Research Lounge: Leslie Djuranovik, “How Indonesia has moved towards macroeconomic stability”

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Date: 11 February (Monday), 2013
Location: PG Hub 7, Senate House
Topic: How Indonesia has moved towards macroeconomic stability
Speaker: Leslie Djuranovik

About the Speaker: Before joining the MSc in Warwick, Leslie obtained a BSc in Statistics from Bogor Agricultural University (Indonesia) and worked for the monetary policy division of the Central Bank of Indonesia for several years.

Country Background
Indonesia is the fourth largest country in the world in terms of population after China, India, and the United States of America (US). Results of the 2010 Population Census by Indonesia Central Agency of Statistics show that the population in 2010 is around 238 million people. Thanks to its large number of population, domestic demand plays a dominant role in the economy. With regards exchange rate management, Indonesia has adopted the free floating exchange rate system since 1999.

Overview of the Economy
Against a backdrop of weaker global economic growth, the Indonesia’s economy in 2012 grew strongly by 6.2%, buoyed mainly by domestic demand. Over the past eight years, the Indonesian economy has continued to grow solidly, averaging in excess of 6%, making Indonesia one of only a very few countries in the world to combine rapid economic growth with maintained stability. This sustainable economic growth was underpinned by a favorable macroeconomic environment and stable financial system.

Inflation reached a single digit, along with improving policy credibility under Inflation Targeting Framework (ITF). Core inflation has been fairly stable in the last three years at around 4%.

In the financial sector, resilient domestic economic performance was also supported by sound performance in the banking sector, as indicated by strong credit expansion and at the same time could be maintained at a level deemed safe for the economy. This was followed by a credit allocation strategy aimed at productive sectors in the form of investment credit.

The intermediation function was performed relatively well, backed by sound banking conditions and well-managed risk exposure. Bank capital picked up, primarily in the form of core capital, therefore adding resiliency to absorb risks emerging from the banks’ business activities or to changes in the business environment.

Monetary policy was aimed to steer future inflation within the target range and provide support for sustainable economic growth. Exchange rate policy is designed to maintain rupiah stability at a level appropriate with economic fundamentals.

Prospects and Challenges
The Indonesia’s economy is expected to post high growth in 2013, with the domestic demand to remain the key contributor to economic growth. Meanwhile, the contribution of exports to GDP is projected to pick up in line with the recovery in the global economy.

The government (in conjunction with the central bank) has set the medium-term inflation target at 4.5%±1% in 2013 and 2014, and 4.0%±1% in 2015 in order to anchor inflation expectations.

In the medium term, Indonesia’s economy is expected to sustain economic growth in excess of 7% along with low and stable inflation. If the trend continues, a report from PwC indicates that in the long term Indonesia will be one of the ten largest economies in the world.

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© The content is provided by the speaker Leslie Djuranovik to present the opinions and findings completely and accurately. Reference and data source may not be fully displayed but can be requested from the author. The Full content is considered as intellectual or academic work and strictly protected by copyright law. All rights reserved.

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