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INDONESIAN COMMERCIAL NEWSLETTER
MONTHLY REPORT
 

INDONESIAN COMMERCIAL NEWSLETTER
October 2008

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CREDIT INTEREST RATE UP CONSUMER GOODS INDUSTRY REELING

Unlike world's major central banks, which chose to cut their credit interest rates to improve bank liquidity and to ease the impact of global financial crisis, Bank Indonesia raised its benchmark interest rate (BI Rate). Bank Indonesia maintained or even raised its benchmark interest rate as inflation is still a potential threat in the country.  High inflation rate forced the Indonesian central bank, to adopt a tighter monetary policy. Bank Indonesia is aware that if the economy is to be revived   liquidity has to be relaxed as the business sector will need working capital and bank loans to facilitate payments.

Anomalies are often to surface in times of crisis especially one of global scale. Safety measure taken by one country could hurt neighboring countries if both sides are in opposite position in economic condition and interest.  When Ireland started to provide full blanket guarantee for bank deposits, large funds from its neighboring countries flowed in to that country, motivated either by security or speculation. Certainly the result was against the interest of the neighboring countries.

Amid the global financial crisis, Indonesia   indeed needs to be extra cautious in managing economic liquidity. Raising interest rate to curb inflation will create market slump as it will be more difficult to secure credits with normal interest rate.

Among the first sectors to get hurt by the increase in interest rate are those that heavily depend on consumer credit facility to boost their sales such as automotive and household electronic goods industries. Sales of automotive products in the country such as cars and motorcycles and electronic goods have been strongly supported by consumer's credits.

So far, consumer sector has been one of the main drivers of the country's economic growth, as this sector has expanded rapidly in the past several years, even when the country was hit by the monetary crisis a decade ago.

Observers have said the current global economic crisis might continue to be on the rampage until 2010 causing fears that the consumer sector could not maintain its role as the driver of the country's economic growth.  Producers of consumer goods are worried by market slump especially as the central bank tends to be more concerned with curbing inflation, thereby raising interest rate.  

However, the domestic market was still strong until the third quarter of 2008 with the economy growing fairly fast.  Even the inflation began to decline in October.

Economic Forecast  2008

According to report issued by Bank Indonesia, the country's economy grew by a fairly high rate until the third quarter of 2008 amid the global economic slow down. Slow down was recorded in some sectors but not very significant. The country's gross domestic products (GDP) was estimated to expand by 6.3% (yoy)

The consumer sector was still the main driving motor of growth. Household consumption was still higher than the previous quarter. According to Bank Indonesia (BI), the purchasing power of the people was still stable in the third quarter of this year and the confidence of consumers was high.

However, exports are expected to be affected by the global financial woes as economic growth would be slowed in major industrialized countries as the main export destinations of the country's commodities. The investment sector is also expected to be affected. The impact, however, may not be too bad as household consumption will remain strong to give a push to the economic development.  Meanwhile, imports are expected to decline with slowed growth of exports and investment.

The country's GDP in the third quarter of 2008 was estimated to remain high propped up by the consumption sector. The relatively stable purchasing power of the people, improvement of the confidence of consumers and seasonal events such as religious celebrations are among the contributors to growth of household consumption.

Meanwhile, exports which grew strongly in the previous quarters, were estimated to expand by a lower rate in the third quarter of 2008 as a result of the global economic slow down and the declining trend of prices of crude oil and other commodities. Imports and the investment sector were estimated to decline.

Inflation on the decline 

Despite a series of polices issued by the government and Bank Indonesia to create price stability, inflation remained high in the past several months. Month-on-month, inflation in September was 0.97% bringing the country's total inflation to 10.47% in the first nine month of this year. 

The rising inflation in the third quarter of 2008 was due mainly to strong domestic demand  and seasonal events  of religious day celebrations  (Idul Fitri) . Year-on-year,  the country's inflation  in September was 12.14% , up from 11.03% by the end of the previous quarter.  The inflation in the third quarter of 2008 was caused by increases in the prices of food products, fuel, and tobacco products and houses, water, gas and electricity bills.

The prices of volatile food  in the third quarter of 2008 grew quarterly and year-on-year. The volatile food price hikes followed rising prices of food products in international market and growing demands during religious day celebrations. Among the products  with prices rising in the third quarter of 2008 were eggs and chicken meat.  The increase in the prices of chicken meat and eggs especially those of pure bred chicken was caused by the rise in the prices of corn and soybean which are the main basic materials for poultry feed.

Meanwhile, the  falling prices of other volatile food products  such as cooking oil, rice,  and spices  could   reduce inflationary pressure. The decline in the price of crude palm oil (CPO) in international market came with the diving price of crude oil. The price of rice was stable although harvest has been over as Bulog held sufficient stocks.  Bulog is ready to release its stock  in the event of sharp price hike. A positive development is also recorded in the market of spices (onion, chili and tomato) with prices falling due to sufficient supplies.

In entering the last quarter of 2008, inflation began to ease. According to the Central Bureau of Statistics, inflation in October was only 0.45% down from 0.97% in the previous month with the stability of the prices of food products, clothes and services such as transport, communications and financial services. Inflation in October was also lower than inflation in the same month last year.

The inflation in the first 10 months, therefore, reached 10.96% and year-on-year inflation in October was 11.77%.

Rupiah continues to weaken

In the first nine months of 2008, the rupiah value was relatively stable or hovering around 9,200 per U.S. dollar before falling to 9,385 by the end of the third quarter. The rupiah fluctuated  more sharply by 1.11%  in the third quarter  as against 0.61% in the second quarter.

The global economic slowdown, the U.S. financial crisis and the gloomier. Prospect of balance payments affected the rupiah stability in the third quarter.  The global economic slowdown, appreciation of the dollar and cause a decline in the prices of commodities including Indonesia's major commodities like CPO, rubber and cacao and mineral products. The commodity price fall signal bad prospects of balance of payments especially current account. The U.S. crisis triggered capital flights from developing nations.

By end of October, rupiah sank crossing the level of 11,000 per U.S dollar. Despite pressures, the rupiah value remained relatively stable compared to other regional currencies. The favorable economic condition, tight monetary policy and intervention by the central bank in money market helped prop up the rupiah.

Interest Rate Up

In the third quarter of 2008,  the BI Rate raised 75 basis points  to 9.25%  by the end of September 2008. The increase in BI Rate was followed with an increase in deposit interest rate. Until the second months of the quarter, the increase in the BI Rate was mainly in the weighted average interest rates on 1-month and 3-month deposits. Contrary to its history, the increase in the interest rate on shorter term deposits was higher than BI Rate. This showed the aggressiveness of bank in seeking to increase their funding capacity as reflected by the strong growth of credits  and increase in LDR.

The increase in BI Rate since May 2008, was followed immediately with an increase in interest rates especially by foreign and joint venture banks.  Regional development bank (BPD) started to make adjustment to the prevailing condition only in July.

The increase in the BI Rate has also resulted in an increase in credit interest rate. By the second month of the third quarter of 2008, the increase in BI Rate   already caused an increase in weighted average interest rates on all credit interest rates.

The highest increase was  recorded in the interest rate on working capital credits, followed by interest rate on investment credits and consumer credits. The effect of the increase in BI Rate was more obvious among foreign and joint venture banks. BPD banks were slower in adjusting to  the change.

Impact on consumer goods industry

The economic development in the past several months immediately caused negative effect on consumer goods industry especially durable goods industry  as sales or purchase of  such  goods are mostly  financed with consumer credits either in the form of  credit card or other consumer credit facilities.

High inflation rate will cause an increase in credit interest rate and weaken the purchasing power of consumers. However, with the inflation easing since October, 2008, the government is considering to reduce the prices of oil fuels in December, 2008.  Therefore, banks are expected to reduce their interest rates.

If the rupiah fluctuation could be overcome demand for durable consumer goods is expected to grow. The problem, however, will remain  over  the flooding of the domestic market with imported products.


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