Global Economy
Federal Reserve maintained its policy target rate at 0%–0.25%, assuring than U.S. economic conditions would warrant exceptionally low level of rate for an extended period.
Asian Development Bank has upgraded Developing Asia’s economic growth forecast from 3.4% to 3.9% in 2009. In 2010, the figure will be 6.4% instead of 6% according to the previous forecast.
The G-20 nations agreed to maintain strong policy response until a durable economic recovery is secured. The group was also said to have a strong consensus to reduce their reliance on exports to induce more balanced global recovery.
Indonesia Economy
Indonesian government officially raised toll road tariffs by 12.74%–18.56%, equiva-lent to Rp 500–Rp 10,500, on 28 September 2009.
State budget deficit is set at 1.6% of gross domestic product (GDP) in 2010. Legisla-tures agreed to give some spending space to the government so that the shortfall may rise as high as 2% of GDP.
Ministry of State Owned Enterprise has given its green light for Pertamina (Persero) to lift the price of 12 kg canister liquified petroleum gas. Pertamina intended to raise the price by Rp 1,200 (Rp 100/kg) per month.
However, the government still believe that price adjustment on subsidized fuel may become a last optional choice.
Banking reserve requirement is set to be 7.5% starting 24 October 2009. It com-prises 5% of primary reserve and 2.5% of secondary reserve.
Rupiah strengthened against US dollar and euro in three days ended 30 September 2009, but it weakened against Japanese yen. We foresee average exchange rate at Rp 9,701/US$ this week and Rp 9,656/US$ in 5–9 October 2009.
Economic Insight: the BI rate
Tough inflationary challenge in the future tells that the BI rate should move north-ward, but the economy still seems vulnerable at the moment to face monetary policy tightening. Therefore, Bank Indonesia may maintain the key rate at 6.5% next week.
Global Economy
Fed keeps key rate interval at 0%–0.25%
United States’ Federal Reserve maintained its target rate at 0%–0.25%, assuring than the country’s economic conditions would warrant exceptionally low level of such rate for an extended period. The Federal Open Market Committee (FOMC) meeting on 22–23 September 2009 concluded various positive development in the world’s biggest economy, including livelier economic activities and further improve-ment in financial market. Household expenditure was deemed stabilizing, yet it remains to be constrained by ongoing job losses, slug-gish income growth, lower housing wealth, and tight credit. Meanwhile, businesses are still reducing their fixed investment and staffing at a slower pace, whereas inventory stocks have been better aligned with sales. In addition, inflation is seen to remain subdued for some time, thanks to mild cost pressures and stable long-term inflation expectation.
The decision is in line with consensus according to Bloomberg survey. Economists expect the Fed rate to remain steady until 3Q10, be-fore picking up to 1% in the end of next year, the survey said.
ADB upgrades Developing Asia’s growth forecasts
Manila-based Asian Development Bank (ADB) has upgraded Developing Asia’s economic growth forecast from 3.4% to 3.9% in 2009. In 2010, the figure will be 6.4% instead of 6% according to the previous forecast. ADB stated that Developing Asia –which consists 44 countries in Asia and Pacific– was becoming more resilient to the global recession than was initially thought. It is due to firm actions by the governments and the central banks, relatively sound financial system prior to the global crisis, as well as rapid recovery in the re-gion’s larger and less export-dependent countries. Along with the revision on its growth forecast, ADB also changed Developing Asia’s inflation estimates from 2.4% to 1.5% in 2009 and from 2.4% to 3.4% in 2010.
Exhibit 1. ADB’s latest economic growth forecasts | ||
Countries | 2009 | 2010 |
China | 8.2 | 8.9 |
Hong Kong | -4.0 | 3.0 |
South Korea | -2.0 | 4.0 |
Taiwan | -4.9 | 2.4 |
India | 6.0 | 6.5 |
Indonesia | 4.3 | 5.4 |
Malaysia | -3.1 | 4.2 |
Philippines | 1.6 | 3.3 |
Singapore | -5.0 | 3.5 |
Thailand | -3.2 | 3.0 |
Vietnam | 4.7 | 6.5 |
Developing Asia | 3.9 | 6.4 |
Source: ADB | ||
Exhibit 2. ADB’s latest inflation forecasts | ||
Countries | 2009 | 2010 |
China | -0.5 | 3.0 |
Hong Kong | 1.3 | 2.0 |
South Korea | 2.5 | 2.5 |
Taiwan | -0.7 | 0.2 |
India | 2.5 | 4.0 |
Indonesia | 5.0 | 6.0 |
Malaysia | 1.1 | 2.6 |
Philippines | 3.2 | 4.5 |
Singapore | 0.0 | 2.0 |
Thailand | -0.5 | 2.0 |
Vietnam | 6.8 | 8.5 |
Developing Asia | 1.5 | 3.4 |
Source: ADB | ||
G-20 to sustain strong policy response, reduce reliance on exports
Leaders of the Group of 20 (G-20) nations have agreed to maintain strong policy response until a durable economic recovery is secured. The group intends to assure the revival of both growth and jobs, hence it pledges to avoid any premature withdrawal of stimulus. G-20 was also said to have a strong consensus to lower their reliance on exports to induce more balanced global recovery. The outline, which was initiated by US, calls for countries to increase the importance of domestic demand. In addition, the G-20 is also set to replace the G-8 as the main forum for global economic coordination, explaining bigger role of emerging economies in governing the world economy. The G-20 consists 19 major industrialized and developing countries i.e. Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, UK, US, as well as the European Union.
Country with less dependence on exports like Indonesia was proved to have more resiliency in dealing with global economic slowdown. The plan, when realized, may protect the nations’ economies better should external condition weakens. Nevertheless, it also means that the economies will earn lesser benefits in bullish cross-border trade situation.
Indonesia Economy
Expressway tariffs up by 12.74%-18.56%
Indonesian government officially raised the toll road tariff by 12.74%–18.56%, equivalent to Rp 500–Rp 10,500, on 28 September 2009. Under the country’s law, expressway tariffs should be adjusted once in two years, with magnitude as same as the inflation rates. This year’s decision was solely based on headline inflation during 1 August 2007 and 31 July 2009 in nine cities, i.e. Medan (14.15%), Jakarta (13.61%), Bogor (17.12%), Bandung (13.49%), Cirebon (18.56%), Semarang (14.03%), Surabaya (12.74%), Cilegon (16.43%), and Makassar (13.98%).
We do not expect these adjustments to affect overall inflation rates in significant manner. We in fact found that the weights of toll road tariffs in the aforementioned cities’ inflation calculation are less than 0.1% (see Exhibit 3). This explains that direct impact of the fares adjustments will be minimum.
Exhibit 3. Weights of toll road tariff in cities inflation calculation | |
Cities | Weights (%) |
Bandung | 0.0069 |
Bogor | 0.0381 |
Cilegon | 0.0509 |
Cirebon | 0.0136 |
Jakarta | 0.0980 |
Makassar | 0.0210 |
Medan | 0.0194 |
Semarang | 0.0349 |
Surabaya | 0.0214 |
Source: BPS | |
Exhibit 4. State budget summary for 2010 (trillion rupiah) | ||
Items | RAPBN | APBN |
Total revenues and grants | 911.47 | 949.65 |
Domestic revenues | 910.05 | 948.18 |
Tax revenue | 729.16 | 742.74 |
Non-tax revenue | 180.88 | 205.41 |
Grants | 1.42 | 1.51 |
Total expenditures | 1,009.48 | 1,047.66 |
Central government expenditures | 699.68 | 725.24 |
Transfer to region | 309.79 | 322.42 |
Budget deficit | 98.00 | 98.00 |
Source: Bisnis Indonesia Daily | ||
2010 budget shortfall to be 1.6% of GDP, may rise to as high as 2%
Indonesian government (GoI) and the House of Representatives (DPR) has agreed upon next year’s budget deficit at 1.6% of the coun-try’s nominal gross domestic product (GDP), equivalent to around Rp 98 trillion. National revenues are expected to achieve Rp 949.65 trillion with total expenditures worth Rp 1,047.66 trillion. DPR also gave a flexibility to the government to add an extra spending until Rp 24 trillion from the agreed Rp 1,047.66 trillion, but overall budget shortfall is limited at maximum level of 2% of GDP. Finance Minister Sri Mulyani Indrawati cited that the additional Rp 24 trillion budget would be allocated for 15 programs pledged in the past General Election, including pro-poor programs in education and healthcare sectors as well as those intended to improve public infrastructure and modern-ize national soldiers equipment facilities.
We thought that the main objective for this ‘flexibility budget’ allocation is for boosting economic growth. Delivering expenditure plans in timely manner is still a hard challenge for the government though. It is imperative for the government to maximize its fiscal policy ef-fectiveness through reducing a complicated bureaucracy.
LPG price is on the brink to hike
Said Didu, secretary general of Indonesia’s Ministry of State Owned Company, said that the price hike in 12 kg canister liquified petro-leum gas (LPG) –which is widely used by households– should be immediately done for preventing further substantial loss on PT. Perta-mina (Persero)’s business activities. The decision might thus affect the government’s dividend revenues from the company. Pertamina noted it had recorded significant loss up to Rp 6 trillion from its business in trading 12 kg LPG, hence it intended to gradually shift the price up until it reach its global price level. The price adjustment –i.e. Rp 1,200 (Rp 100/kg) per month– was initially set to become effective in early September 2009. The plan has been delayed to anticipate massive consumption switching from 12 kg LPG to the 3 kg one, however.
At this early state of economic recovery –when purchasing power has not fully revived as being indicated by lower money withdrawals in this year’s Muslim festive– letting the strategically important LPG price to hike would be counter productive for consumption. Given the circumstances, the plan may get some resistance from the new legislatures. We thus view that the chance of the plan being implement-ed in near time is somewhat slim.
... but raising subsidized fuel prices will be last optional choice
GoI stays cautious to rise subsidized fuel prices at least until next year, though the DPR has blessed the plan. However, the government still believe that this decision may become a last optional choice for keeping balance position in the state budget (APBN). Instead, to reduce budgetary loss from global oil price volatility, the primary action in mind is by applying tight distribution control of subsidized fuel, either by alpha re-measurement or giving tight limitation on fuel consumption level. The government also weighs closed distribution system solution, so that the consumption level of subsidized fuel could be proportionally in line with expectation. According to DPR’s Budget Committee, every US$ 1 escalation of Indonesia Crude Oil Prices (ICP) from its assumed level will take additional budget deficits amounting Rp 100 billion.
Global oil prices may remain volatile until next year, but the slowly progress of economic recovery will give limited impetus for further rise. We reckon that the government has sufficient oil subsidy budget next year –i.e. Rp 58.9 trillion according to budget draft (RAPBN)– for covering current oil prices from global oil volatility attacks at least until first half of the next year. Nonetheless, we view that potential oil-price-driven budgetary loss could be covered by fiscal reserve fund.
Reserve requirement to be 7.5%
Banking reserve requirement is set to be 7.5% starting 24 October 2009. The requirement comprises 5% of primary reserve as well as 2.5% of secondary reserve in the form of government notes, Bank Indonesia Certificates (SBI), and excess reserve (cash not belonged to primary reserve). Bank Indonesia (BI) actually ratified this regulation in October 2008, but banks earned a 1-year transition period to meet the secondary reserve.
Rupiah rises against dollar, euro
Rupiah strengthened against US dollar and euro in three days ended 30 September 2009. According to the central bank, rupiah was traded at Rp 9,681/US$ yesterday, 0.29% stronger than on 25 September 2009. Concurrently, rupiah appreciated by 0.44% against the euro, still it weakened 0.69% in term of Japanese yen. The loss against yen replicated that in 24–25 September, when the currency booked 1.83% of depreciation, whereas the 2-day weakening against dollar and euro stood at 1.35% and 0.82%. This week’s apprecia-tion seemed to be a result of inflows in government bond market as foreign investors sought to make advantage on recent sovereign rat-ing upgrade. This nonetheless coincided with Rp 539.2 billion of foreign net sell in stock market.
Today’s inflation announcement and the central bankers’ meeting on 5 October 2009 seem crucial for determining the short-term pros-pect of rupiah government bonds. Indonesia’s rating story and its relatively high yields of bonds may still lure funds from overseas. As such, we see average rupiah exchange rate at Rp 9,701/US$ this week and Rp 9,656/US$ in 5–9 October 2009.
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