Báo cáo chính sách tiền tệ của Indonesia [English version]

Macroeconomics – ECON1192 Assignment 3 – Policy Report Individual Version 1: Monetary Policy - Indonesia GDP Growth rate: Figure 1: Indonesia’s GDP Growth rate % 2008 - 2018 Source: the

Macroeconomics – ECON1192 Assignment 3 – Policy Report (Individual)

Version 1: Monetary Policy - Indonesia GDP Growth rate:

Figure 1: Indonesia’s GDP Growth rate % 2008 - 2018 (Source: the Word Bank)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 6.014 4.629 6.224 6.17 6.03 5.557 5.007 4.876 5.033 5.067 5.171 Table 1: Indonesia’s GDP Growth rate % 2008 - 2018 (Source: the Word Bank)

There was a sudden change of GDP growth between 2008 and 2010 On the other hand, Indonesia's economy was not very developed because GDP gradually went down in 2010 onwards, though there was an insignificant rise from 2018 to 2018

Inflation rate:

Figure 2: Indonesia’s Inflation rate % 2008 - 2018 (Source: the Word Bank)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 18.15 8.275 15.264 7.466 3.754 4.966 5.443 3.98 2.439 4.275 3.831 Table 2: Indonesia’s Inflation rate % 2008 - 2018 (Source: the Word Bank)

From 2008 to 2011, there is an obvious fluctuation in the change of inflation in Indonesia However, after that, the government tried to stabilize the degree of inflation, which fluctuates between 2% and 5% to promote the development of the economy

Unemployment rate:

Figure 3: Indonesia’s Unemployment rate % 2008 - 2018 (Source: the Word Bank)

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 6.657 5.739 5.128 4.899 4.272 4.379 4.15 4.566 4.573 4.064 4.545 Table 3: Indonesia’s Unemployment rate % 2008 - 2018 (Source: the Word Bank)

The government completed its work well to slightly reduce the unemployment rate annually, although the degree is still higher than developing countries such as Vietnam with an average number: 3% (World Bank 2020)

Covid 19 seriously affects the GDP growth, inflation, and unemployment in Indonesia (IMF 2020) The degree of inflation reduces to 2.8% in 2020 and is predicted to be 2.9% in 2021 (Adrian 2020) There is a lower demand for goods and services from customers so they have more savings because they do not spend money for other expenditures like before

Furthermore, GDP growth sharply decreases to 0.5%, compared to previous years Since factories have to close for a long time, the production of goods is stopped as well as a huge amount of workers lose their jobs This leads to the increase of unemployment as their living standards Post-Covid-19, the Indonesian government wants to raise outputs that are likely to dramatically increase by 8.2% to minimize the shortage of goods (Statista 2019)

2nd: Analysis of Monetary policy: money supply, key interest rates.

Covid-19 has negatively influenced the economy of Indonesia such as the rise of

unemployment rate, the reduction of GDP growth and inflation as I mentioned above

Indonesia’s central bank which is Bank Indonesia (BI) announced that the government decided to modify its monetary policy to recover the economy They applied an expansionary monetary policy which means increasing in money supply and reducing interest rate Figure 1 shows that Bank Indonesia gradually issued money yearly for commercial activities

However, due to the economic recession from coronavirus, they injected about 503,800 billion rupiah into the financial system to improve institutions’ stability (thoibaotaichinh 2020) Looking at figure 2, BI decreased the interest rate to encourage businesses to borrow from commercial banks, which promotes money demand and stabilizes the value of rupiah Additionally, BI required the lower reserve requirement ratios, for example, 200 for

commercial banks and 50bps for Islamic banks (Bank Indonesia 2020) From that, banks may

have more deposits for lending to firms to receive interest rates.

Figure 4: Indonesia - Money supply 2008 - 2019 (Source: Bank Indonesia)

Figure 5: Indonesia Interest Rate 2006 - 2020 (Source: Bank Indonesia)

3rd: Impacts of current policy to the money market diagram and AS AD diagram.

Bank Indonesia injected liquidity to the money market, which leads to the surplus of money supply Moreover, current policy is declining the interest rates to encourage its residents and businesses to borrow money for consumption and investment These make the money supply curve shift to the right and boost the money demand

The reduction of interest rate stimulates increasing investment and consumption, therefore, the aggregate demand curve shifts to the right For instance, factories need more materials, workers, and production price to produce more outputs Otherwise, the number of Indonesian people infected with Covid-19 still rose as well as other countries temporarily closed their borders (Hoax Buster 2020) This results in no raw materials or higher production cost so factories have to fall the quantity of goods As a result, the short-run aggregate supply curve shifts left to C, the quantity of output returns to the original one

Graph 1: the AD AS diagram

Graph 2: the Money market diagram.

4th: Is it likely for the COVID-19 outbreak to have long run impacts? Why

or why not?

From my perspective, the negative impacts of Covid-19 for a long time leads to the shortage

of goods Therefore, suppliers need to grow the quantity of outputs to balance quantity supplied and demanded (James 2020) There are two parties who are badly affected:

producers and workers Firstly, firms need to hire workers, purchase machineries, and

materials to manufacture more products These extra factors make them have higher cost production with lower outputs that are illustrated on the AD-AS graph (point C), suppliers will gain lower profit than before Secondly, employees just receive allowance or no income while quarantine Unluckily, most of them lost their current jobs because the government requires unnecessary stores to close, which raises the unemployment rate After quarantine, when employees are back to work, they have to work extra time Nevertheless, companies still pay for them at the same wage due to lower revenue, workers cannot cover their cost of living

5th: Compare the policies implemented by SBV in Vietnam and Indonesia.

A general purpose of policies implemented in Vietnam and Indonesia: promoting the

economy to get rid of the global economic crisis caused by coronavirus

Central Bank system:

+ Vietnam: the State Bank of Vietnam (SBV)

+ Indonesia: Bank Indonesia (BI)

The similar policy: both governments decided to reduce the interest rates for loans to assist those who need money to overcome a temporary obstacle

+ Vietnam: On March 17th, SBV decreased the interest rates about 50-100 bps On May 13th, it continued to cut by 30 bps (IMF 2020)

+ Indonesia: In February and March 2020, BI announced that it dropped the policy rate approximately 50 bps, to 4.5% It also required the lower reserve requirement ratios for commercial banks (IMF 2020)

In exchange rate and balance of payments (IMF 2020):

+ Vietnam: “it would intervene in the currency market as needed to smooth excessive exchange rate volatility” its government stated

+ Indonesia: BI has intervened in foreign exchange markets and government bond markets to confirm global investors about investment transactions in Indonesia From that, the government may boost and maintain import and export sectors

In conclusion, the governments have completed these current policies that are effective as well to support residents, firms, and ease the negative consequences of coronavirus

6th: Gather data regarding the inflation of the country from 2008-2018 Select the year wherein inflation peaked Investigate the monetary policy implemented by the government during this year.

In 2008, there was the global financial crisis from America, which affected the economy of Europe, Southeast Asian countries, and England In one day, Lehman Brothers Holdings declared bankruptcy after 158 years of operation, Merrill Lynch merged with Bank of

America (Nick 2008) Because of that, international investors lose a great amount of money for American banks, especially, Indonesian investors who lose millions of dollars To address the shortage of money, central banks injected more money to support commercial banks (Vikas 2008) In Indonesia, the government had to decrease the real interest rate, additionally, the value of rupiah and domestic government bonds were slightly weaker (IMF report 2008) These things made the inflation in Indonesia reach the highest peak between 2008 and 2018

Figure 6: Indonesia’s Inflation rate % 2008 - 2018 (Source: the Word Bank)

Additional requirement:

Real Exchange Rate = Foreign Price (P*) x Nominal Exchange rate

Domestic Price (P)

Nominal Exchange rate: 1 IDR = 1.58 VND (State Bank of Vietnam, 2020)

1 kilogram of

well-milled rice

12,903 (Numbeo, 2020)

30,000 (Shopee, 2020)

0.68

1 24-pack Nescafe

instant coffee mix

1,362 (lazada.co.id, 2020)

937,161 (Fado.vn, 2020)

0.0023

1 regular can of

Coca-cola

8,326 (Numbeo, 2020)

9,000 (Vinmart, 2020)

1.46

1 McDonald’s Big

Mac

35,000 (McDonald.co.id, 2020)

66,000 (McDonald.vn, 2020)

0.838

1 pair of Levi’s 501

jeans

1,549,900 (Levi.co.id, 2020)

2,499,000 (Levi.vn, 2020)

0.98

According to the above calculation, most of these products hold true to PPP theory, apart from a can of Coca-cola that is true to the Real Exchange rate

In theory, the Real Exchange rate is lower than 1, which means the country should import more There are two reasons why Vietnam should import these goods from Indonesia Firstly, the price of mentioned items that are sold in Indonesia is cheaper than Vietnam’s ones Secondly, the quantity demanded for consumption of goods in Vietnam is higher than

Indonesian citizens It is shown through numbers of Vietnam and Indonesia’s GDP PPP in 2018: 742.462 billion for Vietnam and 3.117 trillion for Indonesia (World Bank 2020)

Reflection: 284 words

According to important information given by Laurence Boone (OECD Chief Economist), in

my opinion, coronavirus is a key factor influencing the worldwide economy There is much detailed evidence showing the impacts of Covid-19 to stress the crucial position of

government in promoting and stabilizing the economy Firstly, there was a fall in global GDP

growth, from 3% in 2019 to 2,4% now It also negatively contributes to Real GDP growth, for example, China achieved 6.1 % in 2019 but now its number decreases to 4.9% However, China’s government plans an approach to improve the GDP, it is likely to be 6.4% next year Additionally, in the manufacturing sector, figure 7 shows the global industrial production growth sharply dropped in 2019 due to the outbreak of coronavirus The second key point is the economic recession in China, which seriously affects the global growth Because China, which is a major commodity importer to other countries, includes a significant share of China

in global demand for natural resources For instance, Aluminium and Copper accounted for more than 50% share of total global quantity demanded (figure ) For that, the presenter highlighted “Government should act now” to recover the depression There are 3 parties that the authority should pay attention to: residents, firms, and macro policy During quarantine, the central bank should expand liquidity and decrease the interest rate to support its citizens and businesses to borrow money easily From that, they can cover their cost of living and stabilize the investment Moreover, authorities also should give subsidies and health support

to residents and reduce taxes for companies In conclusion, the government plays a crucial part in pulling the country out of recession because of Covid-19

Figure 7: Global Industrial Production Growth from 2016 to 2019

(Source: OECD Economic Outlook database)

Figure 8: China accounts for a large share of global commodities demand

(Source: OECD Economic Outlook database)

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