## Executive Summary — IMF Country Report _cr09230 ## Source details **Canonical URL:** [Executive Summary — IMF Country Report _cr09230](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09230.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09230.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09230.pdf.json) --- ### Impact of global turmoil and initial conditions - Indonesia entered the crisis with strong initial conditions: economic growth averaged 6 percent since 2005. - Both public and external debt halved over five years to about 30 percent of GDP. - International reserves rose by $22 billion to more than 150 percent of short-term debt. - Greater dependence on domestic consumption and election-related spending supported growth through Q1 2009. - Financial markets were hit in late-2008 but largely reversed by mid-2009. ### Near-term outlook and risks - 2009 GDP growth forecast: 3−4 percent (2008: 6 percent). - Growth in 2009 driven by domestic consumption; fiscal stimulus execution critical to support demand. - Downside risk: renewed global risk aversion could reverse capital inflows, tighten external credit, and depress external and domestic demand. - Upside risks: stronger-than-expected monetary transmission and an external recovery. ### Monetary and exchange rate policy - BI cut policy rate by 250 basis points since December 2008 to 7 percent (later cuts bring policy rate to 6.75 percent by July 3, 2009; cumulative cut since December 2008: 275 basis points). - CPI: year-to-date inflation through May 2009 about 0.1 percent; annual rate declined to 6 percent; core inflation year-to-date 1.7 percent. - Staff and authorities: monetary easing cycle may soon have run its course; caution warranted given exchange rate appreciation, commodity-price pass-through to inflation, ample liquidity, and long transmission lags. - Recommendation: anchor monetary policy on a well-defined framework targeting a medium-term inflation range of 3−4 percent to enhance credibility. - Exchange rate: flexibility viewed as an effective shock absorber; rupiah broadly in equilibrium per CGER-based assessments. ### Fiscal policy and stimulus - 2009 stimulus: about 1½ percent of GDP (also cited as about 1.4 percent of GDP and USD 7.1 billion in revised budget description). - Overall budget deficit estimated to reach 2.6 percent of GDP in 2009 (central government balance projected at -2.6 percent of GDP in PIN table). - 2010 authorities’ deficit target: 1½ percent of GDP including about ½ percent of GDP in stimulus measures; staff indicated room for a deficit close to 2 percent of GDP. - Fiscal execution: only 20 percent of revised budget disbursed in first five months of 2009 (marginally up from 19 percent in 2008); delays concentrated in capital project execution. - Recommendations: - Fully implement 2009 stimulus, especially infrastructure spending, to support second-half demand. - Maintain some stimulus in 2010 given fiscal space while pursuing medium-term debt consolidation. - Structural reforms: reduce energy subsidies and expand targeted transfers; broaden the consumption tax base and continue tax administration reforms; anchor fiscal policy in a medium-term budget framework; improve budget execution at sub-national level; link cash and debt management to support capital market access. ### Banking sector resilience and financial stability - Banking system overall resilient; banking performance in 2008 among the strongest in the region. - Financial soundness indicators: system-wide CAR about 17.8 (Apr-09 reported 17.8; April 2009 overall CAR cited as 17.6 in other passages); NPLs around 4–4.1 percent; provisions in percent of NPLs about 132.4; return on assets 2.7; return on equity 17.4. - Liquidity: overnight interbank rates, loan-deposit ratios, and excess reserve holdings returned to pre-crisis levels; liquidity ample. - Main challenge: managing credit risk; smaller banks vulnerable to liquidity and funding stresses. - Recommendations: - Improve supervision and monitoring, particularly of small and mid-sized banks. - Encourage lending aligned with banks’ risk-management capacity; avoid regulatory forbearance or administrative measures that artificially promote lending. - Early and quick action, including liquidity provision for solvent small banks, and enactment/implementation of Financial Safety Net law to enhance resolution powers and coordination. - Forthcoming FSAP to perform in-depth examination and comprehensive stress testing. ### Banking sector sensitivity analysis (Box 3) — key findings - Coverage: all 124 banks. - Loans account for about 80 percent of banking assets. - Exposure to special mention loans about 6–7 percent of total loans; historically 60 percent of these downgrade to nonperforming. - Restructured loans rose from 2 percent at end-2008 to 2.7 percent at end-February. - Scenario 1 (doubling of NPLs from end-March 2009 levels, applying 60 percent downgrade from special mention to substandard; alternative conservative loss rate 50 percent on new NPLs): - System-wide CAR falls from 19 percent to 17 percent under doubling of NPLs. - CAR declines by 1.2 percentage points under 50 percent loss assumption. - Four out of 124 banks (accounting for 2½ percent of banking sector assets) would be undercapitalized (below 8 percent) under the doubling-NPLs scenario. - Market shock (30 percent rupiah depreciation and 30 percent decline in government bond prices): system-wide CAR falls by 0.3 percentage points; no bank undercapitalized. - Banks’ positive net open FX position: 2.6 percent of capital (end-March 2009). - Government bonds account for 12 percent of banking assets; just over 7 percent held in trading account. - Policy implication: system resilient to sizable credit shocks but close supervisory vigilance and stronger provisioning/valuation practices (IFRS adoption in early-2010) warranted. ### Public and external debt outlook and stress tests - Public sector debt: fell to 33 percent of GDP in 2008; projected 31.1 percent in 2009 and to 28.3 percent by 2014 under baseline. - Baseline public sector debt series (selected): 2008: 33.2; 2009: 31.1; 2010: 31.0; 2011: 30.4; 2012: 29.8; 2013: 29.1; 2014: 28.3 (percent of GDP). - Public sector gross financing need: 2009: 4.9 percent of GDP. - Stress scenarios: - Fiscal contingent liabilities of 10 percent of GDP could raise public sector debt to almost 38 percent of GDP by 2014, and above 40 percent in 2010. - A one-time 30 percent real exchange rate depreciation (2009) would raise the public debt ratio by 14 percentage points in 2010, with impact falling to 12 percentage points by 2014. - A large rise in real interest rates would raise the debt ratio to 33 percent by 2014. - External debt: declined to 29.3 percent of GDP in 2008; baseline projects 29.4 percent in 2009 and 21.5 percent by 2014. - External vulnerability metrics (May/Jun-09): - Gross international reserves: 57.9 US$ billion (May-09). - GIR in percent of short-term debt (Proj.): 197.6. - Total gross external debt (Proj. percent of GDP): 29.4. - Gross external financing requirement (Proj., US$ billion): 29.4. - External debt-to-exports ratio 2009 projection: 135.1 percent. - Key macro-fiscal assumptions underlying baseline (selected): - Real GDP growth: 2009: 3.5; 2010: 4.5; 2011: 5.0; 2012: 5.5; 2013: 6.0; 2014: 6.3 (percent). - Inflation rate (GDP deflator): 2009: 5.6; 2010: 6.3; 2014: 3.7 (percent). - Growth of exports (U.S. dollar terms): 2009: -26.9; 2010: 4.4; 2014: 8.3 (percent). - Average nominal interest rate on public debt 2009: 6.7 percent; 2014: 7.1 percent. ### Macroeconomic developments and selected indicators - Q1 2009 real GDP growth: 4.4 percent (y/y). - Balance of payments Q1 2009: surplus $4 billion (Q4 2008: deficit $4.2 billion); current account surplus Q1: $1.8 billion. - Financial account Q1: surplus $2.4 billion largely from sovereign debt demand. - Nominal GDP (2008): Rp 4,954 trillion or US$512 billion; GDP per capita (2008): US$2,297. - Unemployment rate (2008): 8.4. - FDI (2008, net): US$2.0 billion. - Main exports (2008 percent of total): mineral fuels (29), manufactured goods (15), machinery and transport equipment (13). - Real GDP (percent change) actual/projected: 2006: 5.5; 2007: 6.3; 2008: 6.1; 2009: 3.5; 2010: 4.5. - Consumer prices (end period, 12-month percent change): 2008: 11.1; 2009: 5.0; 2010: 5.5. - One-month SBI rate (period average): 2006: 11.8; 2007: 8.6; 2008: 9.1. - Financial sector indicators (Apr-09): CAR 17.8; NPLs 4.1; Provisions in percent of NPLs 132.4; Return on assets 2.7; Return on equity 17.4; Credit to private sector (percent change) 21.4 (Apr-09). ### Financial market and policy chronology (selected actions Sep 2008 − Apr 2009) - BI policy moves: multiple policy rate cuts from Dec-2008 onward totaling 275 basis points to 6.75 percent (by July 3, 2009); reserve requirement reductions for foreign currency deposits and rupiah deposits in Oct-2008; liquidity injections via repos and FX-swap facilities. - Regulatory and market support: temporary ban on short-selling (lifted Feb-2009), suspension of mark-to-market on bank bond holdings (Oct-9, 2008), expansion of deposit insurance coverage from Rp 100 million to Rp 2 billion (Oct-13, 2008), buy-back of government bonds, creation of new export financing agency. - Crisis interventions included state firm repatriation requirements, monitoring of large FX transactions, and supervisory actions (takeover of Bank Century; BI revoked license of Bank IFI). ### Statistical issues and data quality - Indonesia subscribes to SDDS since Sep-1996; most requirements observed. - Weaknesses noted in: trade data coverage and reconciliation (customs vs BI), FDI methodological basis, timeliness and coverage of subnational public finance data, limited nonfinancial services surveys, and outdated services/data collection. - Fund recommendations include: updating business census and establishment surveys, publishing annual GDP series, developing supply and use tables from 2000, improving FDI and financial account compilation, expanding monetary statistics to include mutual funds, and enhancing subnational fiscal reporting. ### Relations with ADB (Annex III) - ADB cumulative loans to Indonesia exceeded $23.5 billion at end-December 2008. - 2008 ADB approvals: $1,085 million (10.3 percent of ADB total approvals); sovereign loans in 2008: $1,010 million with over 80 percent through three policy-based operations. - ADB TA 1967–2008: 499 grants amounting to $266.66 million; 2008 TA grants: $13.0 million. - Cumulative lending by sector (as of Dec-31, 2008): Total 297 loans, $23,523.30 million; sector shares include Agriculture and Natural Resources $3,864.29 million (16.43 percent), Energy $3,781.05 million (16.07 percent), Finance $3,121.10 million (13.27 percent). ### IMF staff update and Executive Board assessment (July 13, 2009; PIN No. 09/93, July 28, 2009) - IMF staff update (July 13, 2009): markets generally quiet before/after July 8 Presidential elections; headline inflation fell to 3.7 percent (y/y) in June 2009; core inflation 5.6 percent; consumer confidence at 4½-year high in June 2009. - Executive Directors welcomed Indonesia’s resilience; endorsed exchange rate flexibility and gradual reserve buildup; cautioned about risks from renewed global risk aversion. - Recommendation: next Article IV consultation on the standard 12-month cycle. *Source: _cr09230 - Executive Summary and selected sections (IMF).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Impact of global financial turmoil and initial conditions - Benefiting from strong initial conditions and timely policy responses, the Indonesian economy has withstood well the recent economic turmoil. - Despite the impact on financial markets during the last quarter of 2008, which has mostly been reversed now, the economy has continued to grow albeit at a slower pace. - The strength of the economy stems from its greater dependence on domestic consumption rather than exports, unlike many of its regional peers. - The economy received a big boost in the first quarter from election-related spending which provided strong support for private consumption. ### Political background - The Legislative elections were successfully completed in April; the Presidential election is scheduled for July 8, with a run-off on September 8, if needed. ### Outlook and risks - Growth in 2009 is expected to decelerate to 3−4 percent, compared with 6 percent in 2008, with growth driven by domestic consumption, although the fiscal stimulus would have to be fully implemented to support demand growth. - Weak external conditions and slow credit growth dampened exports and investment in the first half of 2009. - A return of credit growth and external recovery could support higher investment and exports in the second half of the year. - Downside risk: another bout of global risk aversion could adversely affect external liquidity and growth, potentially leading to reversal of capital inflows, drying up of external credit, and further declines in external and domestic demand. ### Monetary and exchange rate policy - Staff and authorities agreed that the monetary easing cycle since December 2008 may soon have run its course with a more cautionary approach appropriate going forward. - There is ample stimulus in the pipeline from the interest rate cuts already implemented which, combined with the abundant liquidity in the banking sector, should soon result in higher credit growth. - In the medium term, anchoring monetary policy on a well-defined framework would help lower inflation volatility and enhance policy credibility. - The exchange rate is broadly in equilibrium and its flexibility has served well as a shock absorber. ### Fiscal policy - The growth impact of the 2009 fiscal stimulus depends on the timely execution of the spending measures, especially on infrastructure. - For 2010, given the availability of fiscal space and that complete withdrawal of the stimulus could endanger economic recovery, retaining some of the stimulus relative to 2008 would support aggregate demand, with public debt consolidation continuing over the medium term. - Staff advised that there was room for a somewhat higher fiscal deficit for 2010 than currently planned by the authorities. ### Banking sector and financial stability - The banking system has been resilient to the global financial turmoil. - Managing credit risk is the key challenge. - Smaller banks remain vulnerable to liquidity risk given their narrow funding options and difficulties with market access during distress. - Recommendations: improve supervision and encourage lending consistent with banks’ risk management capabilities to help maintain asset quality and enhance public confidence. - Regulatory forbearance or administrative measures to promote lending should be avoided. - The forthcoming FSAP will conduct an in-depth examination of the financial sector and help identify specific areas that need to be strengthened. ### I. Overview — key initial conditions and recent performance - Indonesia entered the current global crisis with strong initial conditions: economic growth averaged 6 percent since 2005. - Both public and external debt have halved in the last five years to about 30 percent of GDP. - International reserves had risen by $22 billion in that period to a comfortable level of more than 150 percent of short-term debt. - Parliamentary elections held on April 9 were not associated with high market volatility; market sentiment subsequently improved. ### II. Background — financial markets and policy response - During the last quarter of 2008, factors affecting investor confidence included falling commodity prices, liquidity problems in some banking segments, default by a huge conglomerate, and global risk aversion. - Sovereign EMBI spreads rose to over 1,200 basis points. - Nonresidents reduced holdings of central bank and government securities by some $6½ billion. - The yield on government domestic bonds spiked to as high as 20 percent in late-October. - The currency depreciated by some 40 percent, and the stock market index declined by a similar amount. - International reserves declined by $10 billion to $50 billion between July and October 2008. - Government and Bank Indonesia measures included lowering banks’ reserve requirements, liquidity injection through repos, expansion of eligible collateral for short-term financing from BI, temporary ban of short-selling, and expansion of deposit insurance coverage. - By end-June 2009: CDS spreads dropped to around 300 bps, the stock market had recovered by 80 percent, the rupiah appreciated by about 20 percent relative to their lowest points late last year, capital inflows resumed, and reserves had risen to $58 billion in May 2009. ### Q1 2009 recovery dynamics - Real GDP growth in Q1 of 2009 was 4.4 percent (y/y). - Recovery was supported by particularly strong private consumption (boosted by election-related spending) and public consumption (frontloading of one-off salary payments and purchases of goods and services). - Investment and exports declined sharply (q/q, s.a.). - Leading indicators—retail sales, motor vehicle sales, and industrial production—suggest the economy may have bottomed out on a sequential growth basis. - Consumer confidence was at its highest since January 2005. ### External accounts in Q1 2009 - Balance of payments surplus in Q1 was $4 billion compared with a deficit of $4.2 billion in Q4 of 2008. - Current account surplus in Q1 was $1.8 billion as non-oil imports fell by more than the decline in exports. - Financial account recorded a surplus of $2.4 billion largely from demand for sovereign debt securities. ### Monetary stance and inflation - BI has been on a monetary-easing cycle since December 2008; the policy rate has been cut by 250 basis points to 7 percent. - CPI: year-to-date inflation through May 2009 is about 0.1 percent; annual rate declined to 6 percent. - Core inflation: year-to-date rate of 1.7 percent. - Inflation in 2008 was 11 percent, above BI’s 4−6 percent target range. ### Fiscal space and stimulus - Government announced a stimulus package for 2009 of about 1½ percent of GDP to support domestic demand. - Years of prudent fiscal management included primary fiscal surpluses of about 2 percent of GDP per year and public debt declined to 33 percent of GDP. - In 2008, fiscal position was broadly in balance and above the government’s revised budget deficit target of 2 percent of GDP. - In Q1 of 2009, a small surplus was recorded, smaller than in 2008 due to tax measures related to the stimulus and some frontloaded spending. ### Banking and corporate sector indicators - Financial soundness indicators improved in 2008—profitability rose and the capital base strengthened as banks retained a larger share of their profits and increased capital. - Overall liquidity conditions improved since end-2008: overnight interbank market rates, loan-deposit ratios, and banks’ overall excess reserve holdings with BI returned to pre-crisis levels. - Credit growth slowed on a monthly basis since December 2008. - Corporate sector reduced vulnerabilities over time: lower leverage ratios, higher profitability margins, reduced exposure to external liabilities. - Corporate sector experienced some distress during the height of the crisis as indicated by a jump in estimated corporate default probabilities for listed companies; more recent data indicate declining default probabilities, albeit still higher than the pre-crisis level. ### III. Outlook and risks (detailed) - 2009 GDP growth projected at 3−4 percent; 2008 growth was 6 percent. - Headline inflation likely to drop to 5 percent by end-2009; core inflation may be higher at about 6½ percent. - External current and financial accounts likely to continue to be in slight surplus. - Staff’s growth outlook is broadly in line with BI’s assessment but lower than the government’s projected growth of 4−4½ percent, which stems mostly from an expectation of stronger consumption growth. - Authorities remain concerned about implications of an uncertain global and regional recovery and potential for further volatility in financial markets. *Source: _cr09230 - Executive Summary (IMF).* ### 11. Key near term risks relate to the underlying strength of both domestic and ### 11. Key near term risks relate to the underlying strength of both domestic and ### Key near-term risks and channels - Private consumption is the largest part of GDP and "may need policy support to maintain growth." - Upside risk: "the stimulus effects of the recent monetary easing may be stronger than expected in supporting domestic demand." - Upside risk: "a stronger than expected external recovery could also provide an added boost." - Downside risks: - "another bout of global risk aversion or fall in commodity prices could impact external liquidity and growth via reversal in capital inflows, tightening credit markets, and fall in exports as well as domestic demand." - "the budgeted spending plans are not executed in time or are insufficient to replace the first quarter’s election-related spending stimulus." ### Medium-term growth and inflation outlook - "Potential growth is expected to be gradually restored." - "GDP growth in 2010 is likely to remain below potential (about 4−5 percent)." - As the global economy improves: - "export growth should slowly recover thereafter." - "Domestic demand should also grow strongly, especially as investment gains momentum, which would lead to higher imports." - "Higher infrastructure investment over the medium term, would contribute to greater efficiency, increase productivity, promote rural development, and help achieve higher potential growth." - Policy targets and recommendations: - "Maintaining an open approach to external trade would also support the economy’s long-term competitiveness." - "Reducing inflation to 3−4 percent would enhance overall policy credibility and lower volatility." ### Policy discussion themes - Three main policy challenges were the focus of discussions: - "(i) the policy mix to support growth;" - "(ii) protecting the safety and stability of the financial sector;" - "(iii) alleviating potential stresses to the balance of payments, particularly if there is a significant worsening in global risk aversion and/or tightening in external liquidity conditions." ### Monetary and exchange rate policy findings and recommendations - Recent policy actions and stance: - "The reduction in the policy rate by 250 basis points since December 2008 was appropriate." - "The monetary easing cycle may soon have run its course." - Concerns and reasons for caution: - Recent increases in commodity prices have "a large impact on domestic inflation." - Exchange rate appreciation and abundant liquidity argue for "a cautionary approach to any further easing." - "Long lags in monetary transmission" imply recent rate cuts may boost the real economy when recovery strengthens, risking "high credit growth and inflationary expectations, and the need to quickly reverse course." - "An estimated Taylor rule indicates BI’s policy stance has generally tended to have an expansionary bias over time." - "Any worsening in global risk aversion and external liquidity risks would also justify a cautious monetary stance so as not to jeopardize capital flows and the international reserve position." - Monetary transmission and credit: - "Monetary transmission in Indonesia has been slow." - "Credit growth is likely to turn positive in the second half of the year." - Deposit rates have typically responded swiftly to policy rate changes; lending rates have been slower to respond. - Banks have been cautious in lending, particularly to SMEs, to build liquidity buffers; some smaller to mid-sized banks have had to offer higher deposit rates. - Staff view: "with the prevailing strong confidence, sufficient liquidity in the banking system, and completion of transmission lags, credit growth is likely in the second half of 2009, albeit at a lower pace than in the last two years." - Monetary framework and inflation anchor: - BI adopted an inflation targeting framework in 2005 but follows a pragmatic approach balancing exchange rate, inflation, and growth. - Staff analysis: a more credible and objective inflation targeting framework to guide inflationary expectations toward "a medium-term target range of 3−4 percent would enhance policy credibility and lower economic costs." - Exchange rate: - "Exchange rate flexibility has served as an important shock absorber." - CGER-based assessments indicate the rupiah is "broadly in equilibrium" with various approaches giving differing misalignments (see Box 2 in source). - Authorities agreed reserve buffers could be built up gradually and intervention should be "largely directed at reducing volatility." ### Fiscal policy findings and recommendations - 2009 stimulus and deficits: - "The fiscal stimulus package for 2009 was appropriate to support weaker domestic demand." - New spending measures amount to "about 20 percent of the stimulus package (mostly on infrastructure projects)" and are "expected to support demand in the second half of the year." - "The overall budget deficit is estimated to reach 2.6 percent of GDP in 2009." - "Public debt-to-GDP ratio is expected to decline further to 31 percent of GDP in 2009." - Frontloaded bond issuances secured "more than two-thirds of gross financing needs" in the first six months, reducing budget financing risks. - Budget execution concerns: - Only "20 percent of the revised budget has been disbursed (marginally up from 19 percent in 2008) during the first five months of 2009." - Tax components were implemented promptly, but "delays have persisted in capital project execution." - Authorities expect the stimulus package to be "fully implemented by the end of the year" and have taken measures to improve execution (simpler procedures, central monitoring committee, expanded scope for reallocations). - Fiscal stance for 2010 and recommendations: - Authorities' current deficit target for 2010 is "1½ percent of GDP" and includes about "½ percent of GDP in stimulus measures." - Staff noted that a deficit "close to 2 percent of GDP could be achieved" to provide room for additional infrastructure spending and strengthening the social safety net without jeopardizing medium-term public debt consolidation. - "Public debt would gradually fall below 30 percent by 2012" given a return to a positive primary fiscal balance after 2010. - Authorities noted their ability to provide additional stimulus depends on market risk appetite; "their 2010 fiscal targets may be revised once the new government takes office in October 2009." - Structural fiscal reforms recommended to provide scope for more public investment and better countercyclical policy: - (i) reducing energy subsidies and expanding transfers programs and social services for the poor; - (ii) raising non-commodity tax revenue ratios by broadening the consumption tax base and continuing tax administration reforms (strengthen arrears collection, taxpayer registration, customized taxpayer services, audit functions); - (iii) anchoring fiscal policies within a medium-term budget framework; - (iv) coordinating with line ministries to strengthen budget execution, including at the sub-national government level; - (v) linking cash and debt management strategies to support capital market access and efficient deficit financing. ### Safeguarding the financial sector — findings and risks - Overall resilience: - "The Indonesian banking sector proved resilient to the effects of the global financial turmoil." - Banking performance in 2008 was "among the strongest in the region and among emerging markets." - Banks reported higher average profitability and capital, helped by continued robust loan growth and large net interest margins. - Asset quality and provisioning: - NPLs "have inched up in the first four months of 2009 to above 4 percent." - "The average loan loss ratio of over 100 percent suggests more than adequate loss coverage." - Distressed institutions and concentration: - Some small banks, "accounting for less than ½ percent of total banking assets, have run into trouble" since the crisis began. - The top 16 banks "account for 70 percent of banking assets." - Smaller and some mid-sized banks "account for less than 10 percent of banking assets" and are of greater concern due to liquidity and funding vulnerabilities. - Stress testing and vulnerabilities: - Sensitivity analysis shows the banking sector is "generally resilient to a range of adverse shocks." - Banks are most vulnerable to "a sharp deterioration in credit quality" and are "less exposed at this stage to market risk." - System-wide banks have a positive net open foreign exchange position as of end-March and regulations restrict equity exposure in trading books; holdings of government securities in trading books have been lowered. - Results are preliminary; a forthcoming FSAP will examine soundness through a comprehensive stress testing framework. - Policy and regulatory actions: - Authorities agreed that "risks remain and safeguarding financial stability is a top priority." - Early and quick action on emerging problems, including providing liquidity for solvent smaller banks, is important. - "The new Financial Safety Net law will enhance the legal framework for bank resolution, enable quick decision-making, and improve institutional coordination." *Source: IMF country report content unit _cr09230 (section excerpts as provided).* ### Box 3. Banking Sector Sensitivity Analysis ### Box 3. Banking Sector Sensitivity Analysis ### Credit risk and loan quality - Loans account for about 80 percent of banking assets. - Loan quality is expected to deteriorate in sectors more affected by the global slowdown (e.g., steel, textile and trade) and in some areas of consumer credit such as unsecured credit card debt (which still accounts for a small share of total loans). - Exposure to special mention loans (mainly unclassified loans overdue up to 90 days) is about 6–7 percent of total loans; historically, 60 percent of these loans are downgraded to nonperforming status. - Restructured loans increased from 2 percent at end-2008 to 2.7 percent at end-February. - These risks, along with slower loan growth, are expected to add pressure to banks’ profit margins. ### Sensitivity testing methodology - Coverage: All 124 banks were covered. - Scenarios chosen were more extreme than staff’s baseline estimates to test for systemic weakness. - Scenario 1: Doubling of NPLs from current levels (end-March 2009), applying historical default rates from special mention to substandard (60 percent) to all other loan categories, and existing provisioning requirements while disregarding collateral. - Alternative conservative loss assumption: Applying a loss rate of 50 percent to all new NPLs. - Mitigating factors allowed in the analysis: half of reported first quarter March profits and excess provision as buffer against higher provisioning costs. - Market shock tested: Direct balance sheet impact from a 30 percent loss in the value of the rupiah and government bond prices. ### Stress test results - System-wide capital adequacy ratio (CAR) would decline by two percentage points from 19 percent to 17 percent under a doubling of NPLs. - Assuming a loss rate of 50 percent on all new NPLs yields CAR declining by 1.2 percentage points. - Four out of 124 commercial banks—accounting for 2½ percent of banking sector assets—would become undercapitalized and fall below the 8 percent regulatory minimum under the doubling-NPLs scenario. ### Market risk exposure - A depreciation of the rupiah by 30 percent and a decline in government bond prices of 30 percent affect banks marginally: system-wide CAR falls by only 0.3 percentage points. - No bank would be undercapitalized under the 30 percent rupiah depreciation and 30 percent government bond price decline scenario. - Banks’ positive net open foreign exchange position was 2.6 percent of capital as of end-March 2009, which provides a buffer against a rupiah depreciation. - Government bonds account for 12 percent of banking assets; just over 7 percent of this is held in the trading account. - Market-risk exposure was reduced in late-2008 when regulators allowed banks to shift part of their government securities from available-for-sale to hold-to-maturity, and at fair value rather than at market value. - Vulnerability could change with adoption of the IFRS in 2010, as banks rebuild trading positions, or if there is volatility in the government securities market. ### Policy implications and next steps - The sensitivity analysis found that even a doubling in NPLs would not undermine the soundness of the banking system, but close supervisory vigilance remains warranted. - The upcoming FSAP will examine banking sector soundness in greater depth using a comprehensive stress testing framework, including both top-down and bottom-up approaches and assessment of vulnerabilities to a range of tail risk shocks, including liquidity risk. - A parallel stress testing TA mission took place to help BI strengthen its credit risk-modeling framework. - Recommendations implied by the analysis include maintaining strong supervision, monitoring restructured and repeatedly restructured loans to guard against “evergreening,” and avoiding administrative measures or regulatory forbearance that promote lending beyond banks’ risk management capabilities. - Planned launch of International Financial Reporting Standards in early-2010 is welcomed as it would strengthen provisioning practices and clarify valuation of security holdings. *Source: Box 3. Banking Sector Sensitivity Analysis (excerpt).* ### 35. It is recommended that the next Article IV consultation take place on the standard ### _cr09230 - 35. It is recommended that the next Article IV consultation take place on the standard ### Recommendation - It is recommended that the next Article IV consultation take place on the standard 12-month cycle. ### Financial market performance (Figure 1) - Stock market: Jakarta Composite Index recovered after the sharp decline in H2 2008 (Local currency, January 1, 2007 = 100). - Sovereign external bond spreads: EMBI Global (Stripped spreads, basis points) — Indonesia, Philippines, Composite — spreads are on a decline. - Government bond yields: 10-year bond yields (In percent) for Indonesia, Philippines, Thailand, Asia (GBI-EM) show yields have returned to their pre-crisis level. - Yield curve: Government Bond Yield (In percent per annum) across maturities shows the yield curve is lower (Maturity (years) series for Dec-08, Jun-08, Jun-09). - Exchange rate: Rupiah exchange rate has been rebounding since March 2009 (Exchange Rates, National currency/U.S. dollar, January 2, 2007 = 100). - Reserves and capital flows: International reserves rising and cumulative portfolio inflows increasing (Reserves and Cumulative Portfolio Inflows in 2007/09, In billions of U.S. dollar). ### Macroeconomic developments and outlook (Figure 2) - Growth: GDP growth is expected to slow in 2009 due to weaker domestic and external demand. - Contribution to GDP growth (In percent, y/y): Net exports, Domestic demand, GDP growth (series covering 06Q1–09Q4 with proj.). - Credit: Credit growth has decelerated, particularly for working capital (Credit Growth by Usage, 3-month annualized growth of 3-mma). - Leading indicators: Consumer Confidence (Index January 2006 =100) and business indicators (Vehicle sales, Retail sales, Industrial production; In percent, 3-month annualized growth of 3-mma) suggest the economy may have bottomed out in Q1 2009. - Trade and current account: Exports of Goods (In percent, 3-month annualized growth of 3-mma, s.a.) — collapse in exports has bottomed out; falling imports resulted in a small current account surplus in Q1 2009. Current account series shown as Export (y/y), Import (y/y), Current account (right scale) 1/ (In percent of GDP, fourth quarter moving average). ### Inflation and monetary developments (Figure 3) - Inflation dynamics: CPI Inflation (Headline, y/y; Core, y/y) — Inflation has been decelerating since October 2008 after rising sharply in H1 2008. Inflation target shown on chart. - Inflation components: Headline, Food, Processed food, Housing, Clothing, Health, Education, Transportation (In percent, year-on-year). - Money and credit: Credit and Money Growth (In percent, year-on-year) — acceleration in credit growth in previous years has receded; Broad money and Base money (y/y 3-month m.a.) series. - Policy rates: Interest Rates (In percent per annum) — SBI 1-month, Bank Indonesia rate, JJIBOR O/N — BI has lowered its policy rate in line with lower inflation and slower economic activity. - Real rates and transmission: Real SBI 1-Month Interest Rates (headline, core) show real interest rates broadly neutral. Interest Rates Spreads (In percent per annum) — transition of rate cuts to deposit and lending rates proceeding slowly; Lending and Deposit spreads plotted. ### Banking sector indicators (Figure 4) - Profitability: Net interest margin and Return on assets (right scale) — banking sector profitability is among the highest in the region. - Asset quality: NPLs state, NPLs private, All banks — asset quality remained steady in 2008, although NPLs have inched up in 2009. - Coverage: Loan loss reserve coverage — average loan loss ratio of over 100 percent suggests adequate coverage (Asset Quality series 2004–2008). - Liquidity: OMO Outstanding (In trillions rupiah) and SBIs — liquidity remains ample and has recovered from the squeeze in late 2008. - Capital and default risk: CAR state, CAR private, All banks — banks have large capital cushions; Default Probabilities for Banks (75th percentile, in percent) for Thailand, Malaysia, Indonesia, Korea, Philippines show default probabilities are falling in line with stock market recovery. - Noted central bank source: Bank Indonesia. ### Corporate sector indicators (Figure 5) - Credit access: Credit Growth to Corporate Sector (In percent, 3-month annualized growth of 3-mma) — SME access to credit curtailed more than for large corporates. - Bank credit growth: Bank Credit Growth (Year-on-year percentage change) — separate series for Large corporates and SMEs. - Corporate bond market: Domestic Corporate Bonds (In billions rupiah, traded through Bapepam) — new issuance and outstanding show issuance resumed after slowdown in H2 2008. - Default risks: Default Probabilities for Corporates (75th percentile, in percent) — default probabilities starting to fall after sharp increase in late 2008. - Balance sheet and profitability: Balance Sheet Indicators (ST debt/total debt, Quick ratio, Debt/equity) and Profitability Indicators (Return on assets, Return on equity) — declining leverage, improving liquidity, and rising profitability over recent years. - Regional comparisons (Figure 5 concluded): Leverage (Debt to Equity, 2008 1/ In percent), Profitability (Return on Assets, 2008 1/ In percent), Liquidity (Quick and Current Ratios, 2008 1/), International Exposure (Foreign Assets to Total Assets, 2008 1/ In percent) — after post-Asian crisis deleveraging, corporate debt ratios now below Emerging Asia average; profitability improved but remain low relative to some peers. Note: 1/ 2007 data for Indonesia. ### Recent regional developments (Figure 6) - Asia Q1 2009: Q1 2009 outturns in Asia were below expectations, but signs of improvement exist. - Financial pressures: Asia stock market performance (Change from trough, in percent) — stock markets recovering from troughs (troughs occur mostly in March 2009). - Exports and industrial production: Export Recovery in Asia (Percent change, seasonally adjusted) and Selected Asia: Industrial Production (Percent change) — exports and industrial production recovering from troughs. - Global demand: China’s PMI — Manufacturing New Orders (S.A., 50+=expansion) shows China’s imports contributing to recovery; Global Environment: Purchasing Managers Survey—New Orders (Index, seasonally adjusted, 50+ implies expansion) shows uncertainty in the U.S. and Euro zone persists. - WEO comparison: Asia: 2009Q1 Real GDP Growth (In percent, quarter-on-quarter, SAAR) — WEO forecast vs Actual for IND, CHN, IDN, AUS, KOR, VNM, THA, PHL, TWN, SGP, JPN, HKG, MYS. ### Summary of financial sector interventions (Table 1, September 2008 − April 2009) - Benchmark policy rates and reserve requirements: - BI’s overnight repo rate cut by 200 bps to 10.25 percent and overnight deposit rate increased by 125 bps to 8.50 percent (September 16, 2008). - Reserve requirement for foreign currency deposits cut from 3 percent to 1 percent (October 13, 2008) and for rupiah deposits from 9.1 percent average to 7.5 percent (October 24, 2008). - BI policy rate lowered by 25 bps to 9.25 percent (December 4, 2008); lowered by 50 bps to 8.75 percent (January 7, 2009); lowered by 50 bps to 8.25 percent (February 4, 2009); lowered by 50 bps to 7.75 percent (March 4, 2009); lowered by 25 bps to 7.50 percent (April 3). - Liquidity support and FX measures: - Rupiah liquidity injected through repos, expansion of eligible collateral, FX swap facilities expanded (October 13, 2008). - Banks allowed to use SBIs and government bonds worth 2.5 percent of their total rupiah deposits as secondary reserves (October 22, 2008). - Banks allowed to sell export receivables to the central bank (December 8, 2008); new export financing agency created (December 17, 2008). - Monitoring of foreign exchange transactions strengthened requiring documentation for transactions in excess of $100,000 (November 13, 2008). - State firms required to repatriate export proceeds and transfer foreign currency deposits to domestic banks (October 28, 2008). - Commodities exporters required to use letters of credit issued by local banks in future (announced January 9, 2009; implementation delayed till April 1). - Securities market support and regulatory measures: - Ban of short-selling, stock market shut down for three days, and trading in Backrie shares suspended (October 8–10, 2008). Short-selling allowed again in February 2009. - All bond auctions suspended until end-2008; government and BI initiate buy-back program of government bonds (October 2008). - Temporary suspension of mark-to-market valuation requirements on banks’ bond holdings (October 9, 2008). - New regulations for share buy-backs issued (daily limits scrapped and rule requiring shareholder approval removed); state firms to conduct share buy-backs (October 9, 2009). - Issuance of decree-in-lieu-of-law establishing a Financial Safety Net (October 15, 2008). Legislation still under discussion by parliament. - Deposit insurance, bank resolution, and regulatory relief: - Deposit insurance coverage extended from Rp 100 million to Rp 2 billion for both local and foreign currency deposits (October 13, 2008). - Deposit Insurance Corporation took over Bank Century (November 21, 2008). - BI revoked the business license of Bank IFI. Deposit Insurance Corporation to handle liquidation process (April 17, 2009). - New regulation banning structured currency derivatives products (November 27 and December 17, 2008). - BI announced Basel II adoption postponed and new regulation to ease capital requirements on SME loans (February 2, 2009). ### Key macro-financial indicators and projections (Tables 2–7; selected figures) - Nominal GDP (2008): Rp 4,954 trillion or US$512 billion - Main exports (percent of total, 2008): mineral fuels (29), manufactured goods (15), machinery and transport equipment (13) - GDP per capita (2008): US$2,297 - Unemployment rate (2008): 8.4 - FDI (2008, net): US$2.0 billion - Public debt (2008, gross): 32.3 percent of GDP - Foreign public debt (2008): 11.9 percent of GDP - Poverty headcount ratio at national poverty line (2008): 15.4 percent of population - Real GDP (percent change), actual and projected: - 2006: 5.5 - 2007: 6.3 - 2008: 6.1 - 2009: 3.5 - 2010: 4.5 - Selected national accounts (2006–10): Domestic demand, Private consumption, Gross fixed investment, Net exports, Statistical discrepancy series as provided. - Saving and investment (percent of GDP): Gross investment and Gross national saving series for 2006–10 as provided. - Prices (12-month percent change): Consumer prices (end period) — 2006: 6.6; 2007: 5.6; 2008: 11.1; 2009: 5.0; 2010: 5.5 - Public finances (percent of GDP): Central government revenue and expenditure, central government balance, primary balance, central government debt series for 2006–10 as provided. - Money and credit (12-month percent change; end of period): Rupiah M2, Base money, Private sector credit series for 2006–08 as provided. - One-month SBI rate (period average): 11.8 (2006), 8.6 (2007), 9.1 (2008) - Balance of payments (US$ billions): Oil and gas (net), Non-oil exports (f.o.b), Non-oil imports (f.o.b), Current account balance, FDI, Overall balance, Gross reserves (end period) series for 2006–10 as provided. - Table 3 (Balance of Payments, 2006–10) and Table 4 (Monetary Survey, 2005–09) contain detailed series including reserve assets position, broad money, base money, claims on private sector, and monetary multipliers. - Table 5 (Central Government Operations, 2005–10) highlights revenues and grants, oil and gas revenues, non-oil revenues, tax and nontax revenues, expenditure breakdown, overall balance, financing composition, primary balance, and public debt to GDP. - Table 6 (Selected Vulnerability Indicators, 2005–09) (Float) includes key indicators as of latest observations: Real GDP growth (Proj.), CPI inflation (May-09) 6.0, Short-term interest rate (Jun-09) 7.0, EMBI spread Jun-09 371 bps, Exchange rate NC/US$ Jun-09 10,128, Current account (percent of GDP) proj. 0.3, Net FDI inflows proj. 0.6 percent of GDP, Exports (US$ value) proj. -26.9 (2009), Real effective exchange rate (May-09) 122.4, Gross international reserves (May-09) 57.9 US$ billion, GIR in percent of ST debt (Proj.) 197.6, Total gross external debt (Proj. percent of GDP) 29.4, Gross external financing requirement (Proj., US$ billion) 29.4, Public sector overall balance (Proj. percent of GDP) -2.6, Primary balance (Proj.) -0.6, Public sector gross debt (Proj. percent of GDP) 31.1, Financial sector indicators (Apr-09): CAR 17.8, NPLs 4.1, Provisions in percent of NPLs 132.4, Return on assets 2.7, Return on equity 17.4, Credit to private sector (percent change) 21.4 (Apr-09). - Medium-term macro framework (Table 7, 2008–14 projections) includes Real GDP growth series 2008–14 (6.1; 3.5; 4.5; 5.0; 5.5; 6.0; 6.3) and other projections for demand, prices, public finances, balance of payments, reserves, external debt, and memorandum items (oil production, Indonesian oil price, nominal GDP US$ billions). ### Appendix I (opening) - Appendix I: INDONESIA—PUBLIC AND EXTERNAL DEBT SUSTAINABILITY — Section A. Public Debt (appendix begins in source). *Source: CEIC Data Co., Ltd.; Bloomberg L.P.; country authorities; Bank Indonesia; IMF staff calculations and estimates (content as provided in the source unit).* ### 1. Public sector debt has declined as a share of GDP since 2000. The ratio fell to a ### _cr09230 - 1. Public sector debt has declined as a share of GDP since 2000. The ratio fell to a ### Public sector debt: recent developments - Public sector debt declined as a share of GDP since 2000. - The ratio fell to a post-crisis record-low level of 33 percent in 2008. - Drivers of consolidation: - Primary surpluses averaging almost 2 percent of GDP per year in the last decade. - Reduced risk premia. - Lower interest rates. - High real GDP growth. - Foreign-currency debt (mostly due to multilateral institutions) has fallen to about half of total debt as the improved fiscal position facilitated government access to the domestic capital market. ### Baseline projections for public debt - 2009: Public debt is projected to fall to about 31 percent of GDP, reflecting rupiah appreciation and falling interest rates. - Medium term: Public debt-to-GDP ratio is expected to decline gradually to 28½ percent by 2014. - Key drivers: - Strong growth from 2011. - Sustained fiscal prudence. - A return to positive primary balances from 2011, consistent with accommodating extra resources for development spending. ### Debt sustainability and stress tests - Standard stress tests indicate vulnerability of the projected decline to contingent liabilities, sharp exchange rate movements, and higher interest rates. - Scenarios and impacts: - Fiscal contingent liabilities amounting to 10 percent of GDP could raise public sector debt to almost 38 percent of GDP by 2014, with the ratio above 40 percent in 2010. - A 30 percent currency depreciation would raise the debt ratio by 9 percentage points compared to the baseline. - A large increase in real interest rates would raise the debt ratio to 33 percent by 2014. - Other macroeconomic shocks have a more limited impact. ### External debt: recent developments - External debt declined from over 150 percent of GDP in 1998 to 29 percent in 2008. - External debt as a percentage of exports declined from 288 percent to 97 percent over the same period. ### Baseline projections for external debt - External debt-to-GDP ratio is projected to decline to around 22 percent by 2014. - Main driving factors: - Projected increase in real GDP growth to 5−6¼ percent over the medium term. - Projected positive growth-interest rate differential. - Expected increase in nondebt-creating capital inflows. - Risk: The favorable trend may be reversed if these expected positive developments do not occur. *Source: _cr09230 - 1. Public sector debt has declined as a share of GDP since 2000. The ratio fell to a* ### 6. The external debt ratio is most vulnerable to shocks to the exchange rate. A one-time ### _cr09230 - 6. The external debt ratio is most vulnerable to shocks to the exchange rate. A one-time ### Vulnerability to exchange rate shocks - A one-time 30 percent real exchange rate depreciation would raise the (public) debt ratio by 14 percentage points in 2010, with the impact falling to 12 percentage points over the baseline by 2014. - One-time real depreciation of 30 percent occurs in 2009 (real depreciation defined as nominal depreciation minus domestic inflation based on GDP deflator). - For external debt, a 30 percent real depreciation shock is presented as a key scenario in the bound tests. ### Public sector debt: baseline projections and dynamics (Table I.1) - Baseline: Public sector debt (percent of GDP) by year: 2004: 55.2; 2005: 46.3; 2006: 39.0; 2007: 35.1; 2008: 33.2; 2009: 31.1; 2010: 31.0; 2011: 30.4; 2012: 29.8; 2013: 29.1; 2014: 28.3. - Of which: foreign-currency denominated (percent of GDP) by year: 2004: 24.2; 2005: 23.4; 2006: 18.2; 2007: 16.5; 2008: 16.3; 2009: 17.4; 2010: 16.4; 2011: 15.6; 2012: 14.7; 2013: 13.7; 2014: 12.9. - Change in public sector debt (percent of GDP) by year: 2004: -3.1; 2005: -8.8; 2006: -7.4; 2007: -3.9; 2008: -1.9; 2009: -2.1; 2010: -0.1; 2011: -0.6; 2012: -0.6; 2013: -0.8; 2014: -0.8. - Identified debt-creating flows (percent of GDP) by year (line 3): 2004: -4.8; 2005: -7.8; 2006: -8.7; 2007: -4.1; 2008: -4.7; 2009: 0.1; 2010: -1.2; 2011: -1.1; 2012: -1.0; 2013: -1.2; 2014: -1.2. - Primary deficit (percent of GDP) by year: 2004: -1.3; 2005: -2.1; 2006: -1.6; 2007: -0.8; 2008: -1.6; 2009: 0.6; 2010: 0.1; 2011: -0.1; 2012: -0.2; 2013: -0.3; 2014: -0.3. - Revenue and grants (percent of GDP) by year: 2004: 17.8; 2005: 17.9; 2006: 18.9; 2007: 17.9; 2008: 19.1; 2009: 15.8; 2010: 15.8; 2011: 15.9; 2012: 15.9; 2013: 15.7; 2014: 15.6. - Primary (noninterest) expenditure (percent of GDP) by year: 2004: 16.4; 2005: 15.7; 2006: 17.4; 2007: 17.1; 2008: 17.5; 2009: 16.4; 2010: 15.9; 2011: 15.8; 2012: 15.6; 2013: 15.4; 2014: 15.2. - Automatic debt dynamics (percent of GDP) by year (line 7): 2004: -1.9; 2005: -5.8; 2006: -7.2; 2007: -3.3; 2008: -3.1; 2009: -0.8; 2010: -1.3; 2011: -1.0; 2012: -0.8; 2013: -0.9; 2014: -0.8. - Contribution from interest rate/growth differential (percent of GDP) by year (line 8): 2004: -4.4; 2005: -7.1; 2006: -5.5; 2007: -4.0; 2008: -5.3; 2009: -0.8; 2010: -1.3; 2011: -1.0; 2012: -0.8; 2013: -0.9; 2014: -0.8. - Contribution from exchange rate depreciation (percent of GDP) by year (line 11): 2004: 2.5; 2005: 1.2; 2006: -1.7; 2007: 0.7; 2008: 2.2; 2009: ... (table continues with ellipses for later years). - Residual, including asset changes (percent of GDP) by year (line 16): 2004: 1.6; 2005: -1.0; 2006: 1.4; 2007: 0.1; 2008: 2.8; 2009: -2.2; 2010: 1.1; 2011: 0.5; 2012: 0.4; 2013: 0.4; 2014: 0.4. - Public sector debt-to-revenue ratio (percent) by selected years: 2004: 310.5; 2005: 259.5; 2006: 205.8; 2007: 196.2; 2008: 174.2; 2009: 196.9; 2010: 196.2; 2011: 191.0; 2012: 187.9; 2013: 184.7; 2014: 181.2. - Gross financing need (percent of GDP) by year (line 6): 2004: 6.9; 2005: 2.3; 2006: 3.3; 2007: 3.7; 2008: 2.3; 2009: 4.9; 2010: 3.8; 2011: 3.3; 2012: 3.4; 2013: 3.0; 2014: 2.8. - Debt-stabilizing primary balance (percent of GDP, line 1 caption): -0.6. ### External debt: baseline projections and dynamics (Table I.2) - Baseline: External debt (percent of GDP) by year: 2004: 54.1; 2005: 46.2; 2006: 35.5; 2007: 31.8; 2008: 29.3; 2009: 29.4; 2010: 27.5; 2011: 26.3; 2012: 24.8; 2013: 23.3; 2014: 21.5. - Change in external debt (percent of GDP) by year: 2004: -4.4; 2005: -7.9; 2006: -10.7; 2007: -3.7; 2008: -2.5; 2009: 0.2; 2010: -1.9; 2011: -1.3; 2012: -1.5; 2013: -1.5; 2014: -1.7. - Identified external debt-creating flows (percent of GDP) by year (line 3): 2004: -6.0; 2005: -7.2; 2006: -14.0; 2007: -9.5; 2008: -5.4; 2009: -2.0; 2010: -1.4; 2011: -1.2; 2012: -1.2; 2013: -1.2; 2014: -1.2. - Current account deficit, excluding interest payments (percent of GDP) by year (line 4): 2004: -2.0; 2005: -1.8; 2006: -4.3; 2007: -3.5; 2008: -0.9; 2009: -1.0; 2010: -0.3; 2011: -0.2; 2012: -0.1; 2013: 0.0; 2014: 0.2. - Exports (percent of GDP) by year (line 6): 2004: 32.2; 2005: 35.0; 2006: 31.6; 2007: 30.2; 2008: 30.3; 2009: 21.8; 2010: 20.7; 2011: 20.6; 2012: 20.5; 2013: 20.5; 2014: 20.5. - Imports (percent of GDP) by year (line 7): 2004: 27.8; 2005: 32.0; 2006: 26.1; 2007: -21.7; 2008: -21.8; 2009: -14.3; 2010: -13.8; 2011: -13.8; 2012: -13.9; 2013: -14.1; 2014: -14.2. - Net nondebt creating capital inflows (negative, percent of GDP) by year (line 8): 2004: -0.3; 2005: -1.6; 2006: -1.0; 2007: -1.5; 2008: -0.4; 2009: -0.8; 2010: -0.7; 2011: -0.6; 2012: -0.6; 2013: -0.7; 2014: -0.8. - Automatic debt dynamics (percent of GDP) by year (line 9): 2004: -3.6; 2005: -3.8; 2006: -8.6; 2007: -4.5; 2008: -4.1; 2009: -0.2; 2010: -0.5; 2011: -0.4; 2012: -0.4; 2013: -0.5; 2014: -0.5. - Contribution from nominal interest rate (percent of GDP) by year (line 10): 2004: 1.4; 2005: 1.7; 2006: 1.3; 2007: 1.0; 2008: 0.8; 2009: 0.8; 2010: 0.7; 2011: 0.9; 2012: 0.9; 2013: 0.9; 2014: 0.8. - Contribution from real GDP growth (percent of GDP) by year (line 11): 2004: -2.7; 2005: -2.8; 2006: -2.0; 2007: -1.9; 2008: -1.6; 2009: -1.0; 2010: -1.2; 2011: -1.3; 2012: -1.3; 2013: -1.4; 2014: -1.4. - Contribution from price and exchange rate changes (line 12) shows large negative contributions in earlier years (2004: -2.4; 2005: -2.7; 2006: -8.0; 2007: -3.7; 2008: -3.3) with ellipses thereafter. - Residual, including change in gross foreign assets (percent of GDP) by year (line 13): 2004: 1.5; 2005: -0.7; 2006: 3.3; 2007: 5.7; 2008: 2.9; 2009: 2.2; 2010: -0.4; 2011: -0.1; 2012: -0.3; 2013: -0.3; 2014: -0.6. - External debt-to-exports ratio (percent) by year: 2004: 168.0; 2005: 132.3; 2006: 112.6; 2007: 105.3; 2008: 96.7; 2009: 135.1; 2010: 133.2; 2011: 127.8; 2012: 120.9; 2013: 113.3; 2014: 105.1. - Gross external financing need (in billions of U.S. dollars) by year: 2004: 21.8; 2005: 24.0; 2006: 19.0; 2007: 18.3; 2008: 37.1; 2009: 29.4; 2010: 33.8; 2011: 37.7; 2012: 42.2; 2013: 46.7; 2014: 53.5. - Gross external financing need (percent of GDP) by year: 2004: 8.5; 2005: 8.4; 2006: 5.2; 2007: 4.2; 2008: 7.3; 2009: 5.7; 2010: 5.9; 2011: 6.1; 2012: 6.3; 2013: 6.5; 2014: 6.8. ### Key macroeconomic and fiscal assumptions underlying the baseline (selected) - Real GDP growth (percent) by year: 2004: 5.0; 2005: 5.7; 2006: 5.5; 2007: 6.3; 2008: 6.1; 2009: 3.5; 2010: 4.5; 2011: 5.0; 2012: 5.5; 2013: 6.0; 2014: 6.3. - Average nominal interest rate on public debt (percent) by year: 2004: 5.3; 2005: 5.3; 2006: 6.1; 2007: 6.1; 2008: 6.4; 2009: 6.7; 2010: 6.6; 2011: 6.7; 2012: 6.9; 2013: 7.0; 2014: 7.1. - Average real interest rate (percent) by year: 2004: -3.2; 2005: -9.0; 2006: -7.9; 2007: -5.2; 2008: -11.9; 2009: 1.2; 2010: 0.3; 2011: 1.8; 2012: 2.7; 2013: 3.0; 2014: 3.4. - Inflation rate (GDP deflator, percent) by year: 2004: 8.6; 2005: 14.3; 2006: 14.1; 2007: 11.3; 2008: 18.3; 2009: 5.6; 2010: 6.3; 2011: 4.9; 2012: 4.2; 2013: 3.9; 2014: 3.7. - Growth of real primary spending (deflated by GDP deflator, percent) by year: 2004: 14.2; 2005: 1.2; 2006: 16.6; 2007: 4.3; 2008: 8.6; 2009: -2.9; 2010: 1.5; 2011: 4.4; 2012: 4.3; 2013: 4.6; 2014: 5.0. - Nominal external interest rate (percent) by year: 2004: 2.6; 2005: 3.4; 2006: 3.7; 2007: 3.5; 2008: 3.1; 2009: 2.6; 2010: 2.8; 2011: 3.4; 2012: 3.9; 2013: 3.8; 2014: 3.8. - GDP deflator in U.S. dollars (change in percent) by year: 2004: 4.2; 2005: 5.2; 2006: 20.8; 2007: 11.6; 2008: 11.7; 2009: -1.8; 2010: 5.2; 2011: 2.5; 2012: 2.4; 2013: 2.3; 2014: 2.1. - Growth of exports (U.S. dollar terms, percent) by year: 2004: 19.8; 2005: 20.7; 2006: 15.1; 2007: 13.4; 2008: 18.7; 2009: -26.9; 2010: 4.4; 2011: 7.1; 2012: 7.8; 2013: 8.5; 2014: 8.3. - Growth of imports (U.S. dollar terms, percent) by year: 2004: 26.9; 2005: 28.0; 2006: 4.1; 2007: -198.3; 2008: 19.1; 2009: -33.5; 2010: 5.9; 2011: 8.1; 2012: 8.9; 2013: 9.6; 2014: 9.4. - Current account balance, excluding interest payments (percent of GDP) by year: 2004: 2.0; 2005: 1.8; 2006: 4.3; 2007: 3.5; 2008: 0.9; 2009: 1.0; 2010: 0.3; 2011: 0.2; 2012: 0.1; 2013: 0.0; 2014: -0.2. - Net non-debt creating capital inflows (percent of GDP) by year: 2004: 0.3; 2005: 1.6; 2006: 1.0; 2007: 1.5; 2008: 0.4; 2009: 0.8; 2010: 0.7; 2011: 0.6; 2012: 0.6; 2013: 0.7; 2014: 0.8. ### Scenarios and stress tests highlighted - Individual shocks in bound tests are permanent one-half standard deviation shocks (except where noted). - Shocks applied include: interest rate shock, growth shock, primary balance shock, combined shock, contingent liabilities shock, and one-time real depreciation of 30 percent. - Historical and baseline scenario figures are presented for comparison in the bound-test charts. - Scenario with key variables at their historical averages (external debt table endnote) shows external debt levels dropping to 29.4; 20.7; 12.6; 5.3; -1.3; -7.2; -0.3 for selected years (table context). *International Monetary Fund, Staff Report for the 2009 Article IV Consultation—Informational Annex (Tables and Figures excerpted)._ ### ANNEX III: INDONESIA—RELATIONS WITH THE ASIAN DEVELOPMENT BANK ### ANNEX III: INDONESIA—RELATIONS WITH THE ASIAN DEVELOPMENT BANK ### ADB engagement and strategy (2006−2009) - ADB cumulative loans to Indonesia exceeded $23.5 billion at end-December 2008. - In 2008, the ADB approved a total of $1,085 million, representing 10.3 percent of the total loans approved by the institution for the year. - Nonsovereign loans in 2008 accounted for $75 million or 6.7 percent of the total loans. - Of the $1,010 million sovereign loans in 2008, more than 80 percent were provided through three policy-based operations which advanced reforms in: - macroeconomic management, - infrastructure provision, and - decentralized public financial management. - In 2006, the ADB Board endorsed the Indonesia Country Strategy and Program (CSP) 2006−2009 with a thematic focus on governance and capacity development. - Five areas of engagement under the CSP: - improved infrastructure and infrastructure services, - deepened financial sector, - improved decentralization, - accelerated MDG achievement, - strengthened environment and natural resources management. - Since endorsement, annual public sector lending and non-lending programs have been agreed with the government, selectively focusing on the five areas of engagement. ### Technical assistance (TA) - Between 1967 and 2008, ADB provided 499 Technical Assistance grants to Indonesia amounting to $266.66 million. - TA grants were financed from ADB’s Technical Assistance Special Fund, the Japan Special Fund, and other sources. - In 2008, eight TA grants amounting to $13.0 million were approved, representing 4.7 percent of total TA grants approved by ADB during the year. ### Recent loan approvals and disbursements (selected years) - Loan approvals (in millions of U.S. dollars): 2003: 261.62; 2004: 225.0; 2005: 1,145.69; 2006: 784.8; 2007: 1,187.1; 2008: 1,085 - Loan disbursements (in millions of U.S. dollars): 2003: 442.9; 2004: 593.5; 2005: 1,014.99; 2006: 1,025.88; 2007: 1,136.3; 2008: 949.6 ### Cumulative lending by sector (As of December 31, 2008) - Total: 297 loans, $23,523.30 million (100.00 percent) - Agriculture and Natural Resources: 92 loans, $3,864.29 million, 16.43 percent - Education: 32 loans, $2,222.35 million, 9.45 percent - Energy: 31 loans, $3,781.05 million, 16.07 percent - Finance: 17 loans, $3,121.10 million, 13.27 percent - Health, Nutrition and Social Protection: 13 loans, $1,068.30 million, 4.54 percent - Industry and Trade: 13 loans, $650.70 million, 2.77 percent - Law, Economic Management and Public Policy: 14 loans, $2,509.22 million, 10.67 percent - Multisector: 42 loans, $3,216.83 million, 13.68 percent - Transport and Communication: 33 loans, $2,713.86 million, 11.54 percent - Water Supply, Sanitation and Waste Management: 10 loans, $375.60 million, 1.60 percent --- ### Statistical issues for Indonesia (summary of Annex IV) ### Overall assessment - Indonesia’s macroeconomic statistics and statistical base are broadly adequate to conduct effective surveillance. - Indonesia has been a subscriber to the Special Data Dissemination Standard (SDDS) since September 1996, observing most SDDS requirements. - Exceptions to SDDS observance include: - the currency composition in the reserve template in the first quarter of 2007, - general government data for 2005, - timeliness in the production index data where short delays have occurred. ### Real sector - Annual national accounts base year: 2000. - Quarterly GDP data (expenditure and production sides) are published in a timely manner, but estimates rely on a limited set of indirect indicators of uncertain quality. - Issues identified: - strong seasonality in some sectors; seasonally adjusted data are prepared but not published, - no survey of nonfinancial services, - economic census of businesses undertaken every 10 years without updates between censuses, - household budget survey does not cover higher income households, - inconsistencies with Bank Indonesia (BI) in imports and exports, and with the Ministry of Finance (MoF) regarding local government figures, - five-yearly input-output tables remove statistical discrepancies, but large discrepancies remain in intervening years. - Fund recommendations for the real sector: - development of a system to continuously update the census of businesses; - introduction of comprehensive annual establishment surveys for nonfinancial services industries; - publication of annual GDP estimates, including a time series of at least 20 years; - development of a set of annual supply and use tables (SUTS) starting from 2000; - enhancing the convergence exercise on trade data with BI. ### Labor market data - Annual labor market survey (Sakernas) by the Bureau of Statistics provides wages and employment data with some delay. - Data on minimum and maximum wages for the formal sector are available. - Quarterly industrial wages data are available, with some delay. ### Public finance - Government finance data weaknesses: classification, coverage, and timeliness. - Central government budgetary data were available until recently with a one-month lag. - Subnational (provincial and local) government data are available only with a lag of two years; quality is variable. - Decentralization initiatives have shifted substantial resources to subnational governments, compounding budget and accounting system problems. - Ongoing reforms include adoption of advanced accounting and statistical standards, introduction of best practice budget management processes, and development of computerized financial management information systems. - Public debt statistics coverage and timeliness are generally adequate; limited information on contingent liabilities. - New expenditure classification introduced in the 2005 budget is generally consistent with GFSM 2001 on functional codes and classification, though data are compiled on a cash basis. - Fund short-term recommendations for fiscal statistics: - establishment of a register of all extrabudgetary units to improve coverage of central government activity; - inclusion of economic codes consistent with GFSM 2001 in the chart of accounts to ensure general government units report transactions and balances. - Fund medium-term priorities: - use subnational fiscal reform efforts to establish reporting arrangements for timely preliminary local government statistics; - develop GFSM 2001 operating statements, statements of sources and uses of cash, and partial balance sheets for publication on the MoF websites. ### Monetary accounts - Good quality monetary statistics are compiled by BI on a timely basis. - With STA assistance, BI developed an integrated database for alternative presentations of monetary statistics. - Coverage needs to be expanded to include mutual funds (REKSA DANA), which report to BAPEPAM. - BI is developing institutional data-sharing arrangements to access mutual funds registers and data. - STA recommended actions to strengthen monetary statistics: - collection of source data on mutual funds in a format meeting statistical requirements; - expansion of monetary statistics coverage to include mutual funds; - harmonization of reported interbank positions between BI and commercial banks. ### Balance of payments (BOP) - Trade data shortcomings: - customs sources used by BI are generally reliable, but merchandise trade coverage is insufficient; - the online reporting system introduced in 2004 reconstructed historical series only as far back as 2003, causing inconsistencies in BOP prior to 2003 with national accounts estimates; - data on services suffer from outdated surveys and weak methodologies. - BI adjustments: - customs data adjusted to cover exports and imports of Batam and other bonded zones; - adjustments to compensation of employees and workers’ remittances to cover professional workers, legal workers not reported to the Ministry of Manpower, and illegal workers. - Capital and financial account issues: - methodological basis for FDI compilation needs substantial improvement; - inflows are currently calculated based on loan disbursements to companies with foreign equity using a fixed ratio to estimate equity inflows; - BI surveys for FDI have a low response rate and enterprise directory coverage should be improved; - recording of trade credits and asset data for portfolio investment and other investment transactions need improvement; - errors and omissions have been significant and appear related to methodology for unrecorded assets in the financial account; - financial transactions data have not been reconciled with changes in the International Investment Position (IIP). - BI planned measures: - establish a working group to reconcile differences between BI and customs data; - collect and publish data on goods imported for processing, goods procured in ports by carriers, and transactions with the oil and gas sector; - collect and publish data on direct investment abroad, portfolio investment assets, other investment assets, and trade credits. ### International Investment Position (IIP) and external debt - An annual IIP is compiled, but underlying data are weak in several areas, notably FDI. - External debt statistics improved with the introduction of an External Debt Information System (EDIS) in 2002. - EDIS records external debt of government and over 800 other entities reporting to BI on a monthly basis. - EDIS generates reliable data for public sector external debt and debt service, and for private banks. - Further improvements needed for private corporate sector data, including: - distinguishing between scheduled and actual debt service; - estimating accumulation/reduction of private sector payments arrears; - estimating rescheduling and debt reductions received by the private sector from external creditors. ### Table of Common Indicators Required for Surveillance (as of June 11, 2009) - Exchange rates: Latest observation 6/11/09; Date received 6/11/09; Frequency of data: D; Frequency of reporting: D; Frequency of publication: W/M. - International reserve assets and reserve liabilities of the monetary authorities: Latest observation 5/29/09; Date received 5/29/09; Frequency of data: D; Frequency of reporting: M; Frequency of publication: M. - Reserve/base money: Latest observation 4/09; Date received 6/6/09; Frequency of data: D; Frequency of reporting: D; Frequency of publication: W/M. - Broad money: Latest observation 4/09; Date received 6/6/09; Frequency of data: M; Frequency of reporting: M; Frequency of publication: M. - Central bank balance sheet: Latest observation 4/09; Date received 6/6/09; Frequency of data: M; Frequency of reporting: M; Frequency of publication: M. - Consolidated balance sheet of the banking system: Latest observation 4/09; Date received 6/6/09; Frequency of data: M; Frequency of reporting: M; Frequency of publication: M; Data quality—Methodological soundness: O, LO, O, O LO, O, O, LO, O; Data quality—Accuracy and Reliability: (as shown in table). - Interest rates: Latest observation 6/11/09; Date received 6/11/09; Frequency of data: D; Frequency of reporting: D; Frequency of publication: W/M. - Consumer price index: Latest observation 5/09; Date received 6/1/09; Frequency of data: M; Frequency of reporting: M; Frequency of publication: M. - Revenue, expenditure, balance and composition of financing—central government: Latest observation 05/09; Date received 06/09; Frequency of data: M; Frequency of reporting: M; Frequency of publication: Mid-year; Data quality indicators: LNO, LNO, LO, LNO / LNO, LO, LO, LO, LNO (as shown in table). - Stocks of central government and central government–guaranteed debt: Latest observation 05/09; Date received 06/09; Frequency of data: M; Frequency of reporting: Q; Frequency of publication: A. - External current account balance: Latest observation 3/09; Date received 5/28/09; Frequency of data: Q; Frequency of reporting: Q; Frequency of publication: Q. - Exports and imports of goods and services: Latest observation 3/09; Date received 5/28/09; Frequency of data: M; Frequency of reporting: M; Frequency of publication: M; Data quality notes: LO, LO, LO, LO / LO, O, LO, O, O (as shown in table). - GDP/GNP: Latest observation 2009Q1; Date received 6/09; Frequency of data: Q; Frequency of reporting: Q; Frequency of publication: Q; Data quality notes: LO, LO, O, LO / LO, LO, LO, LO, LNO. - Gross external debt: Latest observation 12/08; Date received 4/09; Frequency of data: Q; Frequency of reporting: Q; Frequency of publication: A. - International investment position: Latest observation 2007; Date received 4/09; Frequency of data: A; Frequency of reporting: A; Frequency of publication: A. --- ### IMF staff statement update (July 13, 2009) - Information covers events since the staff report circulated on June 30, 2009; it does not alter the staff’s assessment of policy issues and recommendations in the report. - Financial markets were generally quiet before and after the Presidential elections held on July 8, 2009; official results to be known on July 27, 2009. - Market indicators through early July 2009: - rupiah/U.S. dollar exchange rate remained flat so far in July, - government bond yields and CDS spreads stable, - foreign exchange reserves broadly unchanged. - Recent real activity indicators: - leading consumption indicators rose in May 2009, including motor vehicle sales and retail sales, - consumer confidence reached a 4½-year high in June 2009, - tourist arrivals increased by 4 percent in April and May 2009 (y/y), - non-oil exports recovered in April and May 2009 relative to Q1 2009, reflecting rising commodity prices, - imports were up in May 2009 in all groups, including raw materials and capital goods, - on an annual basis, non-oil exports and imports were still down about 15 percent and 30 percent, respectively. - Inflation: - Headline inflation fell to 3.7 percent (y/y) in June 2009, the lowest rate since June 2000. - Deceleration largely due to unwinding of base effects from a 30 percent fuel price adjustment in late May 2008. - Core inflation slowed but remained at 5.6 percent. - Year-end inflation could potentially finish slightly below the current projection of 5 percent. *Prepared by ADB staff; IMF staff statement dated July 13, 2009.* ### 5. In line with expectations, Bank Indonesia (BI) reduced the policy rate on July 3 by ### _cr09230 - 5. In line with expectations, Bank Indonesia (BI) reduced the policy rate on July 3 by ### Monetary policy actions and stance - Bank Indonesia (BI) reduced the policy rate on July 3 by 25 basis points to 6.75 percent. - BI noted that the room for more easing has become limited due to possible inflation risks in 2010. - BI has been on a monetary-easing cycle since December 2008; the policy rate has been cut by 275 basis points to 6¾ percent. - Directors generally considered the monetary policy easing since December 2008 to be timely and appropriate, but supported a more cautious stance going forward given: - ample liquidity in the banking system, - long lags in monetary transmission, - the risk of a reversal of capital flows. - Directors encouraged continued strengthening of the monetary policy framework, including: - strong commitment to the medium-term inflation targets, - publication of inflation forecasts to guide inflation expectations and enhance policy credibility. ### Economic developments and resilience - Indonesia entered the global crisis with strong initial conditions: sound macroeconomic policy implementation, prudent debt management, and a developing sound financial sector. - Economic growth averaged about 6 percent since 2005. - Fiscal performance was strong; the current account was in surplus; both public and external debt dropped to about 30 percent of GDP; international reserves rose to a relatively comfortable level. - Despite the global crisis, the economy rebounded in 2009 with a stronger than expected recovery in Q1 2009, supported by particularly strong consumption and election-related spending stimulus. - CPI inflation decelerated rapidly since October 2008 reflecting weaker economic conditions and falling commodity prices. - External accounts improved in Q1 2009: current account positive from a non-oil trade surplus; financial account registered a surplus due to demand for sovereign debt securities. ### Fiscal policy and stimulus - A fiscal stimulus package of about 1.4 percent of GDP was announced in February 2009. - Directors welcomed the fiscal stimulus plan for 2009 and emphasized that timely and efficient implementation—especially on infrastructure—would be critical to sustaining the recovery. - Directors considered it appropriate to maintain some of the stimulus in 2010, given available fiscal space; most saw room for a somewhat higher fiscal deficit than currently planned, consistent with continued debt consolidation over the medium term. - Directors commended progress in fiscal reforms toward a consolidated Treasury Single Account, simplified budget execution procedures, and strengthened cash management. - Recommendations included further strengthening tax administration and lowering energy subsidies to create fiscal space for priority infrastructure and social expenditures. ### Banking and financial sector - Banking and corporate sector indicators are generally robust and proved resilient to the crisis. - Financial soundness indicators improved in 2008—profitability rose and the capital base strengthened further. - Credit expansion decelerated on a monthly basis since December 2008 after a period of rapid credit growth. - Companies reduced vulnerabilities by lowering leverage ratios, raising profitability, and reducing exposure to external liabilities. - Directors welcomed the robustness of the banking sector, strong capital positions, and improved profitability. - Crisis management measures by Bank Indonesia helped alleviate liquidity pressures and restore market confidence. - Directors looked forward to early parliamentary approval of the Financial Safety Net law and emphasized: - strengthening early warning systems, - continued close supervision of banks, particularly small and medium-sized banks exposed to liquidity risk, - the forthcoming Financial Sector Assessment Program (FSAP) to identify priorities for further reform. ### Executive Board assessment and risks - Executive Directors welcomed Indonesia’s resilience and appropriate policy responses. - Directors warned that another round of global risk aversion could adversely affect external liquidity, demand, and growth prospects. - Exchange rate flexibility was endorsed as an important shock absorber; staff assessed the current level of the real effective exchange rate as broadly in line with fundamentals. - Most Directors considered it prudent to build larger reserve buffers gradually over the medium term to preserve investor confidence, though some believed current reserves and contingency arrangements were an adequate cushion. ### Key statistics and projections (selected; 2006–10) - Real GDP (percent change): 2006 5.5; 2007 6.3; 2008 6.1; 2009 3.5; 2010 4.5 - Private consumption (percent change): 2006 3.2; 2007 5.0; 2008 5.3; 2009 4.9; 2010 5.1 - Gross fixed investment (percent change): 2006 2.6; 2007 9.4; 2008 11.7; 2009 3.2; 2010 7.6 - Net exports (contribution to GDP growth, percentage points): 2006 1.1; 2007 0.6; 2008 0.7; 2009 -0.9; 2010 -0.5 - Consumer prices (12-month percent change, end of period): 2006 6.6; 2007 5.6; 2008 11.1; 2009 5.0; 2010 5.5 - Central government balance (in percent of GDP): 2006 -1.0; 2007 -1.2; 2008 -0.2; 2009 -2.6; 2010 -2.0 - Central government debt (in percent of GDP): 2006 39.0; 2007 35.1; 2008 33.2; 2009 31.1; 2010 31.0 - One-month SBI rate (period average): 2006 11.8; 2007 8.6; 2008 9.1 - Current account balance (in billions of U.S. dollars): 2006 10.9; 2007 10.5; 2008 0.3; 2009 1.4; 2010 -2.4 - Gross reserves (end period, in billions of U.S. dollars): 2006 42.6; 2007 56.9; 2008 51.6; 2009 62.1; 2010 65.1 - Gross reserves (in months of imports): 2006 4.7; 2007 4.7; 2008 6.0; 2009 6.8; 2010 6.5 - Total external debt (in billions of U.S. dollars): 2006 129.5; 2007 137.4; 2008 149.7; 2009 153.0; 2010 157.5 - Total external debt (in percent of GDP): 2006 35.5; 2007 31.8; 2008 29.3; 2009 29.4; 2010 27.5 - Nominal GDP (in trillions of rupiah): 2006 3,339; 2007 3,957; 2008 4,954; 2009 5,413; 2010 6,015 - Nominal GDP (in billions of U.S. dollars): 2006 364; 2007 433; 2008 512; 2009 520; 2010 572 *Public Information Notice (PIN) No. 09/93, July 28, 2009* ### 0.1 percent of GDP, compared with 2.1 percent projected earlier in 2008 when global oil ### _cr09230 - 0.1 percent of GDP, compared with 2.1 percent projected earlier in 2008 when global oil ### Macroeconomic outcomes and short-term developments - GDP growth stalled to 4.4 percent (year-on-year) in Q1 2009 from 6.1 percent in 2008. - Fiscal outturn: - Revenue was about 10 percent above budgeted level. - Debt to GDP ratio declined to 33 percent at year-end. - Inflation and monetary policy: - Policy rate raised from 8 percent in May to 9.5 percent in October 2008. - Policy rate cut in each of eight consecutive months from December 2008 to July 2009 by a total of 275 basis points. - External sector movements: - Balance of payments deficit of USD 4.2 billion in Q4 2008. - International reserves fell from USD 59.4 billion (first half of 2008) to USD 51.6 billion at end-2008. - Overall balance surplus of nearly USD 4 billion in Q1 2009; international reserves rose to USD 54.8 billion (equivalent to 5.9 months of imports and official debt repayment). - Rupiah depreciated more than 15 percent during the last quarter of 2008; stabilized below 10.500 per USD since April 2009 after earlier trading around 11.000-12.000 per USD. - Banking sector indicators: - Rapid credit expansion of 29.5 percent in 2008 followed by a decline in lending. - Capital Adequacy Ratio (CAR) expected to remain about 18 percent in 2009. - Non Performing Loan (NPL) expected to remain below 5 percent in 2009 with over 100 percent loan loss coverage. - April 2009 overall CAR was 17.6 percent; gross NPLs around 4 percent. - Credit Default Swap (CDS) spread eased from 403 bps at end-April 2009 to about 333 bps at end-May 2009. ### Policy responses and stimulus measures - Fiscal policy: - Revised budget includes a stimulus package amounted to USD 7.1 billion covering tax cuts, subsidies for medication and cooking oil, pay increases for civil servants, direct cash transfers, and community block grants. - Budget deficit revised to 2.5 percent of GDP from 1.0 percent in the original budget (parliamentary approval secured). - During Q1 2009 authorities sold USD 3.5 billion dollar-denominated bonds and USD 650 million global Islamic Bond, boosting international reserves to USD 57.9 billion. - Creditors’ commitments to guarantee standby loans amounting to USD 5.5 billion from ADB, WB, Australia and Japan (in the form of guarantee for a samurai bond issuance). - Authorities expedited budget execution, particularly for regional governments, to maintain domestic demand and public purchasing power. - Monetary policy: - Bank Indonesia cut policy rate across eight months from December 2008 to July 2009 by an aggregate of 275 basis points; policy rate reached 6.75 percent and is predicted to approach its bottom. - Inflation for 2009 expected to be at the lower end of the 5-7 percent projection. - Since December 2008, bank deposit rates have come down 150 bps; loan interest rates eased by an aggregate 100 bps. - Bank Indonesia expanded communication to address weak monetary transmission; expected faster credit growth in Q2 2009 post-election. - External liquidity and exchange rate safeguards: - Access to bilateral currency swap arrangement with China amounted to RMB 100 billion (equivalent to USD 15 billion). - Bilateral swap arrangements with Japan, China and Korea totalling USD 18 billion. - Access to Chiang Mai Initiative Multilaterisation amounting to USD 11.925 billion. - Temporary regulation allowing banks to avail USD repurchase agreements with Bank Indonesia using Indonesian Government foreign currency denominated bonds in repo transactions for tenors of 1 month. ### Financial sector resilience and regulatory actions - Banking sector strength and actions: - Liquidity and depositor funds progressively improved; inter-bank money market liquidity improved. - Government takeover of a mid-size problem bank and Bank Indonesia closure of a small problem bank in April 2009 strengthened public confidence. - Indonesian banks limited exposure to large derivative-related problems through prudent regulation. - Supervisory and structural priorities: - Improved coordination between Bank Indonesia and the Government under the new Financial Safety Net framework enhanced surveillance of banking and non-bank financial institutions and the capital market. - Authorities committed to promote bank efficiency and expand financial services while strengthening supervisory framework. - Planned measures include simplifying administrative burdens, ongoing close monitoring, regular stress tests to evaluate vulnerabilities, and prompt corrective actions. ### Prospects, risks, and policy direction (2009–2010) - Authorities remain cautious of downside risks from growing uncertainty, weakening global demand, and limited financing if global slowdown is prolonged. - Strategic policy balance aimed at: - Monetary stability. - Strengthening financial system stability. - Aligning stimuli to maintain economic growth momentum. - External outlook: - Exports expected to vary with global commodity prices; imports likely to decline with weakening domestic demand and international trade. - Risk of a minor current account deficit, though a current account surplus remains possible if global commodity prices rebound and demand from emerging markets improves. - Slower capital inflows expected due to global market consolidations; government financing and foreign direct investment may help offset declines. - Contingency and preparedness: - Authorities engaged development partners for standby loans and enacted preemptive reserve access under multilateral and bilateral arrangements to safeguard exchange rate stability. * _cr09230 - 0.1 percent of GDP, compared with 2.1 percent projected earlier in 2008 when global oil_* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09230.pdf_