NUSANTARA REPORT NUSANTARA REPORT - Bank Indonesia

Review of Regional Economic and Finance

NUSANTARA REPORT OCTOBER 2013

For further information, please contact: Bank Indonesia Department of Economic and Monetary Policy Economic Assessment Group – Regional Economic Division Ph. 021-29818119, 29818868 Fax. 021-2310553

Laporan Nusantara

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NUSANTARA REPORT

Summary of Current Condition and Prospect of Regional Economic Various indicators in the third quarter of 2013 strongly points to a downward trend in the regional economy. Improvement in the regional exports that are reflected in a number of regions is expected to be limited as a result of continued weakness in commodity prices in the global markets. Thus, the prospect of exports is able to compensate the slowing down of household consumption and new investments are unlikely at this time. The slowdown in the economy is predicted in most of the provinces in the Sumatera and the Jakarta region. While, the economy of Java and Eastern Indonesian regions is predicted to grow higher than the previous quarter. Meanwhile, inflation in all regions was recorded higher in the third quarter of 2013 than the previous quarter as a result of an increase in the subsidized fuel prices at the end of June. Unstable supply of several food commodities also contributed to higher inflation in a number of regions. Inflationary pressures, however, was weakened at the end of the third quarter of 2013 with the adequate supplies of shallots, red chili, and meats. A much lower inflationary pressure was recorded in the Eastern Indonesian regions particularly in the Sulawesi, Maluku and Nusa Tenggara regions due to the price correction of fish commodities.

Figure I.1. Regional Economic Growth Q3 2013 (% year on year) *

*) Estimates of regional growth by Bank Indonesia Representative Ofiices **) Average national growth 2010 – 2013 = 6,3%

*) Bank Indonesia divides the analysis of regional economics into 4 (four) regions, each region representing several provinces. Sumatera region (Aceh, North Sumatera, South Sumatera, Bengkulu, Jambi, Lampung, West Sumatera, Riau, Bangka Belitung, and Riau Islands Provinces); Jakarta (DKI Jakarta Province); Java region (West Java, Banten, Central Java, East Java, and DI Yogyakarta Provinces); Eastern Indonesian region (Bali, West Nusa Tenggara, East Nusa Tenggara, West Kalimantan, Central Kalimantan, South Kalimantan, East Kalimantan, North Sulawesi, Gorontalo, Southeast Sulawesi, Central Sulawesi, South Sulawesi, West Sulawesi, Maluku, North Maluku, Papua, and West Papua Provinces).

Laporan Nusantara |1


NUSANTARA REPORT

Regional Economic Growth Various indicators in the third quarter of 2013 strongly points to a downward trend in the national economy. The slow down of the economy is influenced by the dynamics in the global economy as uncertainty is still relatively high, which slows the economic recovery and acceleration in the volume of global trades. This condition has also put pressure on the trade account and exchange rate for the most part of the third quarter. Export improvement in a number of regions is expected to be limited as a result of continuing weak global commodity prices. Thus, the prospect of exports are able to compensate the slowing down of household consumption and investementis unlikely at this moment. A slowing down in the regional economy is projected mostly in the Sumatera and Jakarta regions as reflected in several household consumption indicators, such as import of consumption goods and consumption credit. The global commodity prices that have not yet recovered together with the high inflation give contribution to weak domestic consumption. Increasing export in the Sumatera region is still limited due to weak global commodity prices (Graph I.1 and I.2). Besides that, production of agricultural commodities is also foreseen to be lower in the third quarter because of unfavorable climates and a lack of incentive to plant as selling prices by farmers are still low. Meanwhile, the economy of Jakarta region is affected by the slump of investments as a result of an increase in loan interest rates and depreciation of the exchange rate.

Graph I.1. Growth of Regional Export Volume

Graph I.2. Growth Contribution of Regional Export Value

The economy in the Java and Eastern Indonesian region has a potential to grow upward as indicated by the improvement in exports and a relatively stable domestic demand. Export continues to improve in many parts of provinces in Java particularly the West Java and East Java provinces that are the base for export manufacturing. Hence, higher growth in the Java region is to some extent affected by the slow down in private investments.Exports from the Eastern Indonesian region also increase in the third quarter of 2013 particularly for mining commodities, such as nickel, coal and copper, although the price of those commodities are still weak. The copper production in Papua that was returned to normal after being halted for a period of time also contributed to the economic growth in the Eastern Indonesian region. Government consumption is projected to increase in the third quarter of 2013 due to the realization of the 13th month salary for public servants. In addition, acceleration of government spending in infrastructure projects in a number of regions is also expected to increase government consumption. The official report from the



NUSANTARA REPORT government estimates regional government spending at 358,6 trilion Rupiah or 50,6% from the total spending of the regional government budget in 2013 1.

Bank Financing Bank financing is predicted to be stable in the third quarter of 2013. It is believed to be one of the factors that contribute to economic growth in the regions. Loan is expected to grow between 15,7% and 23,4% (Graph I.3). Fairly stable activities of banking intermediaries in the Java, Sumatera, and Eastern Indonesian regions is supported by growth of working capital loans and consumption credits. A significantly higher growth of credits in the Jakarta region is also contributed by an increase in working capital loans. The latest data also shows an increase in private deposits in conjuction with an indication of potentially higher interest rates for private deposits, particularly time deposits (Graph I.4).

Graph I.3. Credits in Regional Banking 50

Graph I.4. Savings in Regional Banking 30

% yoy

45

Sumatera

Jakarta

40

Jawa

KTI

35

% yoy

25 20

30 25

15

20

10

15 10

5

5 0 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 2011

2012

2013

Sumatera

Jakarta

Jawa

KTI

0 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 9 101112 1 2 3 4 5 6 7 8 2011

2012

2013

Micro, small and medium enterprises credit (MSMEs) is also predicted to grow higher particularly in the Java, Sumatera and Eastern Indonesian regions. Yet, the contribution of MSMEs in the Jakarta region is expected to grow at a slower rate. Until August 2013, the share of MSMEs is around 20% from total loans. This is in line with Bank Indonesia’s target in 2013 to increase the share of MSMEs through policies and programs that aim to improve banking accessibility. Graph I.5. Growth Contribution of SME Credits

Graph I.6. Share of SME Credits in Q3 2013

Note: Data until August 2013

1

Estimation of Regional Government Spending (August 2013), Directorate of Regional Fiscal Balance, Ministry of Finance.



NUSANTARA REPORT

Regional Inflation In the third quarter of 2013, inflationary pressure increased almost across all regions. This pressure was even higher than the previous quarter, explained mainly by the hike in subsidized fuel prices at the end of June 2013 and soaring food prices as a result of tightening in some food supply. Food supply disruption occurred mainly for commodities such as spices (shallots, chili peppers), chicken and beef. The disruption in the supply of food came in the midst of rising demand prior to Eid-ul-Fitr festivities, causing prices to increase further. A significant inflation hike was in Jakarta and its neighboring cities such as Depok, Tangerang and Bekasi. Moreover, sustained pressure from the weakening of the rupiah exchange rate since July 2013 gave additional pressure on domestic prices. Inflationary pressure now appears to be on a downward trend, following the betterment of food supplies, especially for shallots, chili peppers and imported beef. A bountiful amount of food supply, mostly for fresh fish commodities, brought significant food prices correction in Sulawesi, Maluku and Nusa Tenggara. Those three regions recorded monthly inflation rates that were lower than other regions in September 2013. However, inflation rates in some regions were still high, which is recorded well above 10%. Those regions are West Sumatera, West Papua, North Maluku, East Kalimantan and Banten.

Figure I.2. Regional Inflation Q3 2013 (% year on year)

Inf > 8,50% 8,00% < inf ≤ 8,50% 6,80% < inf ≤ 8,00% Inf ≤ 6,80%

Regional Economic Outlook Uncertainty in global economic recovery is bearing down on the economic outlook in the fourth quarter of 2013, with growthpredicted to slip behind the levels of third quarter. Slower economic growth is expected to chart in the region of Java and Eastern Indonesia. Lower growth in private consumption and investment has likely hampered economic performance in the Java region. Meanwhile, waning economic growth in Eastern Indonesia is foremost caused by deteriorating export performance, in line with weakening commodity prices. Furthermore, worsening exports will restrain investment activities in Eastern Indonesia. Laporan Nusantara |1


NUSANTARA REPORT Trade balance deficit is expected to widen across the regions, especially in the Java area and Jakarta. This problem persists since exports have not shown strong signs of improvement, while imports are still quite high. Looking ahead, persisting trade balance deficit needs to be addressed through structural policy to push industrial capabilities as the best response to the rise in the multiplicity of domestic demand. These policies should be made to meet the prerequisites for sustaining the development of the country. To be able to excel in the global economic competition, the economic policy should be directed to build up Nusantara as the main location for manufacturing of final complex goods and its components and as an important player in the global value chain. Concerning inflation, a number of risk factors are still looming the general prices in the coming quarter, even though pressure on inflation has begun to ease. Continued depreciation of the rupiah poses risk that inflation will further increase. There is also an increased risk in supply-side inflation since the upcoming harvest is expected to come later than usual. In addition, the risk is also associated with the price hike in electricity tariff, LPG (12 kg) and a seasonal increase (year end) in airfares. Considering all these risks, for inflation control, Bank Indonesia will remain vigilant and respond with measured policies, including strengthening policy coordination with the government, both at the central and regional levels. In the short term, the Regional Inflation Task Force (RITF) will focus on lowering volatile food price inflation, which currently stands at around 14%. Appropriate actions should be taken to ensure adequate supply and smooth distribution of food staples. Furthermore, the depreciation of the rupiah continues to be monitored to mitigate the impact on general prices.

Nusantara Report is a summary of Board of Governor’s meeting with Regional Head of Representative of Bank Indonesia on October 3, 2013 in Jakarta. The quarterly Board’s meeting is to assess the state of the economy and various strategic issues in the regions as part of consideration in determining the direction of monetary policy of Bank Indonesia.
