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2 CHAPTER 1 — ECONOMIC REPORT ON INDONESIA 2019

An ongoing global economic shift, underway by 2019, challenged efforts to strengthen sustainable world economic growth. Inward-looking trade policies and build-up of geopolitical risks in several countries generated uncertainty in global financial markets and suppressed world economic growth in 2019. Such inauspicious developments spilled over to Indonesia’s domestic economy through trade channels and impacted financial markets adversely until the third quarter of 2019. Notwithstanding these global challenges, resilient economic growth in Indonesia was preserved in 2019 on the back of solid domestic demand and continuing stability in the economic and financial system. Looking ahead, the COVID-19 outbreak that emerged at the beginning of 2020 is projected to undermine Indonesia’s economic growth in 2020. Nevertheless, the economy is expected to regain upward momentum in 2021 and higher growth would persist in the medium- to long-term, supported by macroeconomic and structural policies to accelerate Indonesia’s economic transformation towards the status of an advanced economy.

Latest Economic Developments

Outlook

ECONOMIC REPORT ON INDONESIA 2019 — CHAPTER 1 3

C H A P T E R I


Structural shifts in the global economy over the past few years gained momentum in 2019. There are four interrelated aspects to this global economic shift, namely: inward-looking policies; increasingly volatile capital flows; rapid transformation to a digital economy; and a behavioural change amongst economic agents in response to digitalisation. Consequently, the complexity of macroeconomic management has increased, with implications for economic policies. For instance, the behavioural change amongst economic agents in response to rapid digital development has undermined the effectiveness of some policies. In these circumstances, an effective economic strategy cannot rely upon a single policy or policy instrument; it calls for supporting policies in the form of an integrated policy mix.

The shifting global economic landscape contributed to a softening of world economic growth in 2019. In 2019, global economic growth slumped from 3.6% in 2018 to 2.9%, accompanied by declining world trade volume and sliding international commodity prices, both in line with the emerging, inward-looking policies. Unfavorable international developments triggered heightened uncertainty in global financial markets and intensified the volatility of capital flows. Furthermore, the heightened uncertainty was amplified by a simultaneous behavioural change amongst economic agents induced by the expansive impact of global economic digitalisation. In light of these developments, authorities in

various countries have begun to implement an integrated mix of economic policies; they tended to loosen both fiscal and monetary policies in 2019 in order to mitigate the risk of softening economies. In some cases, such policies were backed by structural reforms to strengthen economic resilience, although the pace was slower-than-expected due to the sluggish stage of the economic cycle.

Global economic moderation has suppressed Indonesian exports, yet the overall economy remained resilient in 2019. As a small open economy, global economic moderation impaired export performance in 2019. Nonetheless, solid domestic demand propped up the national economy, with growth recording 5.02% in 2019. Domestic demand was maintained by an accommodative policy mix instituted by Bank Indonesia along with fiscal stimuli and the positive impact of the General Election through to the third quarter of 2019. Robust economic


growth in Indonesia attracted higher foreign capital inflows in 2019, which supported a surplus in the Balance of Payments (BOP). These conditions contributed to exchange rate appreciation and controlled inflation within the target corridor of 3.5%±1%. Financial system stability was also maintained, although sluggish growth of loans disbursed by the banking industry due to both supply and demand side issues, requires further attention.

The COVID-19 outbreak that began in China in January 2020 has undermined the world economic outlook for 2020. Optimism surrounding the global economy was prevalent until the end of January 2020, supported by an easing of trade tensions between the United States

(US) and China as well as the positive impact of accommodative policies in various countries. Economic optimism had been restored, which prompted an encouraging pace of economic activity in the real and financial sectors in various countries around the end of 2019, including Indonesia. Nonetheless, optimism quickly retreated after the COVID-19 outbreak and its rapid transmission around the world as a pandemic. COVID-19 has severely hampered aggregate demand and supply as well as disrupted production processes, weighing heavily on global and national economic growth in 2020. However, after the COVID-19 crisis has passed, global and national economic growth are expected to regain upward momentum.

▲ Inward-looking policies, illustrated by escalating trade tensions between the United States and China, characterised the global economy in 2019.


1.1

Several shifts in the global economic landscape have persisted and influenced world economic dynamics in 2019. Certain interrelated economic shifts have affected global economic developments over the past few years and they intensified in 2019. These shifts do not merely relate to economic structure; a seismic shift has also been observed in terms of policy response, occasioned by four interrelated factors, namely: inward-looking policies; increasingly volatile capital flows; rapid economic digitalisation; and a behavioural change amongst economic agents in response to digital development. Consequently, the complexity of macroeconomic management has increased, calling for a stronger strategic mix of policies to contain emerging risks.

First, anti-globalisation sentiment is manifested by inward-looking policies in various jurisdictions. This shift has been characterised by efforts to protect national interests through inward-looking trade policies coupled with other political policies. Trade tensions between the US and China in 2019, which spilled

over to other countries, are a clear example of this global economic shift. Developments in 2019 demonstrated that tensions quickly escalated with the introduction of trade barriers and higher import tariffs, accompanied by retaliatory actions. In addition, other geopolitical policies, such as the UK’s plan to leave Europe (Brexit), illustrate inward-looking economic policies.

Second, the volatility of international capital flows has increased, thus heightening uncertainties in global financial markets. Higher volatility is tightly linked to increasing international financial market integration. Consequently, changes in policies and perceptions concerning the world economic outlook can trigger changes in global financial market sentiment and large rebalancing shifts of capital flows to and from emerging economies. Similarly, the posture of monetary policy in advanced economies, including liquidity injections and policy rate reductions, have impacted the sentiment and dynamics of global financial markets. Overall, the correlation between financial market integration and international

Five Shifts Gaining Momentum in the Global Economy

capital flows strengthened in 2019. At the same time, the impact of trade negotiations between the US and China, geopolitical risks and the policy response taken in advanced economies influenced international financial market sentiment, which triggered persistently high global financial market uncertainty and ultimately increased capital flows and exchange rate volatility in many countries.

Third, digital disruption has changed traditional economic activities in the real and financial sectors. On one hand, various empirical studies have shown that digitalisation has increased economic productivity. Rapid innovation brought about by digital technology in the financial industry has seen the proliferation of financial technology (FinTech) in the payment system and financial services sector, including crowdfunding, peer-to-peer lending, insurance and wealth management. In turn, such developments have improved economic efficiency and effectiveness. However, on the other hand, digitalisation demands vigilance due to new ways for economic agents to collaborate,


which could change the role of conventional financial institutions as intermediaries. Furthermore, financial system stability could also be impacted by the rapid expansion of shadow banking activities, along with the rise of digital currency and less regulated digital economic activities. Ultimately, such developments could influence or even change the characteristics of monetary policy transmission.

Fourth, the behaviour and relationship between economic agents has changed in line with the rapid advance of the digital revolution in terms of economic activity. Various empirical studies give evidence of a shift in public consumption towards online shopping through digital platforms using fast and secure mobile payments. The industrial relationship between economic agents has also shifted to a more modular model, accompanied by granular data as a digital footprint of economic activity. On one hand, such developments demonstrate innovation in the digital era, which could increase economic productivity and efficiency through greater access to better information, creating new business models and sources of economic growth. On the other hand, developments in the digital era also require an appropriate response to minimise the concentration of commercial power and granular data that could influence the sustainability of resilient economic growth.

Fifth, the policy response cannot rely on only one policy instrument; integration into an optimal policy mix is required. This paradigm shift in policy is the knock-on effect of preceding shifts in the economic landscape. Increasing uncertainty, either in the real sector due to

inward-looking policies or in the financial sector due to the advance of FinTech, is challenging macroeconomic management and adding new complexities. Macroeconomic management has become more complex due to the simultaneous and rapid emergence of the digital economy, thus sparking a change in the behaviour and relationships between economic agents. In turn, such developments have begun to influence policy transmission channels and the effectiveness of existing policies. These ongoing shifts have pushed many countries towards implementing an integrated policy mix. Synergy between fiscal and monetary policy have been strengthened to mitigate the risk of economic moderation. For its part, monetary policy has been strengthened by optimising interest rate policy, exchange rate policy, liquidity management and capital controls. In addition, the central bank uses macroprudential policies, payment system policy and other supporting policies to reinforce monetary policy. Meanwhile, the Government has strengthened structural reforms to bolster economic resilience against the undesirable impacts of the digital economy.

“Several shifts in the global economic landscape have persisted and influenced

world economic dynamics in 2019”

◀ Rapid advance of digital revolution in various economic activities has changed the behaviour and relationship between economic agents.


The inward-looking policies implemented by major countries influenced global economic dynamics in 2019. The recent era of inward-looking policies can be traced back to trade tensions between US and China in 2019, which quickly escalated to involve, among others, Japan, France, Germany, Mexico, Australia, India, Brazil and Argentina, exacerbated by retaliatory measures taken in respective jurisdictions. In addition, geopolitical risks added to unfavorable global economic conditions. The prolonged Brexit process, coupled with political issues and economic reforms in Mexico, Brazil, Lebanon and Algeria, intensified the geopolitical risks and further compounded global economic dynamics. Moreover, months of protests in Hong Kong, Iran, Chile and Iraq disrupted economic conditions in various developing economies.

Less conducive global conditions have stifled global economic growth. Uncertainty surrounding world trade increased in 2019, causing economic confidence to retreat in various countries (Chart 1.1). Ultimately, world trade volume contracted by 0.2% in 2019, to its lowest level since the Global Financial Crisis (Chart 1.2). Global economic headwinds led to broad-based global economic moderation affecting advanced and emerging economies alike. In 2019, a listless global economy grew at its weakest pace since the Global Financial Crisis, at just 2.9%, down from 3.6% in 2018 (Table 1.1). Advanced and emerging economies grew 1.7% and 3.7% respectively in 2019, down from 2.2% and 4.5% in 2018.

Chart 1.1. Global Bussiness Confidence Index

Source: Bloomberg, calculated

Index Index

EurozoneUS Italy (rhs) Japan (rhs)Germany France

Germany IFO business climate; France Business Confidence Manufacture;Sentix EZ Economy; Italy Business Confidence; Japan OECD Confidence; US OECD Confidence

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Chart 1.1. Global Bussiness Confidence Index

Grafik X.X. Decoupling WTV dan PDB

Source: IMF, Consensus Forecast, CPB, calculated

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Percent, yoy Percent, yoy

2012 2013 2014 2015 2016 2017 2018 2019

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World Trade Volume (rhs)

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Chart 1.2. World GDP Growth and Trade Volume

Global Economic Moderation, Persistently

High Uncertainty

1.2


Table 1.1. World GDP GrowthPercent, yoy

Countries 2015 2016 2017 2018 20191)

World 3.5 3.4 3.8 3.6 2.9

Advanced economies 2.3 1.7 2.5 2.2 1.7

United States 2.9 1.6 2.4 2.9 2.3

Euro area 2.1 1.9 2.5 1.9 1.2

Japan 1.2 0.6 1.9 0.3 0.7

Emerging economies 4.3 4.6 4.8 4.5 3.7

Asia 6.8 6.7 6.6 6.4 5.6

China 6.9 6.7 6.8 6.6 6.1

India2) 8.0 8.2 7.2 6.8 5.3

Latin America 0.3 -0.6 1.2 1.1 0.1

East Europe 0.8 1.8 3.9 3.1 1.8

Middle East and Central Asia 2.6 5.0 2.3 1.9 0.8

Africa and Sub-Saharan 3.1 1.4 3.0 3.2 3.3

Source: WEO IMF October 2019, WEO IMF Update January 2020, Bloomberg1) Based on official release of GDP data in each country as per March 20202) Using fiscal year

Widespread fallout from the trade war spilled over into the services sector and labor markets. Trade tensions not only undermined the international trade of goods, but also impacted other economic activities, including the services sector and labor market. Such developments were confirmed by broad economic moderation, which spread to countries not only reliant on manufacturing but also jurisdictions with a dominant services sector. In addition, business sentiment deteriorated and economic moderation began to impact labor markets, including limited employment growth and smaller wage increases in several countries.

Beset by trade tensions, economic performance in US and China moderated throughout 2019, accompanied by mild inflationary pressures. Trade tensions pushed US and Chinese economies into a lower growth path. In addition, economic moderation in US was accentuated by the fading impact of fiscal stimuli introduced in 2018. Meanwhile, China’s economy softened compared with conditions over the past decade as a corollary of economic rebalancing and financial system deleveraging. Ultimately, trade tensions harmed trade and investment activities in both countries.

Sluggish world trade volume and global economic growth fed through to lower international commodity prices. Trade tensions and other factors weighed on investment performance and pressured international commodity prices. Fiscal stimuli through infrastructure development in China ramped up in the latter half of 2019, yet had a subdued impact on international

metal prices. In addition, coal prices flattened due to environmental concerns in several countries, which could severely compress long-term demand for coal, particularly in China and Europe (Chart 1.3). Furthermore, global oil prices slipped due to weaker international demand, notwithstanding supply cuts implemented by OPEC members. Consequently, the international oil price averaged USD65 per barrel in 2019, down from USD71 per barrel in 2018 (Chart 1.4).

World economic moderation led to persistently high international financial market uncertainty and triggered a rebalancing of global capital flows. Heightened global financial market uncertainty persisted until the third quarter of 2019, as confirmed by uncertainty and global risk indicators, including the VIX

Grafik 1.3. IHKEI and Global Manufacturing PMI

Source: IHS Markit, Bank Indonesia


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Chart 1.3. IHKEI and Global Manufacturing PMI

Chart 1.4. World Oil Prices

Source: Bloomberg

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USD per barel

2015 2016 2017 2018 2019

!-#)"Brent Price

Quarterly Average

Chart 1.4. World Oil Prices


Volatility Index1 and Economic Policy Uncertainty (EPU) index, which gained 19 and 1,947 points respectively (Chart 1.5). Inauspicious global economic dynamics slowed foreign capital inflows into emerging countries. Furthermore, optimism in US economic outlook diverted capital flows from emerging countries as demand for US Treasury bonds increased. Indeed, such conditions produced an inverted yield curve in the third quarter of 2019 (Chart 1.6). In general, global economic headwinds reduced foreign capital flows and increased currency risk in emerging economies.

In response to global economic moderation, various authorities loosened monetary policy. Numerous central banks adopted a more accommodative monetary policy

1 VIX is a measure of market expectations for volatility in the S&P 500 index.

Source: Bloomberg

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Grafik 1.5. Uncertainty Indicators

2014 2015 2016 2017 2018 2019

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Chart 1.5. Uncertainty Indicators

I II III IV

2017 2018 2019

I II III IV I II III IV-1

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10-year and 3-month yield spread

10-year and 2-year yield spread

Bps

Source: Bloomberg

Chart 1.6. Inverted Yield Curve Phenomenon

Grafik X.X. Benchmark Rates

Source: Bloomberg, calculated

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BoE Policy Rate

FFRT-Lower Target

ECB Deposit Facility

ECB Main Refinancing Operation

BoJ Policy Rate

2019201820172016201520142013201220112010200920082007

I III I III I III I III I III I III I III I III I III I III I III I IIIIII

Chart 1.7. Benchmark Rates

by reducing policy interest rates (Chart 1.7). Among the advanced economies, the US Federal Reserve lowered its federal funds rate (FFR) three times since July 2019, for a total of 75 basis points (bps) to just 1.50-1.75% at the end of 2019. Furthermore, the European Central Bank (ECB) adopted an extra accommodative policy posture by reducing the Deposit Rate to -0.5%. The authorities in various emerging economies also loosened monetary policy. The Reserve Bank of India (RBI) lowered its reference rate five times in 2019 by a total of 135bps. For its part, the People’s Bank of China (PBoC) reduced several interest rates, including the Medium-Term Lending Facility Rate (MLF), the Loan Prime Rate (LPR) and the 7-Day Reverse Repo Rate. Lower interest rates were often accompanied by policies to loosen liquidity conditions, such as quantitative easing (QE), relaxed lending facilities and lower reserve requirements.2

A number of governments also adopted expansionary fiscal policies to stimulate economic growth. China strengthened fiscal policy by reducing taxes as follow-up to policies implemented at end-2018, while increasing infrastructure development through the launch of municipal bonds. Fiscal stimuli in India included corporate tax cuts, industrial subsidies and infrastructure development. Nevertheless, and in contrast to previous periods, recent fiscal measures were constrained by

2 In Europe, the ECB launched targeted longer-term refinancing operations III (TLTRO) and reactivated quantitative easing (QE), which had been suspended at the end of 2018. Meanwhile, the Federal Reserve eased the pace of balance sheet reductions and purchased short-term government bonds. In China, the PBoC ensured adequate liquidity by reducing reserve requirements, injecting liquidity through the Medium-Term Lending Facility (MLF) and raising the Standing Lending Facility (SLF) quota.


financial risk in China and long-term fiscal reform in India. US maintained an expansive fiscal posture after agreeing to a spending cap and debt limit. Meanwhile, fiscal space in the European Union, including Italy and several periphery countries, were squeezed by a large debt burden. Similar conditions were also reported in Japan, as that country strives to meet its fiscal consolidation target by 2025.

Fiscal and monetary stimuli were backed by structural reform policy. Structural reforms in advanced economies, including the US, Europe and Japan, were oriented towards increasing productivity and potential output, mainly through labor sector improvements, among others. On the other hand, structural reforms in emerging economies aimed to nurture quality growth accompanied by financial and tax system reforms. In China, the reforms centred on economic rebalancing and financial system deleveraging.

Multilateral institutions also implemented several initiatives. The Financial Stability Board (FSB)3 strengthened the monitoring of shadow banking and its risk assessments in order to maintain global financial system stability. In the face of rapid digitalisation, multilateral institutions also strengthened structural reforms. For example, the Group of Twenty (G20) strengthened its digitalisation policy, including the utilisation of data, facilitating free data flows and strengthening trust between consumers and businesses. In addition, and in conjunction with the International Monetary Fund (IMF), the G20 also backed policies to overcome imbalances and create an environment conducive to individuals achieving their potential amidst global demographic transition. The IMF also prioritised investment in clean energy in line with the large economic

3 The Financial Stability Board (FSB) is an international body with headquarters on Basel, Switzerland. Established after the G20 London summit in April 2009, it monitors and makes recommendations about the global financial system.

burden caused by climate change, particularly in low-income countries.

The policy response effectively reduced financial market uncertainty and attracted international capital flows to emerging economies in the final quarter of 2019. Policy rate reductions taken by central banks in advanced economies, led by the US Federal Reserve (The Fed), obliged global investors to seek higher yields in emerging economies. Therefore, capital flows to financial markets in emerging economies surged, driven by greater liquidity in line with the monetary policy stance adopted in advanced economies. Such dynamics led to currency appreciation in emerging market economies, beginning in the fourth quarter of 2019 (Chart 1.8). For 2019 as a whole, the currencies of Indonesia, the Philippines and Thailand appreciated, accompanied by lower volatility. In contrast, the currencies of Turkey, Brazil and South Africa weakened and displayed higher volatility.

I II III IV I II III IV I II III IV I II III IV I II III IV

2015 2016 2017 2018 2019

Grafik 1.8. Berlanjutnya Aliran Modal ke EM

Source: IIF

USD billion

Emerging EuropeAfrica and Middle East

Emerging AsiaLatin America

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Chart 1.8. Capital Inflows to Developing Countries


Global economic moderation undermined Indonesian export performance in 2019. Exports in 2019 contracted by 0.87%, reversing 6.55% growth achieved in 2018 (Chart 1.9). Exports experienced a steep decline in the first half of 2019, restrained by manufacturing exports to advanced economies. Growth of Indonesia’s major exports, namely crude palm oil (CPO) and coal, was also impacted by policies implemented in several trading partner countries, such as CPO import tariffs in India and restrictions on coal imports in China. In terms of CPO, the export contraction was also attributable to domestic policy to optimise domestic production for domestic purposes.

Mild pressure on exports was apparent in the latter half of 2019, but they were supported by growing demand for some commodities. Agricultural and mining commodities were the main contributors to the export gains late

for soybeans due to trade tensions between US and China. In mining, exports improved on persistently high demand for coal in China, despite policies to restrict its use, because Indonesian prices for coal were competitive vis-à-vis domestic prices in China.

Exports Declined, Domestic Demand

Sustained

Grafik 1.9. Real Exports and World Trade Volume

Source: BPS, Bloomberg, calculated

GDP-Exports of Good and Services

World Trade Volume (rhs)


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Chart 1.9. Real Exports and World Trade Volume

1.3

in 2019. In the agricultural sector, CPO exports increased on rising demand from China. Higher demand for CPO was also linked to India, which aligned its tariffs on CPO imports from Indonesia with those from Malaysia, effectively reducing the tariff on Indonesian CPO. These factors were partly offset by compressed demand


Export gains also stemmed from diversification of products and markets, as well as several domestic policies. Iron and steel, automotive, pulp and wastepaper, gold and textile exports performed well in 2019 as a result of competitiveness, given the high Trade Balance Index (TBI) 2019 and Revealed Symmetric Comparative Advantage (RSCA) 2018 (Chart 1.10).4 Indonesia also successfully diversified its export markets for several commodities, such as iron and steel, by exporting more to ASEAN (Association of Southeast Asian Nations) and Saudi Arabia. In addition to product and market diversification, domestic policies also elevated export performance. Export restrictions on nickel were introduced on 1st January 2020, which prompted a surge of nickel exports in 2019, that is, in anticipation of the export restriction. Furthermore, the government also increased the export quota for copper ore and diversified steel products for export, which also boosted performance.

Despite declining export performance, the growth of private consumption remained solid, especially household consumption. In 2019, private consumption grew by 5.16%, a slight improvement over the 2018 performance, largely accounted for by stable growth of household consumption at 5.04%. These positive developments stemmed from strong purchasing power in line with robust incomes and low inflation, coupled with

4 RSCA is an indicator of a country's comparative advantage compared to other countries in a particular commodity. RSCA has a value between -1 and 1. If the RSCA on commodity A is greater than 0 then the country has a comparative advantage on the commodity; if the RSCA on commodity A is less than 0, then the country has a comparative disadvantage on the commodity.

sustained consumer confidence. Several indicators point to sustained or improving incomes amongst the middle and working classes, for instance, higher real farmworker wages and informal sector wages. Consequently, household consumption growth remained above 5% until the third quarter of 2019, which served to bolster economic growth.

Over a longer horizon, several factors have underpinned resilient household consumption, especially during the past eight years. First, the emergence of a stronger non-tradable sector after the end of the commodity price supercycle in 2011. This stemmed from increasing labor mobility, which migrated from the tradable to non-tradable sector, thus helping to maintain household income and reduce reliance on exports. Second, an increase, especially since 2010, in the middle-income population, who earn USD2.97-8.44 per day and generally enjoy permanent positions and fixed salaries. Third, the maintenance of purchasing power in line with controlled inflation within the target corridor. And finally, rapid development of the digital economy, which has maintained household consumption by offering a broader variety of goods at more efficient prices through e-commerce.

The General Election contested in 2019 was a boon to private consumption among non-profit institutions serving households (NPISH). Data show that NPISH consumption accelerated to 10.62% in 2019. On a quarterly basis, NPISH growth trended higher through the third quarter of 2019, spurred by general election preparations and implementation. An increase in the number of political parties, legislative candidates and election campaigns induced high NPISH growth in 2019, which contributed to household consumption through to the third quarter of 2019.

Government consumption also propped up domestic demand in 2019, despite decelerating compared with 2018. Government consumption slowed as the Central Government pared back spending, particularly on material expenditure and other expenditures, which contracted by 3.9% and 30.4%, respectively, in 2019. However, these declines were accompanied by higher spending in other categories, namely spending on human resources, such as personnel expenditure and social aid programs (bansos). Viewed as a share of total central government spending, in 2019 the shares of personnel expenditure and social

Grafik 1.10. TBI dan RSCA Ekspor Indonesia

Source: WITS 2018, Bank Indonesia 2019, calculated

Fish

Crude RubberPulp andWaste Paper

Textile Fibers

Metalliferous Ores

Coal

CPO

Organic Chemicals

Wood Manufactures

PaperTextile yarn

Iron and Steel

Road Vehicles

Furniture

Apparel

Footwear

Gold

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D

A B C DNumber of Sector 18 5 7 36Share 27.3% 7.6% 10.6% 54.5%Exports value (USD billion) 91.1 16.0 21.0 27.5

% export values 58.5% 10.3% 13.5% 17.7%

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RSCA

TBI

Chart 1.10. TBI and RSCA Indonesia’s Export


assistance increased from 23% to 25% and from 6% to 8%, respectively.

Solid growth of building investment was also maintained, further underpinning domestic demand. Building investment in 2019 grew 5.37%, little changed from 5.41% in 2018. This stable growth was primarily due to infrastructure development in relation to the government’s national strategic projects (PSN), coupled with increasing private construction (Chart 1.11). Furthermore, solid growth of building investment was accompanied by a surge in residential development along with other supporting infrastructure, thus helping to maintain positive sales performance amongst large developers in 2019.

By contrast, the growth of non-building investment was subdued in 2019. Non-building investment growth in 2019 stood

at 1.80%, down significantly from 10.31% in 2018. The slump was primarily due to export contraction in the mining sector, including low coal prices, which made coal firms reluctant to invest in heavy equipment (Chart 1.12). Retreating business confidence due to global economic developments further restrained non-building investment. These declines were partly offset by ongoing government electricity projects. These projects targeted the construction of power stations with a combined capacity of 3,940MW, along with 5,065 km of transmission and substations with a capacity of 11,186MVA. The target and realisation of power station and transmission development exceeded that recorded in 2018.

Declining exports, muted non-building investment and several policy factors prompted an import contraction in 2019. A contraction of manufacturing

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Grafik 1.11. National Strategic Project Development

Source: Committee for the Acceleration of Priority Infrastructure Provision (KPPIP)

Project under construction Projects under construction and started operationProject completed

Projects in preparation stage Project in the transaction stage

Chart 1.11. National Strategic Project Development Grafik 1.12. Non Buildings Investment and Export Sales Likert Scale

Source: BPS, Bank Indonesia2016 2017 2018 2019


Percent, yoy Likert scale

GDP-Non Building Investment

Likert Scale-Export Sales (rhs)

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Chart 1.12. Non Building Investment and Export Sales Likert Scale

exports led to lower imports of raw materials, especially raw materials for industry, which declined 4.5%. At the same time, a sharp fall of non-building investment growth precipitated an 8.28% contraction of capital goods imports. Furthermore, imports of consumer goods also fell, by 8.13% (Chart 1.13). In addition to cyclical factors, imports also declined due to the impact of import substitution policy to improve the oil and gas trade balance. Consequently, government policies to utilise domestic oil products for domestic purposes as well as the government’s B20 policy contributed to a 37.73% contraction in terms of crude oil imports (Chart 1.14).5

Based on these various factors, overall economic growth in Indonesia remained resilient at 5.02% in 2019. Solid growth was supported by domestic economic rebalancing in response to external shocks. Lower

5 The B20 policy, effective in 2018, mandates that all diesel fuel contain 20% locally produced biofuel (CPO). This proportion is scheduled to increase to 30% (B30) in 2020.


imports effectively absorbed global shocks, thus maintaining quarterly growth in excess of 5.0% through the third quarter of 2019, before moderating slightly to 4.97% in the fourth quarter of 2019 (Table 1.2). Despite retreating a little from 5.17% in 2018, national economic growth in Indonesia was solid compared to Emerging Asia, excluding China, India and the Philippines.

Looking at key sectors, gains in consumption and building investment were reflected in several tertiary sectors and construction. Persistently solid consumption propped up sectors like transportation, storage, information and communications whose growth rose to 8.06% in 2019, higher than previous year’s growth of 7.04% (Table 1.3). In addition, construction continued to perform well, in line with high building investment in the form of government infrastructure projects. By contrast, the secondary sector recorded more subdued growth, with manufacturing moderating to 3.80% in line with declining exports and non-building investment. Furthermore, primary sector growth, mining in particular, achieved just 1.22% in 2019, due to compressed global demand.

Source: Bank Indonesia

Grafik 1.13. Real Imports-Non Oil and Gas

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Chart 1.13. Real Imports-Non Oil and Gas

Grafik 1.23. Nominal Imports-Oil and Gas

Gas

Import-Oil and gas

Finished OilCrude Oil


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Percent, yoy

Chart 1.14. Nominal Imports-Oil and Gas

Table 1.2. Gross Domestic Product by ExpenditurePercent

GDP Components 2015 2016 2017 20182019 1)

I II III IV Total

Domestic Demand1) 4.94 4.39 5.13 5.62 5.18 5.34 4.44 4.16 4.76

Private Consumption 4.84 5.04 4.98 5.14 5.27 5.40 5.06 4.93 5.16

Household Consumption 4.96 5.01 4.94 5.05 5.02 5.18 5.01 4.97 5.04

Non-Profit Institutions Servings Households Consumption -0.62 6.64 6.93 9.10 16.96 15.29 7.41 3.53 10.62

Government Consumption 5.31 -0.14 2.12 4.80 5.22 8.23 0.98 0.48 3.25

Investment 3.00 4.99 5.69 8.49 3.82 1.70 2.95 0.98 2.35

Gross Fixed Capital Formation 5.01 4.47 6.15 6.64 5.03 4.55 4.21 4.06 4.45

Buildings 6.11 5.18 6.24 5.41 5.48 5.46 5.03 5.53 5.37

Non-Buildings 1.93 2.43 5.90 10.31 3.69 1.96 1.95 -0.13 1.80

Changes in Inventory* -0.59 0.23 -0.07 0.71 -0.29 -0.85 -0.37 -1.07 -0.65

Net Exports* 0.94 0.13 0.30 -0.94 1.21 1.01 1.77 1.69 1.43

Exports -2.12 -1.66 8.90 6.55 -1.58 -1.73 0.10 -0.39 -0.87

Imports -6.25 -2.41 8.07 11.88 -7.47 -6.84 -8.30 -8.05 -7.69

Gross Domestic Product 4.88 5.03 5.07 5.17 5.07 5.05 5.02 4.97 5.02

1) Domestic Demand is Consumption Expenditure (Private + Government) and Gross Fixed Capital Formation*Contribution to GDPSource: BPS


In regional level, interprovincial trade supported domestic growth in the face of global economic moderation. Intraregional trade supported robust domestic private consumption, including domestic trade in palm oil for the B20 program, along with exports of mining products. Consequently, economic

supported by stronger exports of primary commodities, including coal exports bound for China. In contrast, economic moderation was confirmed to Java and Sulampua (Sulawesi-Maluku-Papua), primarily held back by declining exports as well as copper production constraints. Overall, 14 out of 34 Indonesian provinces

Table 1.3. Gross Domestic Product by Industrial OriginsPercent

Components 20172018

20182019

2019I II III IV I II III IV

Agriculture, Livestock, Forestry and Fisheries 3.87 3.34 4.72 3.66 3.87 3.94 1.82 5.33 3.12 4.26 3.64

Mining and excavation 0.66 1.06 2.65 2.67 2.25 2.16 2.32 -0.71 2.34 0.94 1.22

Processing Industry 4.29 4.60 3.88 4.35 4.25 4.27 3.85 3.54 4.14 3.66 3.80

Electricity, Gas, Water Supply and Water Supply* 1.76 3.33 7.29 5.62 5.64 5.48 4.48 2.65 3.83 5.96 4.24

Construction 6.80 7.35 5.73 5.79 5.58 6.09 5.91 5.69 5.65 5.79 5.76

Trade and Provision of Accommodation and Food Beverage** 4.63 5.02 5.29 5.39 4.68 5.10 5.34 4.80 4.61 4.65 4.84

Transportation, Warehousing, Information and Communication*** 9.12 8.12 6.70 7.01 6.35 7.04 7.45 7.93 8.09 8.75 8.06

Financial Services, Real Estate and Corporate Services**** 5.43 4.63 4.22 4.47 6.13 4.82 7.26 6.03 6.94 8.04 7.07

Other Services***** 4.37 6.01 6.85 7.68 6.82 6.83 7.12 8.41 6.43 5.45 6.81

GDP 5.07 5.06 5.27 5.17 5.18 5.17 5.07 5.05 5.02 4.97 5.02

*) Amalgamation of two economic sectors: (i) Electricity and Gas Procurement, and (ii) Water Supply **) Amalgamation of two economic sectors: (i) Wholesale Retail, Car and Motorcycle Repairs, and (ii) Provision of Accomodation, Food and Beverages ***) Amalgamation of two economic sectors: (i) Transportation and Warehousing, and (ii) Information and Communication ****) Amalgamation of three economic sectors: (i) Financial Services, (ii) Real Estate, and (iii) Corporate Services *****) Amalgamation of four economic sectors: (i) Government Administration, Defence and Compulsory Social Security, (ii) Education Services, (iii) Health Services and Other Activities, and (iv) Other Services Source: BPS

Aceh 4.15

NorthSumatra

5.22

Riau2.84

Bengkulu4.96

Riau Islands4.89

WestSumatra

5.05 Babel Islands3.32

Jakarta5.89

Banten5.53

Yogyakarta6.60

Bali5.63

West NusaTenggara

4.01

East NusaTenggara

5.20

SouthSulawesi

6.92

WestSulawesi

5.66South-EastSulawesi

6.51

Gorontalo6,41

Maluku5.57

NorthMaluku

6.13

North Sulawesi5.66

West Java5.07

EastKalimantan

4.77

Central Kalimantan6.16

Papua-15.72

West Papua2.66

West Kalimantan5.00

SouthKalimantan

4.08

NorthKalimantan

6.91Ka

Central Java5.41

EastJava5.52

Jambi4.4

South Sumatra5.71

Lampung5.27

Sumatra

2017 2018 2019

4.28 4.55 4.57

Kalimantan

2017 2018 2019

4.34 3.91 4.99

National

2017 2018 2019

5.07 5.17 5.02

Bali-Nusa Tenggara

2017 2018 2019

3.61 2.71 5.07

Java

2017 2018 2019

5.62 5.73 5.52

Sulawesi-Maluku-Papua

2017 2018 2019

6.33 6.76 2.45Higher compared to 2018

Lower compared to 2018

Stable compared to 2018

Source: BPS, calculated

Central Sulawesi7.15

Figure 1.1. Spatial Economic Growth

growth in Sumatra increased from 4.55% in 2018 to 4.57% in 2019. Likewise, economic growth in Bali-Nusa Tenggara (Balinusra) accelerated to 5.07% in the reporting period, boosted by copper and nickel ore exports, amongst others. A similar story unfolded in Kalimantan, where regional economic growth was


achieved higher economic growth in 2019 compared with the previous year (Picture 1.1).

Sustained economic growth in 2019 had a positive impact on prosperity. Since 2015, Indonesia’s poverty rate has tracked a downward trend to 9.22% in September 2019, featuring a broad-based decline recorded in urban and rural areas. In line with the lower poverty rate, the Gini ratio improved slightly to 0.38 in September 2019, indicating

less inequality. The improvements were accounted for by the spending distribution among the middle and working classes, as well as disbursements by social aid programs (bansos) in urban and rural areas. Similarly, open unemployment declined from 5.34% in August 2018 to 5.28% in August 2019, while the participation rate increased to 67.49% in the same period. Finally, labor absorption into the formal sector increased while informal labor absorption declined.


External sector remained resilient as indicated by a surplus in the 2019 balance of payments. The overall BOP recorded a surplus of USD4.68 billion in 2019, reversing the USD7.13 billion deficit posted in 2018 (Table 1.4). Reflecting this strength, official reserve assets increased from USD120.7 billion to USD129.2 billion in the reporting period, to the equivalent of 7.3 months of imports and servicing of government external debt, which

is well above the international adequacy standard of three months of imports. Stronger external resilience was also reflected in the sound and manageable external debt profile; the ratio of external debt to GDP was similar to the range of peer countries. In addition, the composition of external debt was also considered healthy, with long-term external debt dominating 84.4% of the total.

Macroeconomic Stability Maintained

1.4

Table 1.4. Indonesia’s Balance of Payments

USD billion

Component2017 2018 2019

I II III IV Total I II III IV Total I* II* III* IV** Total**

Current Account -2.2 -4.6 -4.6 -5.9 -17.3 -5.0 -7.8 -8.5 -9.2 -30.5 -6.6 -8.2 -7.5 -8.1 -30.4

A. Goods 5.6 4.8 5.3 3.1 18.8 2.3 0.3 -0.5 -2.6 -0.4 1.3 0.6 1.4 0.3 3.5

- Exports, fob 40.8 39.2 43.4 45.5 168.9 44.4 43.7 47.7 44.9 180.7 41.2 40.2 43.7 43.4 168.5

- Imports, fob -35.1 -34.3 -38.1 -42.5 -150.1 -42.1 -43.5 -48.2 -47.5 -181.2 -39.9 -39.6 -42.3 -43.1 -164.9

a. Non-Oil and Gas 7.6 6.1 6.3 5.2 25.2 4.4 3.2 3.4 0.1 11.2 2.9 3.1 2.7 3.2 11.9

b. Oil and Gas -2.2 -1.5 -1.3 -2.4 -7.3 -2.4 -2.8 -3.6 -2.9 -11.6 -2.1 -2.9 -2.1 -3.2 -10.3

B. Services -1.1 -2.0 -2.1 -2.1 -7.4 -1.3 -1.7 -1.8 -1.6 -6.5 -1.6 -1.9 -2.3 -2.1 -7.8

C. Primary Income -7.7 -8.1 -8.6 -7.8 -32.1 -7.4 -8.0 -8.0 -7.4 -30.8 -8.1 -8.9 -8.4 -8.3 -33.8

D. Secondary Income 1.1 1.0 1.1 1.2 4.5 1.4 1.6 1.8 2.0 6.9 1.8 2.0 1.8 2.0 7.6

Capital and Financial Account 6.7 5.3 10.3 7.0 29.4 2.2 3.1 4.0 15.6 25.2 9.9 6.6 7.4 12.4 36.4

1. Direct Investment 2.8 4.4 7.4 4.7 19.3 4.8 2.4 4.5 1.6 13.3 5.9 5.6 5.2 3.3 20.0

2. Portfolio Investment 6.5 8.1 4.0 2.2 20.9 -1.1 0.1 -0.1 10.5 9.3 5.2 4.6 4.8 7.0 21.6

3. Other Investment -2.5 -7.2 -1.1 0.1 -10.7 -1.5 0.6 -0.5 3.6 2.2 -1.3 -3.6 -2.7 2.1 -5.4

Overall Balance 4.5 0.7 5.4 1.0 11.6 -3.9 -4.3 -4.4 5.4 -7.1 2.4 -2.0 -0.1 4.3 4.7

Memorandum:

- Official Reserve Asset Position 121.8 123.1 129.4 130.2 130.2 126.0 119.8 114.8 120.7 120.7 124.5 123.8 124.3 129.2 129.2

In Months of Imports & Official Debt Repayment 8.6 8.6 8.6 8.3 8.3 7.6 6.9 6.3 6.4 6.4 6.7 6.6 6.9 7.3 7.3

- Current Account to GDP Ratio (%) -0.9 -1.8 -1.8 -2.3 -1.7 -1.9 -3.0 -3.2 -3.6 -2.9 -2.5 -3.0 -2.6 -2.8 -2.7

*preliminary figures **very preliminary figuresSource: Bank Indonesia


The main contributors to the BOP surplus were a wider surplus on capital and financial account coupled with a narrower current account deficit. Foreign investor optimism concerning the domestic economic outlook, together with attractive yields on domestic financial assets, drew a surge of capital inflows, dominated by portfolio investment and direct investment (Chart 1.15). In addition, the current account deficit narrowed as non-oil and gas exports improved, particularly during the latter half of the year (Chart 1.16). In the third quarter of 2019, the balance of payments recorded a USD46 million deficit, down considerably from USD1.98 billion in the previous period. The gains mounted in the fourth quarter of 2019, when the BOP deficit reversed, to surplus of USD4.28.

The financial and capital account surplus has continued to improve over time. In the first semester of 2019, the financial and capital account surplus stood at USD16.5 billion, significantly wider than the previous year. This large surplus was supported by a surge of portfolio investment inflows into debt securities and stocks. The

financial and capital account surplus strengthened further in the second half of 2019, widening to USD19.8 billion on the back of portfolio investment in Indonesia’s financial markets, especially government debt securities (SUN) in the amount of USD11.27 billion in 2019 (Chart 1.17). Foreign capital inflows were attracted by the continued favorable economic outlook for Indonesia as well as attractive yields on domestic assets for investment, in the face of heightened global uncertainty and more accommodative monetary policies in advanced economies. Near

the end of 2019, global uncertainty was moderated by the phase one trade deal agreed between US and China, as well as The Fed’s accommodative policy stance. The latter triggered an improvement in the VIX index from 16.7 in 2018 to a level of 15.3 in the reporting period.

A narrower current account deficit also supported the BOP surplus in 2019. The current account deficit stood at 2.72% of GDP in 2019, compared with 2.94% the year before. This narrower deficit was partly explained by non-oil and gas export

Grafik 1.27. Transaksi Modan Finansial


USD million

*preliminary figures **very preliminary figures

20,000

-10,000

0

10,000

20,000

40,000

30,000

50,000

Other Investments

Capital And Financial Accounts

Direct Investments

Portfolio Investments

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* 2018* 2019**

Chart 1.15. Capital And Financial Accounts

-4

-3

-2

-1

0

1

2

3

-50,000

-40,000

-30,000

-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* 2018* 2019**

Grafik 1.16. Current Accounts

Source: Bank Indonesia*preliminary figures **very preliminary figures

USD million Percent

Primary Income BalanceSecondary Income Balance

Goods Trade BalanceServices BalanceCA/GDP (rhs)

Current Acounts

Chart 1.16. Current Accounts

Grafik 1.17. Foreign Ownership of Domestic Assets

SBI SUN Stocks

IDR/USD(rhs)

I II III IV

2015 2016 2017 2018 2019

I II III IV I II III IV I II III IV I II III IV12,500

13,000

13,500

14,000

14,500

15,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

8,000

USD million Rupiah per USD


Chart 1.17. Foreign Ownership of Domestic Assets


Grafik 1.18. Exchange Rate Changes

Percent

TRY

ZAR

BRL

KRW

INR

MYR

SGD

IDR

PHP

THB

-20 -15 -10 -5 0 5 10

-11.0-14.4

2.6-8.1

-3.6-7.3

-3.9-5.6

-2.3-2.8

1.0-2.5

1.2-1.1

3.60.8

3.71.8

8.74.1EOP Average

Source: Reuters, Bloomberg, calculated

Chart 1.18. Exchange Rate Changes

Grafik 1.19. Exchange Rate Volatility

Source: Reuters, Bloomberg, calculated

SGD

MYR

THB

INR

PHP

IDR

KRW

TRY

BRL

ZAR

0 5 1510 20 25 30 35

18.1

17.0

16.1

8.7

7.0

6.2

6.1

5.4

5.0

4.5 2018 2019

Percent

Chart 1.19. Exchange Rate Volatility

Grafik 1.20. Daily Average Volume Growth ofForex Transactions

-1

7 87

-8

12.6

17.8

4.7

0.5

5

-10

-5

0

5

10

15

20Spot Transactions Derivative Transactions

2015 2016 2017 2018 2019

Percent, yoy


Chart 1.20. Daily Average Volume Growth of Forex Transactions

gains, especially in the first half of 2019. Also, imports were lower, reflecting restrained non-building investment that weakened demand for imported capital goods and raw materials. In addition, imports decreased in line with policy to optimise the utilisation of domestic oil production coupled with the B20 policy, mentioned earlier. The manageable current account deficit also stemmed from improvements in the secondary income account, primarily in terms of the total number of Indonesian migrant workers and their income remittances.

The stronger balance of payments (BOP) in 2019 supported rupiah appreciation, accompanied by lower volatility. On average, the rupiah strengthened by 0.76% in 2019 to Rp14,139 per US dollar versus Rp14,246 per US dollar in 2018. Point-to-point (ptp), the rupiah gained 3.58% and closed at Rp13,883 per US dollar at the end of 2019. Rupiah appreciation was in line with the peso and baht, but contrasted with the broad-based depreciation experienced by other emerging economies (Chart 1.18). In addition, rupiah exchange rate volatility decreased from 8.5% in 2018 to 7.0% in 2019, below the regional average, particularly for the lira, real and rupee (Chart 1.19).

Rupiah stability was further supported by a deeper and more efficient foreign exchange market. The volume of spot and derivative market transactions has grown by an annual average of 4.4% over the past five years. In 2019, average daily transactions in the derivative market increased by 5% to meet market demand for hedging instruments, primarily in compliance with regulations concerning prudential principles (Chart 1.20). In the second quarter of 2002, 89% of firms with mandatory external debt reporting obligations had met the hedging requirements for the upcoming 0-3 months and 93% for the upcoming 3-6 months. Meanwhile, foreign exchange market efficiency was confirmed by a relatively stable bid-ask spread in 2019 at around Rp8.8 per US dollar compared with Rp7.6 per US dollar in 2018. In addition, the implied yield tracked a consistent downward trend throughout 2019 to a level of 5.1% from 6.5% in 2018.6

Domestic Non-Deliverable Forwards (DNDF) also contributed to greater efficiency in the foreign exchange market. This was reflected in increasing convergence between DNDF and other non-deliverable forwards (NDF) in line with higher DNDF market

6 Implied yield is a measure of hedging cost.


Chart 1.21. Spread Convergency of NDF and DNDF


Grafik 1.21

13,200

13,400

13,600

13,800

14,000

14,200

14,400

14,600

14,800

15,000

15,200

15,400

0

-350

-250

-150

-300

-200

-100

-50

50

150

250

350

100

200

300

IDR IDR

NDF Offshore 1m

NDF Onshore 1m

10 per. Mov. Avg.(Spread NDF offshore -NDF onshore (rhs))

I II III IV I II III IV

2018 2019

Chart 1.22. CPI InflationGrafik 1.22.


-6

-1

4

9

14

19

0

1

2

3

4

5

6

7

8

Percent Percent


2015 2016 2017 2018 2019

CPI

Core

Upper Limit ofTarget Inflation

VF (rhs)

AP (rhs)

InflationTargetRange

liquidity (Chart 1.21). Average daily DNDF transactions consistently increased by around USD56 million per day, with the position reaching USD700 million in December 2019. Higher liquidity was also in line with implementation of BI policy to relax DNDF transactions through the May 2019 release of Bank Indonesia Regulation (PBI) No. 21/7/PBI/2019 (an amendment to Bank Indonesia Regulation (PBI) No. 20/10/PBI/2018). In addition, the number of domestic nonbanks offering DNDF selling transactions increased significantly from just two in April 2019 to 13 non-bank institutions in December 2019. Furthermore, DNDF selling transaction volume by non-bank institutions soared from USD1.4 million in April 2019 to USD34.5 million in December 2019.

Macroeconomic stability was reinforced by low and controlled inflation. Consumer Price Index (CPI) inflation stood at 2.72% in 2019, down from 3.13% in 2018. Also, CPI inflation was maintained within the 3.5%±1% target corridor in 2019, as well as during the previous four years. By component, core inflation and administered prices (AP) decreased compared with the previous year to 3.02% and 0.51%, respectively. In contrast, inflationary pressures on volatile foods (VF) increased to 4.30% in 2019 due to import constraints and weather disruptions (Chart 1.22). Regionally, CPI inflation in 2019 was well maintained in all provinces, with most recording headline inflation below 2.5%. Conversely, only North Sulawesi (3.52%) and South Kalimantan (4.01%) recorded CPI inflation above the target corridor due to intense inflationary pressures on airfares and volatile foods, such as tomatoes, various chili varieties and fresh fish (Chart 1.23).

Low CPI inflation in 2019 was assisted by maintained growth in domestic demand and exchange rate appreciation. Stable growth of domestic demand, near 5% per annum, helped keep non-food core inflation (excluding gold) low. Also, rupiah appreciation edged down non-food, traded core inflation from 3.00% to 2.82%, which limited the overall impact of rising global food prices. Such positive developments were further supported by the inflationary expectations of economic agents anchored to the target corridor of 3.5%±1%. Throughout 2019, the Consensus Forecast (CF) confirmed a disinflationary trend, from 3.3% at the end of 2018 to 3.1% at the end of 2019.

Grafik 1.23

-8-7-6

-4-5

12

-10

-3-2

34

65

-800

2001000-100-200-300-400-500-600-700

300400500600

Sout

h Ka

liman

tan

Nor

th S

ulaw

esi

Lam

pung

Bant

enD

KI Ja

kart

aW

est J

ava

Beng

kulu

Gor

onta

loCe

ntra

l Jav

aYo

gyak

arta

Sout

h-Ea

st S

ulaw

esi

Babe

l Isl

and

Cent

ral K

alim

anta

nBa

liW

est K

alim

anta

nRi

auSo

uth

Sula

wes

iN

orth

Sul

awes

iCe

ntra

l Sul

awes

iEa

st Ja

vaM

aluk

uSo

uth

Sum

atra

Riau

Isla

nd N

orth

Mal

uku

Wes

t Pap

uaN

TBAc

ehW

est S

umat

raEa

st K

alim

anta

nN

orth

Kal

iman

tan

Wes

t Sul

awes

iJa

mbi

NTT

Papu

a

December 2019 Difference with December 2018 (rhs)

Percent bps


Chart 1.23. Spatial CPI Inflation


Controlled CPI inflation was assisted by lower inflationary pressures from administered prices (AP). AP inflation decreased to 0.51% in 2019 from 3.36% in 2018 in line with strategic commodity prices, namely energy, which experienced deflation triggered by lower global oil prices in 2019. In addition, the trend of lower airfare inflation continued, further supporting low AP inflation. Furthermore, government policy effectively suppressed airfare inflation after increasing since 2008 due to fuel costs.7 Nevertheless, AP inflation experienced some pressure due to rising cigarette prices after the announcement of excise duty hikes on tobacco to be implemented in 2020.8

Persistently low inflation was also influenced by structural improvements. The contribution of inflation expectations to overall inflation has increased and remains anchored to inflation target in line

7 Minister of Transportation Decree No. 160 of 2019 concerning Maximum Economy Class Passengers on Commercial Scheduled Domestic Flights.

8 Minister of Finance Regulation (PMK) Number 152 of 2019, promulgated in October 2019.

with policy consistency by Bank Indonesia to maintain inflation within the target corridor. Such conditions are fully consistent with empirical findings indicating a growing influence of forward-looking expectations in the determination of inflation. In addition, the extent of exchange-rate pass-through to consumers has also declined as producers absorb more of the impact of exchange rate change on import prices. Lower exchange-rate pass-through is also the result of central bank policy to maintain exchange rate stability in line with the currency’s fundamental value. Consequently, both developments have made it unnecessary for producers to adjust the prices of final products due to exchange rate movements.

Another structural factor leading to lower inflation is the positive impact of synergic coordination between the Government and Bank Indonesia to control food inflation. Such coordination has helped to maintain a declining VF inflation trend since 2015. Despite intense inflationary pressures on horticultural produce,

inflation of several non-horticultural commodities, such as rice, chicken, eggs and cooking oil, remained low in 2019, thus preventing higher VF inflation. This was linked to central government policy to control food inflation, implemented through four salient measures. First, strengthening regulations through policy measures.9 Second, strengthening coordination in conjunction with regional administrations, relevant institutions and the business community, including the Central Inflation Control Team (TPIP) and the Regional Inflation Control Team (TPID), to ensure adequate stocks, evaluate food prices and control prices. Third, government monitoring and supervision to stabilise basic necessities throughout all regions of the Indonesian archipelago. Fourth, announced efforts to ensure low-cost, market penetration prior to national holidays.

9 See chapter 3 Bank Indonesia’s Policy Mix.


1.5

Financial System Stability Maintained; Bank Intermediation Function

Demands Attention

The maintenance of financial system stability in Indonesia has helped to sustain resilient national economic growth. Throughout 2019, the Financial System Stability Index (ISSK) remained in normal territory, supported by sound financial institutions and by financial market performance.10 In terms of bank capital, the Capital Adequacy Ratio (CAR) was recorded at a level of 23.31% in December 2019, well above the threshold mandated by prudential principles. Non-performing loans (NPL), as a proxy of credit risk, were also managed well below the threshold at 2.53% (gross) and 1.18% (net) (Chart 1.24). In terms of liquidity, the banking industry maintained adequate liquidity, as reflected by a ratio of liquid assets to deposits recorded at 20.86%. The banking industry’s success in maintaining a positive performance, despite considerable global uncertainty, was accompanied by efforts to maintain

10 The Financial System Stability Index (FSSI) is a composite index of financial system resilience, intermediation and efficiency in Indonesia. The index is a performance measure of bank and non-bank financial institutions, as well as the financial markets.

efficiency and profitability, as indicated by the bank overhead cost (BOPO) ratio and return on assets (ROA), which were maintained at 79.58% and 2.44% respectively.

Financial system stability was also supported by the effective transmission of accommodative monetary policy. Adequate liquidity has been remained in the money market and banking system, signalled by a high average daily transaction

Grafik 1.24. Permodalan dan Non PerformingLoan Perbankan

Source: OJK, calculated

USD million Percent

Gross NPL

CAR (rhs)

18

19

20

21

22

23

24

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

I II III IV

2015 2016 2017 2018 2019


Chart 1.24. Banking Capital and Non Performing Loan

volume in the interbank money market at Rp19.0 trillion. Adequate liquidity has also supported the effective transmission of interest rates in the money market, as confirmed by a 115bps decline in the 1-week interbank rate to 5.03% and a 119bps decline in the 1-week Jakarta Interbank Offered Rate (JIBOR) to 5.05% since July 2019. By contrast, monetary policy transmission to bank interest rates has not been optimal. The weighted


average deposit rate stood at 6.31% in December 2019, falling 52 bps since the end of June 2019 prior to the policy rate (BI7DRR) reductions that commenced in July 2019. Meanwhile, lending rates on working capital loans have fallen 18bps since June 2019 to 10.09% recorded in December 2019.

Despite maintained financial system stability, the bank intermediation function demanded attention. Growth of outstanding

loans disbursed by the banking industry in 2019 was recorded at 6.08%, down significantly from 11.75% in 2018. Several demand- and supply-side factors have contributed to this lacklustre performance. On the demand side, the corporate sector pared back its demand for new loans in line with deteriorating exports and non-building investment. On the supply side, banks were more cautious and selective when lending in light of widespread global uncertainty,

Grafik 1.25. Pertumbuhan Kredit dan DPK Perbankan

Source: OJK, calculated

Percent, yoy

4

2

0

6

8

10

12

14

16

18

Deposits

Credit

I II III IV

2015 2016 2017 2018 2019


Chart 1.25. Banking Credit and Deposit Growth

Grafik 1.26. Pertumbuhan Faktor M2

Source: Bank Indonesia, calculated

Percent, yoy

NFA

NCG

Credit

M2

-20

-10

0

10

20

30

40

50

I II III IV

2015 2016 2017 2018 2019


Chart 1.26. Growth of M2 and Its Affecting Factors Grafik 1.27. Pertumbuhan Komponen M2

Source: Bank Indonesia, calculated

Percent, yoy

Currency in Circulation (CiC)

M1

Quasi Money

I II III IV

2015 2016 2017 2018 2019

I II III IV I II III IV I II III IV I II III IV0

5

10

15

20

25

30

M2

Chart 1.27. Growth of M2 Components

fallout from which could hurt domestic corporate performance and repayment capacity. Further declines were offset, however, by bank financing to micro, small and medium enterprises (MSME), which grew 7.6%, absorbed primarily by the agricultural sector and the domestic-oriented manufacturing industry. Consistent with weaker credit growth, expansion of deposits--the primary source of funds in the banking industry--also slumped to 6.54% (Chart 1.25).

Sluggish credit growth fed through to slower broad money (M2) growth. As a broad measure of liquidity in the economy, M2 grew by 6.5% in 2019, relatively stable compared with 6.3% in 2018 (Chart 1.26). By component, the main drag on M2 growth was quasi-money, recorded at 6.1%, in line with the sluggish intermediation process. Meanwhile, narrowly-defined money supply (M1) accelerated from 4.8% in 2018 to 7.4% in 2019, spurred by demand deposits, growing 9.5%. Currency in circulation decelerated to 6.0% in 2019 from 7.8% in the previous year (Chart 1.27).


Grafik 1.28. Pertumbuhan Uang Elektronik


ATM/Debit Cards

Electronic Money (rhs)


0

50

100

150

200

250

300

350

400

-10

-5

0

5

10

15

20

25

Total

Credit Cards

I II III IV

2015 2016 2017 2018 2019


Chart 1.28. Growth of Electronic Money In line with financial system stability, payment system was also well maintained. Growth of cash remained positive against a backdrop of rapid non-cash instrument growth and innovation. Non-cash payment transactions using ATM/debit cards, credit cards and electronic money grew by 2.45% (yoy) in December 2019, dominated by ATM/debit cards with a 92.92% share of the total (Chart 1.28). Furthermore, E-money transactions have continued to flourish, with growth hitting 188.31% (yoy), evidence of greater public uptake of digital currency.


COVID-19 to Hamper Global Economic Recovery

in 2020

1.6

Several positive developments and global economic indicators at the end of 2019 generated optimism regarding the outlook for 2020. The favorable outlook was supported by global monetary policy in 2019. In addition, the phase one trade deal agreed between US and China at the end of the year stoked optimism concerning global economic conditions in 2020.11 Such conditions fuelled economic activity in advanced and emerging economies during the final two months of 2019 and into January 2020. Several global indicators, such as the manufacturing index, new export orders index, production index and confidence index, posted improvements. Economic growth in emerging economies also looked set to increase, including in China, India and Brazil, despite several domestic

11 The phase one trade deal covered the following salient issues: (i) intellectual property; (ii) technology transfer; (iii) trade of food and agricultural products; (iv) financial services; (v) exchange-rate policy; (vi) trade expansion; and (vii) law enforcement.

issues that the relevant authorities were working to overcome. At the end of 2019, therefore, Bank Indonesia projected global economic growth for 2020 at 3.1% up from an estimated 2.9% in 2019.

Global economic optimism at the end of 2019 triggered a surge of foreign capital inflows to emerging economies. In January 2020, capital flows to emerging countries increased, including in shares, bonds and foreign direct investment (FDI). These favorable dynamics translated into broad-based currency appreciation in emerging economies. Widespread optimism offset several geo-political risks, such as a potential conflict between US and Iran, tensions on the Korean peninsula and Brexit negotiations between UK and European Union.12

12 Brexit uncertainty eased at the end of 2019 after a Conservative Party victory in the UK General Election, which promised Brexit implementation on 31 January 2020.


Notwithstanding widespread optimism around year-end, global economic recovery was severely impeded by the COVID-19 outbreak in China at the end of January 2020. The COVID-19 outbreak originated in Wuhan, China, with different characteristics than the Severe Acute Respiratory Syndrome (SARS), namely a faster transmission rate and longer, asymptomatic incubation period.13 Rapid transmission of COVID-19 was exacerbated by the annual exodus of passengers returning home for the Lunar New Year. These conditions were compounded by the prolonged asymptomatic incubation period, just mentioned.

The rapid spread of COVID-19 had an immediate impact on economic conditions in China. March 2020 data reveal precipitous declines in several market indicators in China, such as reduced mobility in urban areas; fewer passengers on public transport; and lower daily consumption of coal by electricity producers. As a result of COVID-19, economic growth in China is projected to drop sharply in the first half of 2020 before gradually

13 Patients producing or showing no symptoms.

improving in line with the policy response instituted by the Chinese Government. Consequently, China’s dominant role in the global economy, contributing 16% of world GDP and 11% of total world trade (Chart 1.29), is expected to severely constrain global economic recovery. In February 2020, therefore, Bank Indonesia downgraded its global economic growth projection for 2020 from 3.1% to 3.0%.

Subsequently, the COVID-19 outbreak spread rapidly to numerous countries outside China. As of 18th March 2020, COVID-19 had spread to 159 countries, with the death toll exceeding 4,000 outside China. No longer restricted to Asia (notably South Korea, Singapore and Iran), COVID-19 was also transmitted to Europe, with epicentres in Italy and US. In a span of just two weeks, the number of infected people had increased 13-fold, with a 3-fold increase in the number of infected countries. Consequently, the World Health Organisation (WHO) declared COVID-19 a pandemic on 11th March 2020, thus necessitating serious

Grafik 1.29. Proporsi PDB dan Perdagangan TiongkokTerhadap PDB Dunia

Source: World Development Indicator

Percent

GDP

Trade

0

2

4

6

8

10

12

14

16

18

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018

Chart 1.29. Proportion of China’s GDP and Trade to World’s GDP

containment measures. Prior to COVID-19, the last pandemic declared by the WHO was H1N1 influenza, which spread to 214 countries and killed more than 18,000 people in 2009.

The broad spread of COVID-19 lowered global economic growth to levels below 2019 through several channels. The impact of the COVID-19 pandemic severely restricted global economic activity, primarily through the tourism, trade and investment channels. Economic activity was also impeded by the COVID-19 containment strategies employed in various countries, resulting in partial or total lockdowns. The spread of COVID-19 outside China further impacted projections of economic growth. By way of examples, restrictions on business and leisure travel undermined global tourism; low economic activity in trading partner countries hurt exports with feedback into demand for domestic products; and restrictions on business travel reduced investment, including in industries that require foreign workers. In the midst of these rapidly changing dynamics, Bank Indonesia again downgraded its global economic growth projection for 2020, this time to 2.5%, with signs of large downside risks.

The prospect of economic moderation reignited global financial market uncertainty. Data as of the middle of March 2020 revealed how COVID-19 triggered a global rebalancing of capital flows from emerging economies to safe-haven financial assets and commodities. Stock prices in many countries tumbled, including in advanced economies, while bond yields in emerging economies skyrocketed. Investors moved


liquidity to safe-haven assets, such as US bonds, resulting in a drop in yields on US Treasuries; soaring gold prices; and dollar index (DXY) appreciation (Chart 1.30). Ultimately, such developments triggered pressures on major global currencies, accompanied by higher volatility. Moving forward, the impact of COVID-19 will continue to demand attention considering that, at the time of writing, the pandemic showed no sign of abating with potential recessionary pressures in the global economy and fallout beginning to affect the Indonesian economy.

Grafik 1.30. Indeks VIX dan DXY

Source: Bloomberg

VIX DXY (rhs)

90

92

94

96

98

100

102

10

12

14

16

18

20

22

Index Index

I II III IV

2015 2016 2017 2018 2019


Chart 1.30. VIX and DXY


Domestic Economic Gains in 2020 Delayed

1.7

At the end of 2019, Bank Indonesia projected domestic economic growth for 2020 in the 5.1-5.5% range. This projection was characterised by optimism regarding global economic recovery, coupled with improving commodity prices. These were expected to boost exports and investment, especially non-building investment. The export and investment gains would feed through to increasing consumption due to higher incomes, thereby driving stronger economic growth. Furthermore, export growth would further stimulate non-building investment in line with demand for capital goods to increase output. In addition, a flourishing and more dominant middle-class would bolster resilient household consumption and shore up domestic economic growth.

In February 2020, however, after the COVID-19 outbreak in China, Bank Indonesia marginally revised down its domestic economic growth projection to 5.0-5.5% for 2020. The outlook was downgraded due to the direct and indirect impact of economic moderation in China. China’s economic contribution to Indonesia is not insignificant, particularly through tourism, exports and investment, which tainted the outlook (Table 1.5). The economic impact of

COVID-19 was not only direct through China’s economy but also indirect through spill over effects through other countries and the broader global economy, which were also expected to decline. Furthermore, COVID-19 transmission heightened global financial market uncertainty and triggered portfolio adjustments.

The downgraded growth projection of February 2020 was based on the estimated economic impact of COVID-19, which was expected to hurt the tourism industry and potentially restrain foreign direct investment (FDI) from China. Any impact on the tourism sector would reduce foreign exchange receipts due to fewer travellers visiting Indonesia from China, which is the dominant contributor to foreign exchange from tourism in Indonesia, surpassing Australia, Singapore and Malaysia.14 Based on monitoring of the major gateways into Indonesia, international arrivals fell sharply by 21.9% (yoy) in February 2020, an inauspicious development that is expected to persist.

14 Data for 2019 show that international travellers from China accounted for around 13% of total international travellers visiting Indonesia, generating 14% of total foreign exchange.


In terms of FDI, COVID-19 is expected to restrain investment and foreign workers from China. China has increased FDI to Indonesia significantly over the past five years, primarily targeting Java and Sulawesi-Papua. The surge of Chinese investment has been a boon to the secondary sector, predominantly the base metal industry. Sulawesi-Papua has attracted more investment due to its proximity to raw materials, primarily nickel concentrate. Furthermore, the increase of Chinese FDI has also been accompanied by an influx of foreign workers from China. However, the COVID-19 outbreak forced several Chinese FDI companies operating in Indonesia to initiate risk-mitigation measures against the virus along with the local governments, including suspending the recruitment of new foreign workers from China and delaying the return of existing Chinese workers to Indonesia after the Lunar New Year festive period. Ultimately, such conditions could potentially constrain realised Chinese investment in Indonesia.

Table 1.5. Contribution of China in Indonesian Economy 2019

Contribution of China Nominal (USD million) Share to Total

Exports (2019)

Indonesia's Total Exports to China 29,769.38 17.0%

Indonesia's Oil and Gas Exports to China 3,898.03 19.5%

Indonesia's Non-Oil and Gas Exports to China 25,871.35 16.6%

Indonesia's 10 Main Non-Oil and Gas Exports Commodities 20,236.92 13.0%

Imports (2019)

Indonesia's Total Imports from China 29,428.63 17.2%

Indonesia's Oil and Gas Imports from China 40.18 0.2%

Indonesia's Non-Oil and Gas Imports from China 29,388.44 19.7%

Indonesia's 10 Main Non-Oil and Gas Imports Commodities 28,393.64 19.0%

International Visitors (2019)

China's Tourists to Indonesia 2.07 million people 12.9%

Indonesia's Foreign Exchange Revenue from China's Tourists 2,385.48 14.1%

Foreign Direct Investment (2019)

China's FDI to Indonesia 4,744.50 16.8%

Source: Bank Indonesia, BPS, calculated

The spread of COVID-19 to numerous countries, including Indonesia, intensified pressures on the domestic economic outlook. Subdued economic activity in countries impacted by COVID-19, including Indonesia, were a consequence of supply constraints between countries for production purposes as well as restrictions imposed on economic activities to prevent further COVID-19 transmission. This had follow-on effects of lower labor demand, income and consumption, which undermined domestic demand. In addition, retreating confidence

amongst economic agents in terms of the economic outlook is expected to delay consumption, primarily to travel destinations and outings to public spaces. Pessimistic global conditions will leave investors reluctant to invest in Indonesia in line with dwindling global demand for domestic products along with more muted domestic demand. Furthermore, heightened uncertainty has triggered portfolio adjustments and foreign capital outflows from emerging economies, including Indonesia, which have exacerbated pressures on the rupiah. Bank Indonesia therefore projects a transient, near-term impact of COVID-19 on national economic growth before recovering gradually. Based on the current risks, Bank Indonesia again downgraded its economic growth projection for Indonesia in 2020 to 4.2-4.6% (Table 1.6).

By component, exports will be restrained in 2020 by lower-than-expected global economic growth. Exports are projected to contract by 5.2-5.6% in 2020 due to global economic moderation, declining world trade volumes and low international commodity prices. Disruptions in global supply chains caused by COVID-19 will also influence Indonesian exports through a lack of intermediate goods produced in

Table 1.6. GDP Outlook by ExpenditurePercent

Component 2019 Projection 2020

Projection 2021

Gross Domestic Product 5.0 4.2 - 4.6 5.2 - 5.6

Private Consumption 5.2 4.6 - 5.0 5.0 - 5.4

Government Consumption 3.3 2.1 - 2.5 2.9 - 3.3

Gross Fixed Capital Formation 4.5 3.1 - 3.5 5.9 - 6.3

Exports of Goods and Services -0.9 -5.6 - -5.2 6.0 - 6.4

Imports of Goods and Services -7.7 -9.3 - -8.9 4.6 - 5.0

Source: BPS (2019) and Bank Indonesia’s Projection (2020 and 2021)


other countries. Moreover, the mining and quarrying sector will also weigh heavily on exports owing to weaker demand, especially from China, for major export commodities. In addition to goods exports, services exports will also be held back by COVID-19, including by declining international arrivals.

Declining export performance is also expected to rein in investment. Limited investment growth is projected, in the 3.1-3.5% range for 2020, which is down from 2019. An export contraction will impede the pace of investment growth, particularly non-building investment. Also, the rapid spread of COVID-19 has forced the government to implement containment measures, including restrictions on foreign workers from affected countries. Preventing Chinese workers from entering Indonesia will undermine investment growth in the near-term, because workers from that country typically accompany Chinese overseas investments. Nevertheless, ongoing government infrastructure development projects are expected to maintain

Table 1.7. GDP Outlook by Industrial OriginPercent

Component 2019 Projection 2020

Projection 2021

Gross Domestic Product 5.0 4.2 - 4.6 5.2 - 5.6

Agriculture 3.6 3.1 - 3.5 3.4 - 3.9

Mining and Quarrying 1.2 0.0 - 0.4 1.4 - 1.8

Manufacturing 3.8 3.3 - 3.7 4.1 - 4.5

Electricity, Gas & Water 4.3 4.0 - 4.4 5.1 - 5.5

Construction 5.8 4.4 - 4.8 6.3 - 6.7

Trade, Hotel & Restaurant 4.8 4.1 - 4.5 5.5 - 5.9

Transportation and Communication 8.1 7.4 - 7.8 8.0 - 8.4

Finance, Rental & Services 7.1 5.6 - 6.0 6.2 - 6.6

Services 6.8 4.9 -5.3 5.8 - 6.2

Source: BPS (2019) and Bank Indonesia’s Projection (2020 and 2021)

investment growth, particularly building investment. In addition, the planned reduction of sectors on the Negative Investment List (DNI), and a change of terminology to the Positive Investment List (DPI), are expected to stimulate foreign capital investment. Furthermore, the accommodative monetary policy stance maintained by Bank Indonesia has lowered the cost of investment and provided strong incentives for business agents to increase investment.

Private consumption is projected to moderate in 2020, into the 4.6-5.0% range. Certain concerns prompted by COVID-19 will impact consumption, for example by: the government’s announcements to contain spread of the virus through reduced mobility; and retreating confidence in the economic outlook. Households have increased consumption of basic needs, but postponed other consumption. Clothing, transportation, household equipment and leisure are expected to be adversely affected. Meanwhile, consumption of basic needs (sembako) will be maintained, despite concerns surrounding the COVID-19

pandemic. Notwithstanding, a modest downturn consumption growth is expected to remain resilient, reinforced by a flourishing and more dominant middle-class. In general, members of the middle-class are salaried with permanent employment in the formal sector; COVID-19 is therefore expected to have a minimal impact on their income and consumption.

The Government is projected to maintain positive growth in its consumption spending while improving the quality of spending, notwithstanding slower growth of government revenues. Government consumption in 2020 is projected to expand in the 2.1-2.5% range, with fiscal policy oriented towards increasing competitiveness through innovation and the quality human resources. In relation to COVID-19, the government’s fiscal stimulus program is focusing on three priority areas, namely: bolstering the resilience of sectors affected by the pandemic; maintaining public purchasing power; and ensuring business continuity. Such policies will allow national government ministries and agencies, as well as regional administrations, to accelerate spending, particularly during the first quarter of 2020, in order to contain the economic impact of COVID-19. Additionally, the Government has reallocated budget resources, concentrating on healthcare and social assistance rather than non-emergency materials and capital spending.

The Government has further strengthened policies to minimise the economic impact of COVID-19. In the middle of March 2020, the Government announced a stimulus


package worth Rp33.3 trillion, equivalent to around 0.2% of GDP, as a mitigation measure against the economic fallout from COVID-19. The stimuli, consisting of two economic packages totalling Rp10.4 trillion or

0.06% of GDP and Rp22.9 trillion or 0.19% of GDP respectively, will focus on healthcare, social safety nets and protecting affected businesses and economic sectors. The first stimulus package was announced at

Table 1.8. Government Fiscal Stimulus Package I

Stimulus Program Nominal (Rp T) Period %

Budget

Consumption of Basic Needs (Sembako) Card Incentives 4.6 March-September (7 Months) 0.18

Additional Housing subsidy 1.5 2020 0.06

Flight Subsidies 0.4 March-May (3 Months) 0.02

PJP2U Tariff Subsidy 0.3 March-May (3 Months) 0.01

Avtur Price Subsidy 0.3 March-May (3 Months) 0.01

Budget reallocation to 10 Tourism Destinations 0.1 2020 0.00

Hotel and Restaurant Tax Exemption 10 Tourism Destinations 3.3 March-May (3 Months) 0.13

Total Incentives 10.4 0.41

Source: Ministry of Finance, calculated

Source: Ministry of Finance

PPh 21 Tax Exemption(Rp 8,6 T)

Fiscal Non-Fiscal Financial Sector Food Policy

PPh 21 paid fully (100%) by the Government for income of workers from all industrial sectors in DJP’s classification of business field which included in category C (processing industry). Valid Apr-Sep (6 months)

PPh 22 Imports Tax Exemption (Rp 8,15 T)

Exemption of PPh article 22 regarding imports is given to 19 sub-sectors in processing industry from Apr-Sep (6 months)

PPh 25 Organization Tax Exemption (Rp 4,2 T)

Reduction of PPh 25 Organization installment tax for 30% to 19 sub-sectors in processing industry from Apr-Sep (6 months)

Value Added Tax Restitution (Rp 1,97 T)

Acceleration of PPN restitution from Apr-Sep (6 months) for exporters without nominal limit and for non-exporters with nominal limit up to Rp 5 Billion

Reduction of Exports Ban & Restriction

Health Certificate and V-Legal document are no longer required. In consequence, there is reduction of ban & restriction for 749 HS codes, which consists ofi 443 fish commodities and products, and 306 forestry industry products

Reduction of Imports Ban & Restriction

Reduction of imports ban & restriction primarily raw materials for producer with producer status of steel, alloy steel, and its derivative products (early stage). Next, it will also be implemented to strategic food products (industrial salt, sugar, flour)

Exports & Imports Process AccelerationFor reputable traders, exports & imports process will be accelerated through auto response and auto approval system. There are 735 companies considered as reputable

Exports & Imports Service AccelerationDevelopment of National Logistics Ecosystem to simplify and synchronize information flow and exports & imports documents

Ease of Financing

Assessment of credit/financ-ing/provision of fund only based on punctuality of principal payment and/or interest for credit up to 10 billion, also applied to micro, small, and medium-scale businesses

Restructurisation

Bank could perform restrcturisation for whole credit/financing without considering credit limit or debtor type, espescially micro, small, and medium-scale businesses debtor

BPJAMSOSTEK Relaxation

Stimulus injection will still be formulated appropriately, so it will not affect benefits to recipients and interfere continuity and security of employment & social security program fund

Government guarantee availability of main and strategic supplies to resident with affordable price

Main and strategic food supplies are rice, corn, shallot, garlic, chili, cayenne chili, beef, chicken meat, chicken egg, sugar, and cooking oil

During Mar-Aug 2020, availability projection of 11 strategic commodities confirmed to be adequate. Most of the supply is from domestic production, only garlic, beef, and sugar are imported

Accelerating the imports recommendation process for several commodities that need to be imported, as an impact of COVID-19

Gambar 1.2. Stimulus Pemerintah Jilid IIFigure 1.2. Fiscal Stimulus Package II

the onset of the COVID-19 outbreak to offer incentives to businesses impacted by COVID-19 in order to maintain consumption (Table 1.8). As the COVID-19 outbreak spread, the Government announced the second stimulus package through tax breaks and incentives to stimulate spending and maintain purchasing power and through certain non-fiscal measures. The latter would stimulate trade and safeguard food supply (Picture 1.2). Bank Indonesia appreciates the fiscal stimulus measures implemented by the Government to minimise the impact of COVID-19, which are expected to shore up economic growth.


Imports are projected to contract by 8.9-9.3% in 2020, mainly hampered by languishing domestic demand and exports. Weak non-building investment will also restrain imports of capital goods. Furthermore, import substitution policy, like accelerating the B30 program and adjustments to limits on import tariffs, will curb import growth. Moreover, domestic content requirements (TKDN) for electricity projects and other sectors could potentially lower imports further.

A narrower current account deficit will help to maintain a strong balance of payments (BOP) in 2020. A manageable current account deficit is projected in the 2.5-3.0% of GDP range in 2020, driven by stronger net exports, reflecting a deeper import decline than export moderation. In addition, continued export diversification into non-traditional markets will limit export declines attributable to weakening global demand. Import substitution policy, revised import tariffs and domestic content requirements (TKDN) will be used to further contain the current account deficit. Nonetheless, heightened uncertainty due to the COVID-19 pandemic has undermined investor appetite for direct investment which will limit foreign capital inflows into Indonesia, thereby eroding the capital and financial account surplus.

Inflation in 2020 is projected to remain under control and within the target corridor of 3.0%±1%. Controlled headline inflation will be supported by low core inflation despite a build-up of inflation pressures on VF and AP. Rational inflationary expectations anchored to the target, coupled with weak demand will keep core inflation stable. VF inflation is projected to intensify in line with food distribution constraints resulting from large-scale mobility restrictions to contain COVID-19 as well as the usual possibility of inclement weather. Regarding a notable measurement matter, a January 2020 update to the methodology in the Cost of Living Survey (SBH) in 2018, concerning the use of geometric means, will contribute to lower inflationary fluctuations (Box 1.1:

Updated Cost of Living Survey 2018). Regionally, the inflation outlook in most regions is expected to support attainment of the national inflation target, backed by strong interregional cooperation through TPID.

Bank intermediation is confronting the challenge of COVID-19. For 2020, Bank Indonesia projects growth of outstanding loans disbursed by the banking industry in the 6.0-8.0% range; deposits would grow at the same pace, making for adequate liquidity. Bank Indonesia revised down its projection for loan growth due to restrained domestic economic activity and unconducive global economic conditions. Meanwhile, financing from the financial markets will be adversely impacted by a portfolio adjustment in the face of widespread uncertainty triggered by COVID-19.

The global and domestic economic outlook for 2020 will depend heavily on the COVID-19 containment process and speed of the subsequent economic recovery. The risk of prolonged COVID-19 transmission, affecting a broader population across wider areas, would further suppress global GDP growth and world trade volumes, leading to deeper international commodity price declines. Such dynamics could trigger a further correction in the national economic growth outlook. Furthermore, increasing interconnectedness through the trade channel and an integrated global financial system imply that the impact of lower global growth could quickly be transmitted through contagion to other countries. Ineffective containment measures implemented in affected countries could also lead to lower-than-expected global and domestic economic growth.


Global economic growth is expected to regain upward momentum in 2021 in line with the post-COVID-19 global economic recovery. The stimulus policies instituted by the Chinese Government and authorities in many other countries are oriented towards overcoming the economic impact of COVID-19. Accommodative global monetary policies in 2020 will stimulate investment and catalyse economic growth in subsequent periods, including 2021. Close coordination across borders and among international institutions to contain the COVID-19 pandemic will also contribute to economic improvements. Consequently, global economic growth is projected to accelerate to around 3.7% in 2021, spurred by gains in terms of trade, tourism and investment. Furthermore, world trade volumes and commodity prices are expected to increase on rising global demand.

A rebound from the COVID-19 crisis would increase national economic

growth in 2021 to around 5.2-5.6%. Global economic growth and international commodity prices will rebound as global investment and production activities ramp up in the wake of COVID-19, which will stimulate domestic economic recovery. Stronger global conditions will spark demand for Indonesian export commodities while domestic policies like raising the export quota for copper, downstream processing and the development of industrial zones will also foster further export gains. Product and export market diversification will remain an ongoing matter, particularly amongst emerging economies as the backbone of future global economic growth. In turn, export gains will feed through to investment, particularly non-building investment. In addition, government efforts to improve the investment climate through the Omnibus Bills on Job Creation and Taxation will nurture investment. Besides, the accommodative policy stance maintained by Bank Indonesia will

Domestic Economic Outlook Promising

in Medium Term

1.8

spur financing for economic activities and, hence, nurture economic growth in subsequent periods. Private consumption is expected to remain resilient, due to rising incomes, particularly from export gains.

Economic stability will be maintained with inflation controlled in the 3.0%±1% target corridor. The inflation outlook is anchored in inflationary expectations and managed by aggregate demand, improving external conditions and controlled core inflation. Volatile food prices are expected to contribute little to inflation, in line with the outlook for controlled food inflation in most regions, supported by stronger interregional trade to maintain food availability through TPID.

The domestic economic outlook is projected to improve in the medium term, supported by global economic improvements and higher productivity. The promising global economic outlook over the


medium-term is backed by several factors, namely the growing contribution of emerging economies in the global economic recovery, easing trade tensions and less geopolitical risk in various jurisdictions. Furthermore, the accommodative monetary policy stance instituted by authorities in many countries will increase global economic growth in the medium term, with world trade volumes expected to improve along with rising international commodity prices.

The promising global economic outlook continues to demand attention, however, because of structural challenges that could emerge and potentially restrain productivity gains. Productivity growth will be diminished by an ageing population that dominates advanced economies and will reduce the total labor force. In addition, low global investment will create lags in terms of capital accumulation and technological innovation. Meanwhile, a shift in advanced economies from manufacturing towards services will slow the pace of global productivity growth, triggered by lower prices for manufacturing products due to tight competition. Ultimately, unresolved issues of income inequality in emerging economies due to low-quality growth will continue to challenge the medium-term global economic outlook.

In the medium term, Indonesia’s domestic economy is projected to build momentum in line with global economic improvements and higher productivity. On the one hand, the global economic recovery will stimulate world trade activity and induce higher international commodity prices, thus providing an opportunity for Indonesia to boost external performance. On the other hand, productivity in Indonesia is expected to increase due to ongoing structural reforms and exploitation of the current demographic endowment. In the medium term, therefore, Bank Indonesia projects domestic economic growth in the 5.5-6.1% range, accompanied by controlled inflation within the target corridor and a manageable

current account deficit in the 2.2-2.7% of GDP range as of 2024. Based on that growth trajectory, Indonesia is expected to achieve high-income, advanced economy status by 2045.

Higher productivity will be achieved by strengthening infrastructure accompanied by a more favorable investment climate. Better basic physical infrastructure (such as toll roads, ports, airports and power stations) will reduce logistical costs and improve interregional connectivity. In addition to such ‘hard’ infrastructure, the Government has also increased focus on soft infrastructure (mainly human resource development), which will improve economic efficiency. Meanwhile, the Government is improving the investment climate by accelerating structural reforms, including enactment of Omnibus Laws on Job Creation and Taxation. Furthermore, to improve the investment climate, the Government is accelerating sources of innovative financing through financial market deepening, including infrastructure bonds, infrastructure mutual funds and infrastructure investment funds. The investor base for the financial markets will be expanded, primarily to attract domestic investors in order to minimise vulnerabilities to external shocks. A larger portion of domestic investors in the financial markets will buffer the impact of external dynamics on the domestic economy.

Higher productivity will be further supported by improving the quality of human resources to increase the availability of skilled labor. Average years of schooling is expected to increase gradually, backed by government efforts to improve education quality through development of vocational education. Such efforts have been bolstered by a budget allocation adequate to support research activity and the quality of education throughout the Indonesian archipelago. Vocational education and training will be provided in conjunction with the industry/private sector, with an emphasis on mastering the skills demanded by industry in order to increase productivity


and competitiveness, particularly in Indonesia’s major industries.

The BOP outlook for the medium term is solid, supported by a manageable current account deficit and a surge of foreign capital inflows. The solid BOP outlook is underpinned by a manageable current account deficit due to the impact of economic transformation in several priority sectors that has supported export gains, coupled with ongoing import policies to increase local value added. Bank Indonesia projects a current account deficit in the 2.2-2.7% of GDP range in the medium term. Meanwhile, foreign capital inflows are expected to increase, including direct investment. Portfolio investment inflows are also predicted to increase in line with favorable global financial market conditions, a stronger domestic economic outlook for Indonesia and upgraded sovereign investment rating. In addition, the range of domestic financial instruments will be broadened to attract more foreign investors, especially for the financing of infrastructure in Indonesia.

In the medium term, inflation is projected within the target corridor, supported by greater economic efficiency and productivity. Low and stable inflation is projected within

the target corridor. Core inflation will remain low in line with rational inflationary expectations anchored to the target range through policy consistency by Bank Indonesia to maintain price stability, accompanied by low exchange-rate pass-through. In addition, low core inflation will be supported by supply-side improvements in line with higher production capacity in response to growing demand. Furthermore, more effective and efficient distribution of goods and services, accompanied by greater availability of connectivity infrastructure, will be a boon to transportation and logistics efficiency and, ultimately, contribute to lower inflation.

Attainment of the inflation target will also be accompanied by fewer interregional inflation disparities. This will be achieved through supply-side improvements in line with greater sectoral productivity, interregional connectivity and infrastructure quality as well as advanced crop management and import management. The rapid proliferation of the digital economy will also help to dampen interregional inflation disparity through broader access to price information. In addition, the use of digital platforms for economic activities will help maintain low and stable inflation.


Effective January 2020, BPS-Statistics Indonesia updated the weights used in calculating the Consumer Price Index (CPI) to reflect 2018 spending patterns. Essentially, this update refines the methodology for CPI calculations to reflect recent changes in local consumption patterns, using BPS’s latest Cost of Living Survey (SBH) 2018. The update is also in line with the latest international standards contained in the Consumer Price Index Manual. The salient differences between SBH 2018 and the previous SBH (2012) include: (i) a broader scope of cities surveyed; (ii) a larger household sample; (iii) fewer commodities surveyed in total; (iv) a lower weight for food consumption; (v) refined inflation groups; and (vi) a different methodology to calculate inflation (Table 1).

It is notable that the use of SBH 2018 is expected to reduce fluctuations in measured inflation, due to methodological changes concerning city weights and the introduction of a geometric mean for certain calculations. More specifically, SBH 2018 will no longer use city weights to calculate national inflation, instead applying city consumption values.1 In addition, SBH 2018 now uses a geometric mean for some calculations, which replaces the arithmetic mean used for SBH 2012. As one outcome of using a geometric mean, inflationary

1 In SBH 2012, national NK is calculated on a weighted average basis (weighted by city weight to national NK). Meanwhile in SBH 2018, national NK is a sum of city consumption values.

fluctuations will be lower, effectively because lower weights are applied to outliers, that is, to goods that record higher price variability. But despite less fluctuation, the overall direction and movements using SBH 2018 will be consistent with SBH 2012.

Further on the new CPI, inflation groups have increased from 7 to 11, which effectively reduces the overall weight of food, reflecting changes in the composition of household spending. Nonetheless, the food, beverages and tobacco category retains the highest weight in SBH 2018, despite being lower weight than in SBH 2012. Looking at other aspects of disaggregation, the weights of core inflation and administered prices have increased in SBH 2018, whereas with the weight for volatile foods is lower.

SBH 2018 has impacts in both lowering the fluctuation and the inflation. The fluctuation is lowered due to geometric mean methodology. While, updated total commodities and commodity weights contributes to lower CPI inflation and its components, core inflation, administered prices and volatile foods. Nonetheless, the dynamics of inflation movements across SBH 2018 are consistent with SBH 2012.

Box 1.1.

Updated Cost of Living Survey 2018

Details SBH 2012 SBH 2018

Basic Year 2012=100 2018=100

City Coverage82 cities 33 Provincial Capital 49 Recencies/Cities

90 cities 34 Provincial Capital 56 Recencies/Cities

Coverage Until 13,608 Census Blocks 136,080 Households

14,160 Census Blocks 131,600 Households

Commodity Package Total: 859 City: 224-461

Total: 835 City: 248-473

Proportion of Consumption Value

Food: 35.04%- Raw Food: 18.85%- Prepared Food, Beverages, Cigarettes and Tobacco:

16.19%Non-food: 64.96%

Food: 33.68%- Raw Food: 18.02%- Prepared Food, Beverages, Cigarettes and Tobacco:

8.67%Non-food: 66,32%

Commodity grouping by City and National 7 Groups and 35 subgroups (city and national alike) 11 Groups in the city and national

34-43 subgroups in each city

Average price calculation Arithmetic Mean Geometric Average

National CPI Calculation Aggregation Using City Weight obtained based on the number of households (Multiplication index with city weight)

Aggregation of total consumption value of all cities (not using city weight)

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Table 1. Cost of Living Survey Profile Last Two Periods

latest economic developments outlook · 2020. 9. 16. · 2 chapter 1 — economic report on...

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