FOCUS : PURCHASING POWER OF THE PEOPLE TO GROW IN 2007

INDONESIAN COMMERCIAL NEWSLETTER

January 2007

FOCUS

PURCHASING POWER OF THE PEOPLE TO GROW IN 2007

The increase in the oil fuel price late 2005 has weakened the purchasing power of the people in the following year as indicated by the lower growth of consumer spending in the first and second quarter of 2006. An increase was recorded only in the consumer spending in the last quarter of 2006 but the growth rate was still lower than in 2005.

Data at the country's Gross Domestic Income (GDP) in 2005 and 2005 showed a decline in the growth of consumer spending. The consumer spending grew 3.95% in 2005 and the percentage dropped to 3.17% in 2006 as shown in the following table.

Economy improves

The economy showed signed of revival in the third quarter of 2006, but the purchasing power of the people remained weak. Retail business was in the doldrums as there were fewer shoppers. The gradual cut in the benchmark interest rate of the central bank had no immediate result on bank loan interest.

However, in September 2006, consumption began to rise after banks finally reduced their interest rates and banks were more aggressive in offering credits with lower interest rates.

In 2007, observers expressed optimism that the purchasing power of the people will fully increase again as a result of improvement in macro economic indicators.

Bank Indonesia also predicted improvement in the condition of the country's economy in 2007 with the success made in maintaining or improving macro economic stability.

Inflation has remained under control, even tended to decline as a result of rupiah strengthening and low increase in administered prices.

In January, 2007, the inflation was 6.26% year-on-year, down from 6.6% by the end of 2006.

Meanwhile, the rupiah gained 0.13% from 9,082/USD in December 2006 to the level of 9,070/USD in January, 2007. The rupiah strengthening came with low volatility of 0.52%.

The rupiah appreciation was attributable to success in maintaining stability in other macro economic indicators including surplus that increased in trade balance and strong inflows of foreign capital for portfolio investment.

The rupiah, however, has been weakened by external factor as a result of the policy of restricting capital inflows in emerging markets and improvements in the indicators of the U.S. economy.

Interest rates down again

On January, 4 in 2007, Bank Indonesia cut again its benchmark interest rate (BI rate) by 25 basis points to 9.50%. The central bank cut the interest rate after evaluating the macro economic condition in 2006, economic prospects and risk to be faced and the inflation targets at 6% 1% and 5% 1% in 2007 and 2008 respectively.

The decline in the BI rate has been followed with a cut in commercial bank interest rates.

Despite the decline in interest rate, deposits have continued to increase. In December, 2004, the amount of deposits or third party funds grew 14.1% year-on-year.

The amount of credit disbursement rose with the decline in BI rate and in commercial bank interest rates. By the end of December, 2006, bank credits grew 13.2% year-on-year, up from 10.7% in the previous month. The growing trend began in September 2006.

Table - 2

Developments of interest rates

(%)

The condition of the banking industry improved in 2006 as indicated by the increase in total assets and productive assets including credits. Total banking assets rose Rp 174.6 trillion in 2006 or an increase of 11.88% from Rp 1,469.8 trillion by the end of 2005. The capital adequacy ratio (CAR) rose to 20.5% in 2006 from 19.5% in 2005 on the average.

Meanwhile, credit disbursement in 2006 totaled Rp102.8 trillion bringing the total outstanding credit to Rp 832.9 trillion by the end of 2006 or an increase of 14.1% from a year before. The non performing loan (NPL) ratio declined to 8% (gross) and 4.7% (net) from 8.3% (gross) and 4.8% (net) in December, 2005.

Opportunity for retail business to revive

Retail trade began to revive after the impact of the fuel price rises late 2005 started to recede in the third quarter of 2006. In 2007, retail trade is expected to grow strongly sales of cars and motorcycles have started to scale up after deep slump.

The government began to launch big infrastructure projects in 2007. The implementation of the projects are expected to push up growth of the retail trade. The sharp increase in the price of rice early 2007 caused no significant increase in the country's inflation as previously feared. Low purchasing power kept the prices of other goods from rising. Improvement in the general condition in 2007 is expected to strengthen the purchasing power of the people and in turn increase demand for retail goods.