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BANK INDONESIA
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MONETARY POLICY REPORT
BANK INDONESIA

MONETARY POLICY REPORT
QUARTER III-2008

The Monetary Policy Report is published quarterly by Bank Indonesia after the Board of
Governors» Meetings in January, April, July, and October. In addition to fulfilling the
mandate of article 58 of Act Number 23 of 1999 concerning Bank Indonesia, amended
by Act No. 3 of 2004, the report has two main purposes: (i) to function as a tangible
product of a forward-looking working framework in which formulation of monetary
policy is based on economic and inflation forecasts; and (ii) as a medium for the Board of
Governors of Bank Indonesia to present to the public the various policy considerations
underlying its monetary policy decisions.

The Board of Governors
Boediono

Governor

Miranda S. Goeltom

Senior Deputy Governor

Hartadi A. Sarwono

Deputy Governor

Siti Ch. Fadjrijah

Deputy Governor

S. Budi Rochadi

Deputy Governor

Muliaman D. Hadad

Deputy Governor

Ardhayadi Mitroatmodjo

Deputy Governor

Budi Mulya

Deputy Governor

i

MONETARY POLICY REPORT
BANK INDONESIA

ii

MONETARY POLICY REPORT
BANK INDONESIA

Enhanced Monetary Policy Measures
Under Inflation Targeting Framework

In July 2005, Bank Indonesia implemented and enhanced monetary policy measures within the Inflation Targeting Framework
(ITF) which encompasses four main areas: the use of the BI rate as an operational target, enhanced decision making process,
more transparent communications strategy, and strengthened policy coordination with the Government. The measures is
intended to strengthen the effectiveness and to provide good governance to its monetary policy making to achieve the price
stability needed to support suistainable economic growth and attain social welfare.

Monetary Policy Strategy
Basic Principles
•

With the ITF, inflation target is the overriding objective and nominal anchor of monetary policy. In this regard, Bank
Indonesia will apply a forward-looking strategy to steer present monetary policy towards achievement of the mediumterm inflation target.

Inflation
•

Application of the ITF does not mean that monetary policy will not take account of economic growth. This policy will
retain the fundamental paradigm of monetary policy in striking an optimal balance between inflation and economic
growth in both the establishment of the inflation target and in monetary policy response, which will be targeted
towards low, stable inflation in the medium and long-term.

The Inflation Target
•

The Government, after consultation with Bank Indonesia, has established and announced targets for CPI inflation
targets at 8%±1%, 6%±1%, and 5%±1% for 2006, 2007, and 2008 (Based on press release on 17 March 2006
from the Coordinating Ministry for Economic Affairs. These inflation targets are consistent with the process of
gradual disinflation towards a medium to long-term inflation target of about 3%, competitive with other nations.

Instruments and Monetary Operations
•

The BI Rate is used to convey the monetary policy stance and operational targets. The BI Rate is a one-month interest
rate regularly announced by Bank Indonesia for a specific time frame.

•

The BI Rate is implemented through open market operations (OMO) using 1-month SBIs. To strengthen the
effectiveness of liquidity control on the market, Fine Tune Operations (FTO) will be carried out on a daily basis using
SBIs and Government Securities as underlying instruments.

Policymaking Process
•

The BI Rate is determined by the Board of Governors in the quarterly Board of Governors» Meeting held each
January, April, July, and October. Under certain conditions, if necessary, the BI Rate may be adjusted in the Board of
Governors» Meeting convened in other months. Changes in the BI Rate are indicative of Bank Indonesia»s assessment
of the inflation forecast in relation to the established inflation target.

Transparency
•

From time to time, monetary policy will be communicated through customary media communications, such as
statements to the press and market players, the website, and the publication of the Monetary Policy Report (MPR).
This transparency is intended to strengthen understanding and build public expectations of the economic outlook
and future inflation as well as the monetary policy response pursued by Bank Indonesia.

Coordination with the Government
•

To provide coordination in inflation targeting, monitoring, and control, the Government and Bank Indonesia have
set up a team made up of officials from various relevant agencies. In the course of its work, the Team deliberates
and issues recommendations concerning the necessary policies for both the Government and Bank Indonesia in
curbing inflationary pressure to achieve the established inflation target.

iii

MONETARY POLICY REPORT
BANK INDONESIA

iv

MONETARY POLICY REPORT
BANK INDONESIA

Contents

Monetary Policy Report - Quarter III-2008

Contents

1. General Review ...........................................................................

1

2. Latest Macroeconomic Indicators ..............................................

5

Economic Growth ..........................................................................

5

The Balance of Payments ............................................................... 11

3. Monetary Indicators and Policy, Q3/2008 ................................. 14
Inflation ......................................................................................... 14
Rupiah Exchange Rate .................................................................... 16
Monetary Policy ............................................................................. 18

4. Outlook for the Indonesian Economy ....................................... 23

Assumptions and Scenarios ............................................................ 24
Economic Growth Outlook ............................................................. 25
Inflation Forecast ........................................................................... 29
Risks .............................................................................................. 30
5. Monetary Policy Response Q3-2008 .......................................... 31

Statistics .......................................................................................... 32

vii

General Review

1. General Review
Inflationary pressure in Indonesia remained strong during Q3/2008. Driving this
were high public expectations of inflation, buoyant domestic demand and the impact
of imported inflation related to the potential for rupiah depreciation brought about
by the US financial crisis. In their policy response to these developments, the Bank
Indonesia Board of Governors sees the need for curbing of inflationary pressure to
achieve the medium-term inflationary target and safeguard the stability of the
economy as a whole.

Q3/2008 was dominated by global financial markets woes and the fallout of these
problems on the Indonesian economy. The world economic slowdown has now
taken hold in several industrialised nations and begun spreading to emerging
markets, including Indonesia. The turmoil on global markets has spread inexorably
further, with the Indonesian economy also affected. Despite Indonesia»s robust
economic fundamentals, the negative sentiment engendered by the crisis prompted
a new wave of capital outflows. This has put pressure on both the stock market
and the rupiah exchange rate. The stock index plunged dramatically alongside
depreciation in the exchange rate. Both developments augur for a pessimistic outlook
for the domestic economy. In response, Bank Indonesia and the Government have
maintained close policy coordination and continue to monitor developments in the
economy on a regular basis.
With conditions still shrouded in these problems, inflation and economic stability
remain the primary focus of Bank Indonesia. Efforts to strike an overall balance
between inflation control and the risk of instability on the money market are
ongoing. To curb inflation, Bank Indonesia has pursued a tight bias monetary stance
by raising the BI Rate 75 bps during Q3/2008 and optimising the use of all monetary
policy instruments at its disposal. The upward movement in the BI Rate was followed
by higher rates for bank time deposit and lending rates. As of August 2008, time
deposit rates had climbed faster than the BI Rate, with rates for working capital

credit and investment credit following suit. Rates for consumption credit, however,
were relatively stable.
Bank Indonesia has kept a close watch on money market liquidity, with several
banks caught in a liquidity squeeze. This tightening was triggered by disparities in
liquidity held by banks, given that liquidity in the banking system was still adequate
overall. Added to this, high-paced bank credit expansion not balanced by sufficient
growth in depositor funds led to a liquidity crunch at some banks. The cautious
stance taken by banks to anticipate the surge in demand in advance of the religious
festivities and low rate of expansion in the government account put added pressure
on liquidity in the banking system. Nevertheless, this tightening of liquidity is
predicted to be temporary. The liquidity squeeze is forecasted to ease after the end
of the Eid-ul-Fitr period, when cash begins returning to the banking system. Added

1

Monetary Policy Report - Quarter III-2008

to this will be the expansionary trend in government accounts during Q4/2008. To
resolve the problem of tight liquidity, Bank Indonesia has pursued a series of measures
through improvements in monetary operations.
Amid the global financial turmoil of Q3/2008 and slowing world economic growth,
the Indonesia economy still managed to chart healthy growth. In preliminary figures,
the GDP grew by 6.3% (yoy) in Q3/2008, following 6.4% growth (yoy) in Q2/
2008. Household consumption was again indicated as the main driving force for
this growth. Vigorous growth in consumption was bolstered by continued strength
of purchasing power and increased availability of consumer finance. Investment,
another component of domestic demand, also recorded high growth, particularly
for non-construction activities. Nevertheless, the slowdown in the world economy
has also taken the edge off Indonesia»s export growth, although growth remains
strong. Alongside this, imports are forecasted to expand rapidly as suggested by
the strength of domestic demand and export production needs.
Global economic developments subsequently put pressure on Indonesia»s balance
of payments in Q3/2008. Export growth is lagging behind that of imports. Imports
maintained a rapid pace of expansion, driven by heavy domestic demand and also
price increases. The combination of the economic slowdown in the developed world
and falling world commodity prices is set to bear down on Indonesia»s export
performance. However, this decline is not expected to be excessive, given that
Indonesia»s exports are natural resource-based and therefore less sensitive to an
economic slowdown in the developed world. In addition, international trade in the
Asia-Pacific region, led by rapid expansion in China and India in recent years, is
adequate to keep exports from steeper decline.
Analysis of the composition of imports reveals that import growth has taken place
mainly in raw materials and capital goods. This in turn will spur growth in domestic
production and production capacity, which will benefit the economy in the medium
to long-term. Leading importers were the industry sector (specifically the chemical
industry subsector, the base metals, iron and steel subsector and the transportation
equipment, machinery and tools subsector) and the transport and communications
sector, both of which have substantial backward and forward linkages.
In the capital and portfolio account, negative sentiment spurred by the turbulence
on global financial markets prompted a wave of capital outflows. In portfolio
investments, foreign capital recorded net outflows. To cover the costs of rising
imports, domestic economic actors have drawn on assets placed overseas and some
have availed foreign financing, as indicated by the other investment component
that recorded net inflows. In the upshot of these developments, international reserves
reached USD57.1 billion, equivalent to 4.2 months of imports and servicing of
official debt.
The outflows of foreign capital put downward pressure on the rupiah during Q3/
2008. Nevertheless, Bank Indonesia kept a close watch on movement in the

2

General Review

exchange rate under the forex market stabilisation policy aimed at mitigating
pressures and easing rupiah volatility. As a result, the average value of the rupiah in
Q3/2008 appreciated further over the earlier period. Measured as a quarterly average,
the rupiah gained 0.47% from Rp 9,259 to the USD to Rp 9,216 to the USD.
Downward pressure began to set in near the end of Q3/2008 as foreign investor
behaviour came under the influence of global economic developments. Risk aversion
among investors led to pressure on the rupiah. Downward pressure was also
sustained by regional currencies that weakened from the spillover effects of external
turbulence. On the other hand, the rupiah still offered attractive investment yields,
reflected in the broad interest rate differential. This in turn eased pressures and
helped stem further capital outflows from rupiah instruments.
In related developments, the Indonesian Composite Index (IDX) closed at 1,832 at
the end of the period under review (September 2008), a drop of 21.9% compared
to end Q2/2008. The disappointing Q3/2008 performance of the IDX Index is
explained more by the influence of deteriorating global financial markets as more
and more international financial institutions faced bankruptcy.
Looking forward, economic growth is predicted to remain at a healthy 6.2%-6.4%
amid the turmoil besetting the world economy in 2008 before tapering off slightly
in 2009. The continued strength of economic growth is driven primarily by domestic
demand. In turn, domestic demand is not only supported by availability of financing,
but also the continued strength of public purchasing power. Household consumption
is forecasted to maintain momentum. At the same time, investment growth is
being fuelled mainly by non-construction investment. Externally, the fast-rising
imports of capital goods and raw materials are expected to boost the future capacity
of the Indonesian economy. Underlying this optimism are the substantial multiplier
effects on the economy in the industry sectors importing these capital goods and
raw materials. On the other hand, growth in exports of goods and services is
forecasted to decline in keeping with the slowdown in the world economy and
falling international commodity prices. Inflationary pressure is also predicted to
remain high during the coming months. CPI inflation in 2008 is forecasted in the
range of 11.5%-12.5% (yoy). In 2009, inflationary pressure is expected to ease
midway through the year in response to the current monetary policy stance and
falling imported inflation as international commodity prices maintain a downward
trend. Accordingly, inflation in 2009 is forecasted in the range of 6.5%-7.5% (yoy).
Looking forward, the Indonesian economy is also confronted by various risks. These
risks are explained largely by developments in the world economy, and most
importantly the outworking of the global financial crisis. Economic growth may
take a downward bias due to the crisis, which is also likely to affect balance of
payments performance given the potential for falling international commodity prices.
Within the future policy framework, Bank Indonesia will focus on efforts to curb
the risk of inflation while avoiding excessive disruption to the upward trend in
economic growth. To this end, Bank Indonesia will continue to implement a prudent,

3

Monetary Policy Report - Quarter III-2008

measured monetary policy stance while sustaining the momentum for economic
growth. The decision of the BI Board of Governors to raise the BI Rate a further 25
bps to 9.5% in October 2008 was based primarily on this reasoning. In regard to
financial stability, the Bank Indonesia policy is also expected to safeguard the stability
of the domestic financial system. The policy will also be reinforced by more optimum
use of other monetary instruments, such as forex market interventions to minimise
volatility in the rupiah exchange rate and maintain adequate liquidity on the money
market. Bank Indonesia will maintain a close watch and monitor global economic
developments and make immediate policy adjustments if necessary to safeguard
macroeconomic stability and achievement of the medium to long-term inflation
target.

4

Latest Macroeconomic Indicators

2. Latest Macroeconomic Indicators
Amid the uncertainties of global economic developments, the Indonesian economy
continued to chart high growth in Q3/2008, albeit down slightly from the preceding
quarter. The high rate of growth was bolstered by vigorous domestic demand and
especially household consumption. Household consumption maintained reasonably
brisk growth, albeit slightly less than in the preceding quarter. Supporting this was
relative stability in public purchasing power and an upswing in consumer confidence.
However, preliminary figures for exports suggest that growth was held back by
weakening economic conditions in key developed nations. Consistent with slowing
export performance, figures also point to modest decline in investment growth
momentum. However, this slowdown is not expected to have excessive impact,
given the continued robust growth in household consumption and improving
business optimism for future economic conditions. On the other hand, indicators
suggest that import growth was curbed to some extend by the effects of slowing
exports and investment.
On the supply side, key sectors driving the economy maintained relatively stable
growth in preliminary figures with the exception of agriculture, which shed some
growth. Nevertheless, the slowing growth in agriculture was adequately offset by
high growth in non-tradable sectors such as transport and telecommunications
and services and resumption of positive growth in the mining sector. Based on this
assessment, third quarter growth in the Gross Domestic Product (GDP) reached an
estimated 6.3% (yoy).

ECONOMIC GROWTH
Indonesia charted another quarter of strong growth in preliminary figures for Q3/
2008, consistent with the high growth outcome for the preceding quarter. Despite
this, various indicators point to slowing growth, even though
significant downturn is not suggested. Accordingly, GDP growth
in Q3/2008 is estimated at 6.3% (yoy) (Graph 2.1).

% y-o-y
7.0

Aggregate Demand

6.5

On the demand side, Q3/2008 GDP growth was again high,

6.0

bolstered to strong domestic demand and especially consumption
5.5

(Table 2.1). The relative stability in public purchasing power,
improving consumer optimism and seasonal factors with the

5.0

religious festivities provided an added boost to household
4.5

I

II

III
2005

IV

I

II

III
2006

IV

I

II

III
2007

IV

I

II
III*
2008

consumption growth. However, the accelerated export growth
in the preceding quarter is expected to let up slightly in the figures

Graph 2.1

for Q3/2008 due to the slowdown in the global economy and

Growth of Gross Domestic Product (GDP)

falling prices for oil and other commodities. Consistent with this

5

Monetary Policy Report - Quarter III-2008
%Y-o-Y, Base Year 2000

Table 2.1
Economic Growth - Demand Side
Item

2005

2005

2006

2006

2007

2007

2008

I

II

III

IV

I

II

III

IV

I

II

III

IV

I

II

III*

2.0

2.6

5.5

6.7

4.3

3.8

5.6

2.8

3.5

3.9

4.6

4.6

5.3

5.1

4.9

5.6

4.9

5.0

Private Consumption

3.4

3.8

4.4

4.2

4.0

2.9

3.0

3.0

3.8

3.2

4.7

4.7

5.1

5.6

5.0

5.7

5.3

5.1

Government Consumption

-9.6

-6.7

14.7

24.9

6.6

11.5

28.8

1.7

2.2

9.6

3.7

3.8

6.5

2.0

3.9

4.7

2.2

4.5

Total Investment

14.9

16.7

10.4

2.7

10.9

1.4

0.9

0.8

6.8

2.5

7.0

6.9

10.4

12.1

9.2

15.4

12.8

12.0

Domestic Demand

5.0

5.9

6.7

5.7

5.8

3.2

4.4

2.3

4.3

3.5

5.2

5.2

6.6

6.8

6.0

8.0

6.9

6.8

Export of Goods and Services

22.0

17.6

12.3

15.6

16.6

11.8

11.4

8.3

6.6

9.4

8.1

9.8

6.9

7.3

8.0

15.5

16.1

15.8

Import of Goods and Services

22.2

23.6

17.7

8.9

17.8

4.8

9.3

10.9

9.2

8.6

8.5

6.5

7.0

13.6

8.9

17.8

16.7

16.0

GDP

6.0

5.9

5.8

5.1

5.7

5.1

5.0

5.9

6.0

5.5

6.1

6.4

6.5

6.3

6.3

6.3

6.4

6.3

Total Consumption

* Bank Indonesia Projection figures

trend, some slackening is also expected in investment growth
and import growth.

gGDPHousehold Consumer2 (Reference Series) and Cli1
101

101.50

100

101.00

In estimates, household consumption maintained robust

100

100.50

expansion, although down slightly from the preceding quarter

100

100.00

as suggested by leading indicators (Graph 2.2). In Q3/2008,

100

99.50

growth in household consumption reached 5.1% (yoy) in

100

99.00

preliminary figures on the strength of relative stability in public

98.50

99
Import of Consumer Goods, Real M1, CPI

98.00

99
99

gGDPHousehold Consumer2
CLI
97.50
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I
2002
2003
2004
2005
2006
2007
2008 2009

purchasing power and improved consumer confidence. Also
contributing to the strong growth in household consumption
was expanded consumer financing extended by banks and other
finance institutions. Consumption of durable goods, such as

Graph 2.2

electronics and motor vehicles, maintained vigorous expansion.

Leading Indicators of Private Consumption

Growth in consumer goods imports was also quite strong early
in Q3/2008. At the same time, the findings of the Bank Indonesia
Consumer Survey point to an upsurge in consumer confidence
(Graph 2.3), largely attributable to rising income expectations
and availability of jobs. This indicates that the public has begun
to recover from the impact of the fuel price hike, despite the

Index
120

looming threat of diminished sources of income. Also pointing

optimistic

110

to relatively stable conditions was the upward movement in the

100

retail sales index. The stable index growth is largely the result of
real sales growth in the household articles and the clothing and

90

accessories categories.
80

Expectation Consumer
Present Situatuions Index (PSI)
Consumer Confidence Index

pessimistic
70
60

1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9
2005
2006
2007
2008

Graph 2.3
Consumer Confidence Index √ BI Consumer Survey

6

Estimated investment growth in Q3/2008 is slightly down from
the preceding quarter, in line with the trend in investment leading
indicators (Graph 2.4). However, no significant decline is expected
in view of the relatively stable public purchasing power and
growing business optimism for future economic conditions.
Reinforcing this confidence were developments in several leading

Latest Macroeconomic Indicators

investment indicators, such as relatively strong imports of capital
Gross Fixed Capital Formation2 (Reference Series) and Cli1

goods and investment credit expansion (Graph 2.5). Investment

102
Gross Fixed Capital Formation2

CLI

in Q3/2008 is therefore estimated to have charted 12% growth

102

(yoy).

101
101

Analysed by component, Q3/2008 investment growth was

100

supported by vigorous growth in non-construction investment

100

(Graph 2.6)
2.6). Indications of this are evident in renewed increase

99

in the production index for the domestic machinery industry

IPI, Sales Commercial Car, IPI Machinery and Equipment, Industrial
Electricity Consumption, Cement Consumption

99

I

II III IV I
2002

II III IV I II III IV I II III IV I II III IV I
2003
2004
2005
2006

alongside high growth in imports of capital goods. In contrast,
II III IV I
2007

II III IV
2008

Graph 2.4

cement consumption, a key indicator relevant to construction
investment, showed some decline.

Investment Leading Indicators

On the other hand, indications of business interest in investment
remain strong
strong. The business tendency index published in a survey
by the Central Statistics Agency (BPS) points to improvement,
reflected in rising orders for input goods and domestic and foreign

(%)

(%)

20.0
15.0

25.0

orders in Q3/2008 (Graph 2.7). The findings of the Business

20.0

Confidence Survey (SKDU) also point to a growing number of

10.0
15.0
5.0
0.0

10.0

-5.0

5.0

-10.0
-15.0

Gross Fixed Capital Formation (y-o-y)
Real Invesment Credit_Seasonal Adjusted_CMA (m-t-m)
Real Invesment Credit (y-o-y)

-20.0
-25.0
1

3

5

7 9 11 1
2005

3

5

7 9 11 1
2006

3

5

7 9 11 1
2007

3

business actors interested in investing during the second half of
2008. Even so, investment continues to be hampered by such
factors as interest rates, licensing and access to bank credit.

0.0

Exports again recorded high growth in preliminary figures for

-5.0

Q3/2008, albeit down slightly from the preceding quarter.

-10.0

Weakening export growth was closely linked to the world

5 7 9
2008

economic slowdown and falling international commodity prices,

Graph 2.5

particularly for agricultural and mining products. In the preceding

Real Investment Credit Growth

quarter, export demand from emerging market countries such
as China and India contributed significantly to Indonesia»s export
growth, but this demand gradually slackened due to depressed
growth in advanced economies. Nevertheless, the cumulative
measure of exports for January-August 2008 was still high at

(%,yoy)

(%,yoy)

18

50
Manufacturing

16

40

USD95.45 billion, representing 29.87% growth (yoy) over the

Non Manufacturing

14

same period in 2007. Accordingly, preliminary figures for Q3/

Gross Fixed Capital Formation (rhs)

12

2008 suggest export growth at 15.8% (yoy), buoyed mainly by

10

agricultural and mining products (Graph 2.8).

30
20
10

8

0

6

Imports are expected to show slightly less vigorous expansion in

-10

4

Q3/2008 in keeping with the softening performance of exports

-20

2

and investment (Graph 2.9). Despite this, no major downturn in

-30

0
I

II

III
2005

IV

I

II

III
2006*

IV

I

II

III
IV
2007**

I

Graph 2.6
Construction and Non-Construction
Investment Growth

II
III
2008***

import growth is expected, given the continued strength of
household consumption and improving business optimism for
future economic conditions. Preliminary figures for Q3/2008 place
import growth at 16.0% (yoy), down from the earlier quarter.
Analysed by category of goods, import growth was driven mainly

7

Monetary Policy Report - Quarter III-2008

by raw materials and capital goods. In the latest data released
Index

Index
140

130

130

120

by BPS, cumulative imports for the January-August 2008 period
reached USD89.83 billion, an increase of 91.19% (yoy) over the
same period in 2007.

120
110
110

Government Financial Operations

100

90

80
I* II* III* IV* I*
2004
BTI

II* III* IV* I*
2005

Domestic Order

II* III* IV* I*
2006

Foreign Order

100

Government financial operations in Q3/2008 (July-August) again

90

produced a budget surplus. In Q3/2008 (July-August), the budget

80

surplus reached Rp 20 trillion (0.5% of GDP), which compares

II* III* IV* I* II* III*
2007
2008

Input Goods Order

to the deficit of 0.1% of GDP recorded for the same period one

Real Sales Price (Rhs)

year before. Accordingly, realised Government financial

Graph 2.7

operations during the first eight months of 2008 charted a surplus

Business Sentiment - BPS

at Rp 81.8 trillion, equal to 1.8% of GDP. This was considerably
higher than the surplus for the same period in 2007 at Rp 14
trillion (0.1% of GDP).

(%)

The hefty surplus came as the result of considerably improved

(%)
25

130

gExport (yoy) rhs

agriculture export

industry export

mineral export
20

100

revenue performance compared to the same period last year. At
end-Q3/2008, total revenues and grants stood 67.9% of the
Revised 2008 Budget target, well ahead the same period in 2007

15

70
40

10

when revenues and grants came to 57.9% of the Revised 2007
Budget. The improvement in state revenues was achieved mainly
in taxation, non-tax revenues from oil and natural gas resources,

10
5
-20
0

-50
I

II III
2004

IV

I

II III
2005

IV

I

II III
2006

IV

I

II III
2007

IV

I

II III
2008

profit share from SOEs and other non-tax revenues.
On the expenditures side, Budget implementation has just
reached 53.2% of the Revised 2008 Budget, largely on par with

Graph 2.8

the outcome for the same period one year earlier at 51.5% of

Export Growth by Sector

the Revised 2007 Budget
Budget. Budget expenditure absorption in Q3/
2008 was again dominated by transfer payments with subsidies
at Rp 52.1 trillion, including Rp 31.3 trillion for the fuel subsidy.
Line ministry/government agency expenditure items, i.e.

imp_gdp (Reference Series) and Cli1
100.8

personnel expenditures, material expenditures and capital

100.6

expenditures, did not undergo significant expansion. Concerning

101

100.4

regional expenditures, Transfers to the Regions were lower during

101

100.2

the period under review compared to the same period one year

100

100.0

before. These funds were derived mainly from Profit Sharing

100

99.8

Funds, Special Allocation Funds and Special Autonomy and Fiscal

99

99.6

Balance Funds. Measured for the whole year, Transfers to the

99.4

Regions reached only 55.2% of target in the Revised 2008

102
imp_gdp
102
CLI

99
98

Industrial Production Index, Volume of Industrial Electricity, Automotive Production,
Japan Manufacturing Index, Paper/Paper Products Production Index, Clothing and, Rp to
Accessories Production Index, Korea Production and Services Index, Rp to USD,
Rp to JPY, Real Consumption Credit, Real M1

99.2
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
2002
2003
2004
2005
2006
2007
2008

Graph 2.9
Leading Import Indicators

Budget. This was down from the same period in 2007, when
these transfers reached 61.2% of target.
Concerning budget financing, the less conducive conditions on
financial markets have exacerbated the constraints on issuing

8

Latest Macroeconomic Indicators

Government Securities. The increased yield on Government Securities, all to be
expected in the present conditions of global financial market turmoil and tight
liquidity since mid-way through the period under review, have impacted issuances
of Government Securities. For year-to-date, net issuance of Government Securities
is only at 87% of the targeted level in the Revised 2008 Budget.1
Government consumption and investment is estimated to have charted more
vigorous growth in Q3/2008 compared to Q2/2008
Q2/2008. In July-August 2008, Central
Government expenditures and Transfers to the Regions measured 65.5% against
projections, indicating that the targeted Government consumption for Q3/2008
was achievable. However, the low rate of capital expenditures, only at 53% of the
budget projection, indicates that Government investment in Q3/2008 will fall short
of projects even though Transfers to the Regions are estimated to be on track.
Nevertheless, the overall rate of realised Government investment in Q3/2008 is
expected to surpass the levels reached in Q2/2008.

Aggregate Supply
Consistent with supply-side developments, the economy is estimated to have
maintained strong supply-side growth during Q3/2008. In preliminary figures, most
economic sectors charted high growth (Table 2.2). The leading growth sectors,
manufacturing and trade, hotels and restaurants, maintained relatively stable
performance with growth at 4.0% (yoy) and 7.8% (yoy). Despite this, the agriculture
sector recorded lower estimated growth at 2.1% (yoy) as expected with the passing
of the harvest season. On the other hand, estimated growth in other sectors, such
as transport and communications, the electricity, gas and water utilities sector and
construction, was again strong at 19.5% (yoy), 11.0% (yoy) and 8.1% (yoy).
Supporting these sectoral growth estimates were various sectoral indicators generally
pointing to improvement, such as the capacity utilisation based on the Bank Indonesia
Production Survey and the machinery and tools production index. The findings of
the Business Tendencies Survey conducted by BPS also indicate positive sentiment
in business expectations during Q3/2008, fuelled by increased domestic and foreign
orders and orders of input goods. Alongside this, capacity utilisation in the Business
Survey was relatively stable. Analysis of sectoral distribution shows that
manufacturing, the trade, hotels and restaurants sector and agriculture were again
the dominant areas of economic activity. However, when analysed by contribution
to GDP growth, the leading sectors were transport and communications, the trade,
hotels and restaurants sector and manufacturing.
Manufacturing maintained relatively stable growth in Q3/2008 at 4.0% (yoy). Rising
demand driven by the religious festive season at end-Q3/2008 was on factor spurring
growth, particularly in the food, beverages and tobacco industry subsector and the
textile industry subsector. In addition, some leading indicators for industry, such as

1

Based on cash proceeds paid into the Government account at Bank Indonesia.

9

Monetary Policy Report - Quarter III-2008
%Y-o-Y, Base Year 2000

Table 2.2
Economic Growth - Supply Side
Sector

2006
I

II

III

IV

2006

2007
I

II

III

IV

2007

2008
I

II

III*
2.1

Agriculture

6.6

1.6

2.6

2.6

3.4

-1.7

4.7

7.6

3.1

3.5

6.1

4.6

Mining and Quarrying

2.3

3.6

1.1

0.0

1.7

6.2

3.2

1.0

-2.1

2.0

-1.9

-0.9

1.0

Manufacturing

3.0

3.6

5.9

5.8

4.6

5.2

5.1

4.5

3.8

4.7

4.2

4.1

4.0

Electricity, Gas and Water Supply

5.1

4.5

5.8

7.7

5.8

8.2

10.2

11.3

11.8

10.4

12.6

11.2

11.0

Construction

7.7

8.5

8.5

8.6

8.3

8.4

7.7

8.3

9.9

8.6

7.9

8.0

8.1

Trade, Hotels and Restaurants

4.9

5.9

7.9

7.0

6.4

9.2

7.6

7.9

9.1

8.5

7.1

7.9

7.8

Transportation and Communication

12.0

13.8

14.5

17.0

14.4

13.0

12.7

14.1

17.4

14.4

20.3

19.6

19.5

Financial, Rental and Business Services

5.6

5.2

4.5

6.5

5.5

8.1

7.6

7.6

8.6

8.0

8.2

8.7

8.5

Services

5.8

6.0

6.7

6.2

6.2

7.0

7.0

5.2

7.2

6.6

5.6

6.5

7.3

GDP

5.1

5.0

5.9

6.0

5.5

6.1

6.4

6.5

6.3

6.3

6.3

6.4

6.3

* Bank Indonesia Projection figures

the Manufacturing Production Index released by BPS, maintained stable movement.
Also reflecting this was the stable level of vehicle production. In contrast, the
Production and Capacity Utilisation Index in the Bank Indonesia Production Survey
showed a rising trend. Financial statements of several industrial companies reported
improvement, with sales growth matched by increased inventory. As regards
financing, the industry sector continued to show credit expansion. Another leading
indicator, the high level of bank lending to industry as of mid-Q3/2008, offers
further confirmation of industry sector growth.
The trade, hotels and restaurants sector recorded another quarter of strong growth
at an estimated 7.8% (yoy) for Q3/2008. Vigorous household consumption,
especially in advance of the religious festivities at the end of Q3/2008, was one
factor driving growth in the trade, hotels and restaurants sector. Furthermore, some
leading indicators for trade, hotels and restaurants also provide confirmation of
high growth. As of early Q3/2008, the Bank Indonesia Retail Index maintained
stable growth. Similar upward trends were also visible in the corporate sales and
inventory within the trade sector to the end of Q2/2008. The indicator for the
hotels subsector, i.e. hotel occupancy rates in Jakarta and Bali, showed relatively
stable growth as of end-Q2/2008. In regard to financing, bank lending to the trade
sector maintained brisk expansion in activity until mid-Q3/2008.
Growth in the agriculture sector slowed from the preceding quarter to an estimated
2.1% (yoy) in Q3/2008. The less vigorous growth in the agriculture sector is
explained, among others, by the end of the rice harvest. Added to this, the slowdown
in the estates subsector caused by falling export demand put further brakes on
agriculture sector performance. Nevertheless, the foodcrops subsector remained
stable as demonstrated by the relatively stable figures released by BPS for rice
production (ARAM II - 2008) compared to the preceding year. Reinforcing this was
the high growth in agriculture sales and inventory as of Q2/2008. In the financing

10

Latest Macroeconomic Indicators

area, indications of slowing agriculture performance were also reflected in the
downturn in agriculture sector lending during mid-Q3/2008.
Q3/2008 growth in the mining sector is estimated at a positive 1.0% (yoy), even
though not fully reflected in leading indicators. Mining performance was bolstered
by exports of coal, metal ores, clinker and concentrates, alongside indications of
rising aluminium exports. However, mining sales and inventory still showed a
downward trend. As regards financing, lending growth in the mining sector was
marked by slowing momentum.
The transport and communications sector again forged ahead in Q3/2008 with
growth estimated at 19.5% (yoy). The continued strength of growth in this sector
is attributable largely to performance in the communications subsector, reflected in
ongoing growth trend in cellular telephone subscribers during Q2/2008. Alongside
this, the transportation subsector also showed signs of an upward trend, reflected
in rising numbers of rail passengers. Financing in the transport and communications
sector maintained growth with credit expansion on the rise. The high rate of credit
expansion in this sector was driven mainly by the telecommunications subsector,
where strong prospects are underpinned by the still enormous potential market.
The construction sector achieved estimated Q3/2008 growth at 8.1% (yoy).
Confirming the growth in this sector were various indicators, such as growth in
commercial property construction. From the financing side, loan disbursements for
property credit and construction credit maintained stable growth, even surpassing
the averages of 2007.

THE BALANCE OF PAYMENTS
Strong economic growth and the onset of decline in world commodity prices led to
changes in performance of the balance of payments, most importantly in the current
account. The current account began to record a deficit as a result of continued
strength of imports. Leading in import growth were imports of capital goods and
raw materials in support of investment and production. In a similar vein, the capital
and financial account sustained pressure from the shift in investor interest in response
to the turbulence on global financial markets. In the final outcome, international
reserves reached USD57.1 billion, equivalent to 4.2 months of imports and servicing
of official debt. Measured annually, indicators of external vulnerability showed further
improvement with the continued positive performance in exports and subdued
foreign debt indicators. Like before, the condition of external balances was conducive
to Indonesia»s economic performance.

The Current Account
In preliminary figures for Q3/2008, the current account came under pressure from
accelerated import growth that outpaced the rise in exports
exports. Driving the high rate
of import growth was strong inflation in trading partners, in addition to the continued

11

Monetary Policy Report - Quarter III-2008

robust domestic demand. Leading in import growth were imports of capital goods
and raw materials in support of investment and production. On the other hand,
despite indications of slowdown, exports maintained positive performance.
Indonesia»s exports to several developed nations continued to rise, as to be expected
with the nature of Indonesia»s resource-based and low-end technology exports
that are less sensitive to changing incomes in developed countries. The slowing
trend in export growth resulted mainly from the downward trend in international
commodity prices.
Based on data for the January-August 2008 period, non-oil and gas exports
reached USD72.9 billion, representing growth of 19.3% (yoy) over the same period
one year before. The high rate of export growth was driven by growth in
agricultural and industrial exports at 37.5% and 22.8%. In contrast, mining
commodities slowed considerably, with export growth at a mere 0.8% over the
same period last year. This is explained by a drop in coal exports brought on by
the shift to meeting growing domestic energy needs and the onset of decline in
international metal prices. On the other hand, non-fossil fuel imports for JanuaryAugust 2008 mounted 42.6% (yoy) to USD67.5 billion, with import growth for
consumer goods, raw materials and capital goods recorded at 29.9%, 41.6%
and 55.6% respectively. The growth in non-fossil fuel imports is expected to
benefit the domestic economy, given that since 2006, positive trends in import
growth have been positively correlated with growth in consumption and
investment.
In the oil and gas sector, the trade balance was strengthened by gas exports. During
January-July 2008, oil and natural gas exports reached US$10.4 billion and US$10.1
billion, up 64.0% and 58.2% over the same period one year earlier. On the other
hand, soaring prices resulted in spiralling oil imports during January-July 2008 (up
72.7%, yoy), pushing Indonesia»s oil trade deficit for that period to USD6.2 billion.
Despite this, with the solid performance in gas exports, the oil and gas sector still
managed a surplus of USD3.9 billion.

The Capital and Financial Account
In preliminary figures, the capital and financial account recorded yet another surplus
in Q3/2008
Q3/2008. The primary source of the capital and financial account surplus is the
withdrawal of corporate assets held overseas and drawing on private foreign
borrowings to finance rising imports. Besides this, the relative domestic
macroeconomic stability amid turbulence on global financial markets and the
incentive of high yields paved the way for inflows of foreign capital on the
Government Securities market. Offsetting this was the shift in foreign investor
preferences and flight to quality triggered by the global financial market woes,
which put mounting pressure on the capital and financial account.

12

Latest Macroeconomic Indicators

International Reserves
In response to the developments in the current account and the capital and financial
account, international reserves at end-Q3/2008 stood at USD57.1 billion
billion, equivalent
to 4.2 months of imports and servicing of official debt.

13

Monetary Policy Report - Quarter III-2008

3. Monetary Indicators and Policy,
Q3/2008
Developments in the Indonesian economy were marked by a series of external and
internal shocks during Q3/2008. Inflationary pressure remained high, fuelled by
robust domestic demand and high inflation expectations. The annual measure of
CPI inflation was again markedly higher in comparison to Q2/2008. Q3/2008 CPI
inflation was recorded at 2.88% (qtq) or 12.14% (yoy). Despite the increase in
annual CPI inflation (yoy), quarterly inflation (qtq) in the CPI showed some movement
in return to the normal trend. The average rupiah exchange rate for Q3/2008
appreciated 0.47% from Rp 9,259/USD to Rp 9,216/USD albeit with a build-up of
downward pressure at the end of the period. Stable macroeconomic conditions,
the continued attractiveness of rupiah-denominated yields and broad interest rate
differential proved adequate to rein in capital outflows from rupiah instruments
and prevent the rupiah from steeper decline.
To safeguard macroeconomic stability, Bank Indonesia decided to raise the BI Rate
75 bps to 9.25% at end-Q3/2008. This rate policy was bolstered by a range of
actions to maintain rupiah stability and other measures designed to reinforce
monetary control operations.

INFLATION
Monthly inflation maintained a rising trend during Q3/2008, mainly in response to
heavy domestic demand and the seasonal factor of religious festivities (Eid-ul-Fitr)
(Eid-ul-Fitr).
Measured annually, CPI inflation at end-Q3/2008 reached 12.14% (yoy), up from
11.03% (yoy) in the preceding quarter (Graph 3.1). In September 2008, monthly
inflation came to 0.97% (mtm). Analysed by expenditure category, inflation in Q3/
2008 was driven primarily by the foodstuffs category; housing, water, electricity,
gas and fuels; and the processed foods, beverages, cigarettes
and tobacco category (Graph 3.2).
%, mtm

%, yoy
22

5

MtM
YoY (RHS)

17

The CPI inflation rate is explained by the non-fundamentals of
rising pressure in volatile foods and administered prices,1 and
fundamental factor of core inflation made up of inflation

4
12
3
7
2

expectations, demand-side pressure and the output gap. Pressure
from volatile foods inflation was commensurate with the high
international food commodity prices and the seasonal trends

2

1

0

-3
1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9
2006
2007
2008

associated with the Ramadan fasting month and Eid-ul-Fitr
festivities. Administered prices inflation, which mounted due to
the ongoing shortages of energy commodities in some regions,

Graph 3.1
CPI Inflation

14

1

Aggregated inflation (core, volatile foods and administered prices) calculated by Bank
Indonesia based on sub-category approach.

Monetary Indicators and Policy, Q3/2008

also exacerbated Q3/2008 CPI inflation. At the same time,
inflationary pressure from fundamentals, as reflected in the trend

Transportation, Communication
& Financial Service

0.92

in core inflation, also remained high. The main factors influencing

Education, Recreation
& Sport

3.77

Health

core inflation were persistently high inflation expectations and

1.64

Clothing

imported inflation and swelling aggregate demand.

Share (m-t-m)
Inflation (m-t-m)

0.77

Housing, Electricity, Water,
Gas, and Fuel

Volatile foods inflation mounted higher in Q3/2008 in both

3.58

Food, Beverages, Cigarattes
& Tobacco

quarterly and annual figures. The surge in volatile foods inflation

2.62

is related to high international foodstuff prices and escalating

Proccesed Food

4.75
0

1

2

3

4

5

6
%

Graph 3.2

seasonal demand at the time of the fasting month and Eid-ulFitr festivities. Commodities in this category that underwent
inflation in Q3/2008 included eggs and broiler chicken. In the

Inflation and Contribution to Inflation by Category,
Goods and Services Q3/2008 (q-t-q)

case of broiler chicken and eggs, prices increases resulted mainly
from increased international market prices for corn and soy beans,
used as raw material for domestic animal feeds. On the other
hand, prices for other volatile food items, such as cooking oil,

rice and seasonings, helped to mitigate the surge in inflationary pressure. The drop
in international CPO prices in line with the drastic fall in world crude oil prices to
below USD100 per barrel prompted manufacturers to hold back from raising
domestic cooking oil prices. Furthermore, despite the end of the harvest, rice prices
were relatively stable due to the maintenance of adequate rice buffer stocks by the
National Logistics Agency (Bulog) for market operations in the event of price increases
beyond reasonable limits. Positive developments were also evident in the seasonings
category (shallots, red chilli peppers and tomatoes), which underwent deflation as
a result of plentiful supply.
Monthly administered prices inflation showed an upward trend in Q3/2008, but
was lower in the quarterly measure compared to Q2/2008
Q2/2008. The increased
administered prices inflation resulted largely from increases in bottled LPG and
kerosene prices, due to shortages. Teething troubles in the conversion programme
caused by shortages of LPG and kerosene supplied by Pertamina
were exploited by some parties to sell LPG and kerosene at
%,yoy

%,yoy

23

5

for clove cigarettes and filter clove cigarettes, although the impact

18
Depreciation/Appreciation Rp/USD (LHS)

3.89

4

13
12.14
8
3

marked-up prices. Besides kerosene and LPG, prices mounted

3

was minimal. Despite the prevailing upward trend, the quarterly
measure of administered prices inflation (qtq) was well below
that of the earlier quarter, due to the absence of lingering impact

CPI (LHS)
0.45 2

from the past fuel price hike.

-2
1
-7

Trade Partner Countries Inflation (RHS)

-12

0
1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9 11 1 3 5 7 9
2004
2005
2006
2007
2008

Graph 3.3
Exchange Rate and Trade Partner Countries Inflation

Core inflation was again strong in Q3/2008. The most important
factors influencing core inflation during the quarter originated
from external pressures comprising heightened inflation in trading
partner countries (Graph 3.3) and high international foodstuff
prices. In a similar trend, public expectations generally remained
high during Q3/2008 (Graph 3.4). Expectations were not only

15

Monetary Policy Report - Quarter III-2008

fuelled by external pressures, but also by the hike in domestic
%, yoy
11.0

fuel prices in the preceding quarter. Analysed by demand-supply

2008

10.5

interaction, inflationary pressure from the output gap is

2009

10.0

forecasted to be negative due to the continued supply-side

9.5

responsiven