2018


Chart 4.25. Contributors of Administered Prices Inflation


the end-2017 level of 7.79%. The downward trend in cigarette inflation had been underway since 2016 and was due to lower increases in cigarette excise from 2016 to 2018, among other things.

4.5. Subdued Regional Inflation

The achievement of low national inflation in 2018 was supported by subdued inflation in some regions. In 2018, inflation in most regions came within the national inflation target range of 3.5±1% (Figure 4.1), and converged with the national inflation target (Chart 4.27).

The comfortably safe level of national inflation resulted mainly from low inflation in Sumatra and Java. In 2018, inflation in Sumatra continued on a downward trend, arriving at the end of 2018 at a level well below the historical average (Chart 4.28). Most regions in Sumatra recorded significantly low inflation at about 2%, and in North Sumatra the inflation was as low as 1.22%. Inflation in some regions of Java was relatively low at about 3%, including in Jakarta, which represents the largest share of the national inflation calculation. However, Eastern Indonesia was marked by an upward trend in inflation, particularly in Central Sulawesi, Papua, West Papua, North Kalimantan and Central Kalimantan, due to the impact of natural disasters and problems with food supply.

Subdued food inflation in some regions contributed to their low overall inflation levels. Food inflation in some regions remained below the combined average for the past three years, despite a modest rise from 2017. Sumatra was the only region to record declining food inflation in 2018; higher production of seasonings such as red chili peppers and hot chili peppers pushed down prices (Chart 4.29). North Sumatra and Aceh were in fact the two provinces with the lowest level of inflation nationwide.

Other regions recorded higher food inflation, resulting in part from increases in prices of miscellaneous seasonings, fresh meat and fish and cereal grains (Chart 4.30). Escalating prices in the miscellaneous seasonings

Gambar 5.2. Peta Perkembangan Inflasi Daerah (%yoy)


Inf ≥ 4.5% 3.5% ≤ Inf < 4.5%2.5% ≤ Inf < 3.5% Inf < 2.5%

ACEH1.8

SUMUT1.2

RIAU2.4

SUMBAR2.6 JAMBI

3

BENGKULU2.4

SUMSEL2.7

LAMPUNG2.7

BANTEN3.4

DKIJAKARTA

3.3

JABAR3.5

JATENG2.8

DIY 2.7 JATIM2.7

BALI 3.1

NTB 3.2 NTT 3.1

KALBAR3.8

BALI 3.1

KALTENG4.5

KALSEL2.6

KALTIM3.2

KALTARA5.0

SULTENG6.5 SULUT 3.8

GORONTALO 2.1

SULBAR1.8

SULSEL3.5

SULTRA2.7

MALUT4.1

MALUKU 3.3

PAPBAR 5.2

PAPUA 6.4

Figure 4.1. Map of Regional Inflation Development (%yoy)

Grafik 4.35. Inflasi Tarif Angkutan Udara

2017 2018

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1 2 3 4 5 6 7 8 9 10 11 12

Historical 2014 - 2017

Percent, ytd


Chart 4.26. Airfares Inflation


category, which includes shallots, red chili peppers and hot chili peppers, fueled inflationary pressure in some areas of Bali-Nusa Tenggara (Bali-Nusra), Sulawesi and Kalimantan (Chart 4.31). The highest inflation in miscellaneous seasonings took place in Bali, Papua, Central Kalimantan and South Kalimantan, while on the island of Sulawesi, inflation in miscellaneous seasonings occurred mainly in Southeast Sulawesi and Central Sulawesi. Meanwhile, the highest increases in fresh fish prices occurred in Papua, North Sulawesi and West Papua due to difficulties in supply.

The subdued regional inflation was also a response to low administrative prices inflation in many regions. Lower

levels of AP inflationary pressure was most visible in the Sumatra, Java and Kalimantan regions, due to reductions in electricity billing rates. The fall in aviation inflation is explained by increases in the capacity of regional airports and an expansion of aircraft fleet in response to high demand. In Java, downward price correction in airfares took place mainly in Central Java, East Java and Jakarta, all of which contribute significantly to national inflation. Significant decline in aviation inflation also occurred in other provinces: South Kalimantan, West Nusa Tenggara, West Sumatra, South Sumatra and Bengkulu. In Bengkulu, the fall in aviation inflation contributed significantly to lower overall inflation, to the extent of lowest in the last ten years.

However, inflation ran above the national average in other regions, including Central Sulawesi, Papua and West Papua. The natural disaster in Central Sulawesi led to rising inflation in almost all categories of commodities. In West Papua and Papua, inflation mounted in response to increases in airfares and in the prices of miscellaneous food seasonings, chicken and fish. The 2018 airfare increases in these two regions were higher than the combined average increase for fares over the preceding three years, due to high demand. The strong preference for eating fresh marine fish and adverse weather conditions led to shortages of fresh fish, which frequently culminated in higher prices. In addition, supply of fresh fish in the Maluku-Papua (Mapua) region was also hampered by shrinking capacity of fishing vessels. High inflation was also recorded in Central Kalimantan

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2013 2014 2015 2016 2017 2018

Grafik 4.37. Sebaran Inflasi Provinsi


Province Inflation Above National Inflation

Province Inflation Below National Inflation

Inflation Target

National CPI

Percent, yoy

Chart 4.27. Ditsribution of Province Inflation

Grafik 4.38. Inflasi Regional


Historical 2015-2017 2018

Percent, yoy

0

1

2

3

4

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6

Sumatera Jawa Bali-Nusra Kalimantan Sulawesi Maluku-Papua

Chart 4.28. Regional Inflation

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15 Garlic Bird’s Eye Chilli OthersRed Chilli Onion

Grafik 4.41. Disagregasi SubKelompok Bumbu – bumbuan



Percent, yoy

Chart 4.29. Disaggregation of Sub-groups of Selected Spices by Region


and North Kalimantan, due to rising prices of chicken, seasonings, fresh fish, and airfares, particularly during the peak season.

The generally subdued inflation at the regional level, was attributable to the positive impact of the coordination of inflation control between Bank Indonesia and the central and regional governments. Regional-level inflation control was progressively strengthened and expanded by the regional inflation control teams (TPIDs). The teams focus on ensuring prices are affordable, supplies are available, distribution is speedy and information on policies is communicated effectively. In 2018, the priorities were

to ensure supplies were available and distribution was swift. The teams introduced a food resilience program built around expansion and intensification of production (Figure 4.2).

To expedite distribution, action was taken on interregional trade cooperation, which is crucial for supporting regional equilibrium in supply and demand. One of these initiatives involved empowering regional government enterprises to engage in trade cooperation. In this case, the trade cooperation was developed mainly for regions that are consumption centers. This includes Jakarta: the capital city is supplied by various regions, for example with eggs from Blitar, shallots from Brebes, rice from Lampung and beef from West Nusa Tenggara. Jakarta is also now exploring possibilities for cooperation with East Java and West Sulawesi for corn. In some regions, initiatives for interregional trade cooperation focused on optimizing the food surpluses and deficits within a single province, as carried out by Central Java. Accompanying this were broader efforts to streamline existing retail distribution channels, such as the Toko Tani discount outlets for agricultural products.

Efforts to increase food production were initiated intensively in some regions. These efforts included expansion of agricultural land and also increasing productivity. Expansion of agricultural land for food production was carried out by developing new rice fields and included conversion of swamp and peatlands in Kalimantan and other regions to use for food crop agriculture. At the same time, Indonesia successfully improved productivity through innovative types of cultivation, by strengthening institutional support for farmers, and by developing food crop clusters and urban farming.15 Some regions also continue to pursue other measures to maintain continuity of supply by, for example, refrigerating agricultural products. Products kept in cold storage include red chili peppers and shallots, as implemented in Jambi, Central Java and Bali. To support these measures, the Government worked actively to promote quality improvements in regional infrastructure and agricultural facilities by optimizing funds transfers to the regions, including under village funds.

15 Urban farming comprises all the systems for food production (horticulture, livestock farming and aquaculture) and includes cultivation, processing and distribution, albeit in an urban location.

Grafik 4.39. Inflasi Bahan Pangan


2017 2018


Percent, yoy

0

1

2

3

4

5

6

Chart 4.30. Food Inflation by Regions

FishesSpices OthersGrains, Tubers and The Result Meat and The Result

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Grafik 4.40. Sumbangan Inflasi Bahan Pangan Per Komoditas


Sumatera Jawa Bali-Nusra Kalimantan Sulawesi Mapua

Percent, yoy

Chart 4.31. Disaggregation of Food Inflation by Commodities


■ Horticulture extensification (chili and onion)■ Controlled atmosphere storage procurement■ Strengthening chicken farmer institutions■ Toko Tani Indonesia Center■ Optimization of retail distribution channels

Sumatra

■ Coordination to maintain the smooth supply of DKI Jakarta and buffer cities (Bogor, Bekasi and Depok)■ Empowerment of BUMD (regional government-owned enterprise) in inter-regional trade cooperation■ Optimalization of private warehouses for grain / rice storage (implementation of Warehouse Receipt System)■ Issuance of regional regulations related to food reserves■ Establishment of legal farmers-owned enterprise■ Usage of food information systems■ Development of inter-island trade information systems

Java

■ Land optimization, paddy field printing and rice cluster development■ Construction of tertiary irrigation lines■ Spice house movement (urban farming)■ Development of fisheries cold storage

Sulawesi■ Extensification of agricultural land■ Agriculture and horticulture downstream■ Market inspection and price monitoring■ Strengthening coordination and institutions

Kalimantan

■ Cheap markets, market operations, and price monitoring■ Inflation control communication■ High level coordination and TPID’s (Regional Inflation Controller Team) capacity building

Bali-Nusa Tenggara

Gambar 5.3. Peta Perkembangan Inflasi Daerah (%yoy)Figure 4.2. Regional Inflation Control Program

Source: TPID

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