Indonesia Country Report

Indonesia

[pic 1]

Module: Economic Environment II

Professor: PABLO SWEDBERG GONZALEZ

Assessment: Economic Policy Analysis and Recommendations

Date: March 3rd of 2017

Group E

Thomas Beaumont

Isabelle Chaaito

Agila Karakayeva

Pierenrico Orlandi

Nishok Tressler

Sofia Paz Vivo

Table of Contents

1. Monetary policy……………………………………………………………………………3
2. Fiscal policy………………………………………………………………………………..4
3. Labour market reforms and immigration…………………………………………………..5
4. Trade policy and exchange rate management……………………………………………...6

Appendices………………………………………………………………………………………8

Bibliography…………………………………………………………………………………...13

1. Monetary policy

As we outlined in our previous report the Indonesian economy has suffered 3 consecutive years of declining GDP growth (annex 1), largely due to low prices of the world’s natural resource market. Amid these uncertainties, the Bank of Indonesia (BI) has limited monetary policy changes, prioritizing stability instead. The last major changes came in April 2016 when an attempt was made to bring lending rates down to around the 5.5% mark after they were hovering around 12% (annex 2). More recently, the refinancing rate was fixed by the BI at 4.75% (annex 3), which is significantly higher than the 1.25% charged by the Federal Reserve, meaning access to capital for Indonesia commercial banks is much tougher. The fact that the BI cut interest rates six times throughout 2016 draws attention to two potential problems with the Indonesian economy:

• Sluggish growth, dropping from 6.2% growth in 2011 to 4.8% in 2015
• A highly fluctuating level of inflation, being as high as 15.4% in 2010 before falling to 4% in 2 years and rising again more recently. It is currently missing a target of 4%, with levels at 6.61%. (annex 4)

Currently Indonesia’s monetary policy seems uncertain. Whilst the BI stresses stability and conservatism in almost all financial reports, their actions are contradictory. The aforementioned interest rate cuts in 2016 followed by a repurchase of government bonds worth 24 trillion rupiah, thus injecting this money into the banking system following the Trump election. There are four tools of monetary policy that BI can use:

1. Buying or selling government backed securities. Through repurchasing these securities held by commercial banks BI is increasing the monetary supply in the banking system and thus, according to Keynesian economics, stimulating aggregate demand.
2. Loans and the interest rates charged to banks. An increase in the interest rate (endogenous) raises the opportunity cost of holding money and the quantity of money demanded is falls, this reduced spending helps to curtail a dramatic rise in inflation.
3. Changing the reserve requirements for commercial banks. Currently it is 6.5% in Indonesia compared to the 1% set by the ECB meaning that of the available money commercial banks hold, Indonesia commercial banks can offer less in loans.
4. Quantitative easing is a combination of both decreasing interest and increasing money supply. This is usually done when the economy is particularly sluggish and interest rates are already close to 0.

We believe that Indonesia’s monetary policy should not focus on stimulating growth through reduced interest rates and increasing the money supply for the following reasons;