Executive Summary Recent Economic Developments

Penulis: Pusat Kebijakan Ekonomi Makro

- The economy grew by 6.2% in Q2-2010. The whole year it forecasted to grow within the range of 5.5%-6.0% by the end of 2010, and estimated to reach the upper limit projection, bolstered by Indonesia's external sector performance, investment, and consumer spending.

- The latest macro economic indicators supported us to believe that the economy, in line with the development in the global economy, is steadily moving on an upward trend accompanied by financial system stability. It bolstered Indonesia's external sector performance and investment, with domestic recovery gaining strength as the economy is no longer reliant solely on consumption. The optimism also supported by latest development in the perception indicators such as an upgrade to investment grade, yield spread, CDS, CRC-OECD, etc. An assessment of economic developments during July 2010 points to improvement in the domestic economy amid persistent risks of global uncertainties.

- On July 13th 2010, Japan Credit Rating Agency (JCR) upgraded Indonesia's sovereign rating to Investment Grade, from BB+ to BBB-. This upgrade was the first investment grade for Indonesia in 13 years. Currently, the Republic of Indonesia’s sovereign rating BB+ /Stable from Fitch, BB+/Stable from R&I, BB/Positive from S&P, and Ba2/positive from Moody’s.

- The latest Board Meeting convened in August 2010 resolved to hold the BI Rate at 6.5%. For the time being, the current rate considers adequate to safeguard future inflation expectations. However, BI is taking careful note of the recent onset of higher inflationary pressure and will pursue the necessary monetary and banking policy actions to ensure that future inflation remains on track with the established target at 5%+1% for 2010 and 2011. BI will soon respond with measures to tighten liquidity management without disruption to the bank intermediation function, implemented through changes in the statutory reserve requirement.

- Regarding prices, the Board of Governors is closely monitoring the onset of rising inflationary pressure. July 2010 recorded fairly brisk CPI inflation at 1.57% (mtm) or 6.22% (yoy). Inflationary pressure was driven mainly by higher inflation in the foodstuffs category and particularly rice, due to seasonal uncertainties. In contrast, pressure from core inflation has been kept at modest levels as a result of adequate supply-side response to increases in demand and the appreciating trend in the exchange rate.

- Overall, banking industry remains in a stable condition and convinced to be run prudently, which is reflected in the well-maintained Capital Adequacy Ratio of 17.4%, and safe level of Non-Performing Loans at 3.3%, as of end of June 2010. By end of 2010, lending growth is projected to reach 22%-24%. Up to July 2010, banking industry has reached the remarkable lending growth at 19.6%. Improved market confidence also bring more optimism to further banking intermediation function. Going forward, BI will keep a close watch on bank lending growth to keep it within the range envisaged in the Bank Business Plans. Special efforts will be devoted to increase credit for productive purposes. The purpose of these measures is to ensure that demand-side increase will be adequately offset on the supply-side and thus not generate excessive inflationary pressure.

- Balance of payments has posted a significant surplus over Q2-2010 at US$5.4 billion. The surplus was contributed from both the current account and capital and financial account. The current account posted a US$1.8 billion surplus, bolstered from upbeat performance in non-oil/gas trade balance, the gas trade balance and the current transfers balance. The ongoing world economic recovery has strengthened non-oil/gas exports with growth outperforming non-oil/gas imports. The capital and financial account recorded a US$3.3 billion surplus distributed fairly among all major components. renewed growth in capital inflows in response to the upward revision of the credit rating outlook and more upbeat international perceptions.

- International reserves position at 30 July 2010 reached USD78.8 billion, equivalent to 6.03 months of imports and servicing of official external debt. This helped the rupiah to maintain stable movement throughout July 2010 with an appreciating trend.

- In May 2010, the parliament approved 2010 revised budget proposed by the government . The revision is perceived as a necessary measure to adjust the current economic conditions especially changes in the macroeconomic assumptions. The proposed budget adjustment would increased deficit from 1.6 to 2.1%, in order to contain increasing subsidies figures due to rising commodity prices mainly from oil.

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