Indonesia's inflation rate in June was 1.03 percent, a significant rise compared to the previous month (deflation of 0.03 percent). Although the government's decision to increase the price of subsidized fuel in the second half of June 2013 already made an impact on the country's inflation rate, it is expected that in the next two months inflation will peak over two percent. Apart from the fuel price, other factors that will cause high inflation are the start of the holy fasting month (Ramadan), the new school year and the higher electricity rate.

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Indonesia's June inflation rate was recorded at 1.03%. Components that contributed most to this increase were food (including instant foods), drinks, tobacco and housing (gas, water and electricity). The government's decision to raise the price of subsidized fuel last month already made an impact but it is expected that this impact will be heavier in the months ahead when more prices are revised upwards. On 22 June, prices of subsidized gasoline were raised by 44%, while prices of subsidized diesel were raised by 22%.

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Indonesia's inflation rate is expected to exceed one percent in June 2013 as a result of the increase in price of subsidized fuel that was implemented last week. Throughout Indonesian society, prices have been revised upward to cover for the increased fuel costs. These first round effects may still be felt in July, when inflation is expected to peak at two percent as the fasting month (Ramadhan) and the new school season will start. Second round effects may continue for another five months.

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Both Industry minister M.S. Hidayat and Economic minister Hatta Rajasa confirmed that on Friday (21/06) the government will announce the increase in price of subsidized fuel after it had already been approved by the House of Representatives (DPR) last Monday (17/06). Immediately after the announcement, the price of fuel is set to be raised. It has been reported that the government's announcement will be revealed at midnight, implying that the price hike is effective starting from Saturday.

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After a long plenary session on Monday (17/06), Indonesia's House of Representatives (DPR) and the government have agreed to the revised 2013 State Budget (APBN-P). The revision was needed as original macroeconomic assumptions began to fall out of tune with reality. Due to global and domestic conditions a number of assumptions needed to revised down. Most controversial decision that was taken is the increase in price of subsidized fuel by 44 percent to IDR 6,500 (USD $0.66) per liter.

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Late on Monday evening (17/06), the increase in the price of subsidized fuel, as stated in Law No. 19/2012, was approved by Indonesia's House of Representatives (DPR) through a voting session as political parties could not agree collectively on the price hike as well as on cash programs for the poor to mitigate effects of the higher fuel price. Demonstrations against the price hike were staged in various regions. In Medan (North Sumatra), Jambi (Central Sumatra) and Ternate (North Moluccas), it led to clashes between the police force and protestors.

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The plenary session of Indonesia's House of Representatives (DPR) is still ongoing as the various political parties could not agree yet on the increase in the price of subsidized fuel. Five political parties agree to the price hike, while four others have rejected it. If the political parties can not agree to the proposal, then it will be decided by individual voting starting from midnight (Indonesian time). The price hike has been long awaited as a measure to relieve pressure on Indonesia's budget deficit.

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Today (15/06), it was reported in Indonesia's media that the government will announce details regarding the new price of subsidized fuel on Monday (17/06) after a plenary session of the House of Representatives (DPR). The Union of Indonesian Workers (Konfederasi Serikat Pekerja Seluruh Indonesia) has announced that it will stage a large demonstration on 17 or 18 June at the DPR/MPR building (the seat of the government) in Indonesia's capital city as well as smaller demonstrations in various cities across the archipelago.

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The central bank of Indonesia (Bank Indonesia) decided today to raise its benchmark interest rate by 25 basis points to 6.0 percent. The decision was made amid concerns about the inflationary impact of a hike in subsidized fuel prices (planned this June) as well as increasing uncertainty in global financial markets as central banks' may scale back stimulus programs. The Indonesian rupiah has weakened considerably in 2013 and forms the worst performer in Asia after the Japanese yen among the 11 most-traded currencies tracked by Bloomberg.

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To ease pressures on the IDR rupiah, Indonesia's central bank has used about USD $2.0 billion of its foreign exchange reserves to support the currency as the country's continuing trade deficit as well as concerns about the possible increase in price of subsidized fuel in June has caused much uncertainty about the level of inflation in the near future and puts downward pressure on the rupiah. Indonesia's foreign exchange reserves fell to USD $105.2 billion in late May 2013 from USD $107.3 billion at the end of April.

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Laju IHSG yang awalnya hanya melemah tipis dan mencoba untuk rebound, jelang sore hari berubah menjadi pelemahan setelah dipersuram oleh hasil RDG BI yang menaikkan BI rate dari level 7,25 persen menjadi 7,5 persen. Kenaikan BI rate ini tentunya dipersepsikan bahwa kondisi makroekonomi Indonesia yang belum akan membaik dan terutama timbul juga penilaian bahwa masih akan tingginya inflasi hingga akhir tahun.

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Bank Indonesia decided to raise the BI rate by 25 bps to the level of 7.50 percent, with the Lending Facility rate and Deposit Facility rate raised to 7.50 percent and 5.75 percent respectively. This policy was taken in light of the persistently large current account deficit amid widespread global uncertainty. Therefore, the decision was taken in order to ensure that the current account deficit is reduced to a more sound level and inflation in 2014 returns to around 4.5±1 percent, thereby supporting sustainable economic growth.

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ICRA Indonesia, an independent credit rating agency and subsidiary of ICRA Ltd. (associate of Moody's Investors Service), publishes a monthly newsletter which provides an update on the financial and economic developments in Indonesia of the last month. In the October 2013 edition, a number of important issues that are monitored include Indonesia's inflation rate, the trade balance, the current account deficit, the IDR rupiah exchange rate, and gross domestic product (GDP) growth. Below is an excerpt:

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Indonesian car sales have already exceeded the one million mark in October 2013. In the January-October period, 1,018,786 car units were sold, a ten percent increase compared to car sales in the same period last year. Growing demand for cars in Indonesia indicates that this sector of Southeast Asia's largest economy is not influenced by current negative market sentiments, such as the sharply depreciated Indonesian rupiah exchange rate (against the US dollar), high inflation (8.32 percent yoy in October 2013), and slowing economic growth.

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Indonesia will most likely not meet its original GDP growth target of 6.3 percent (stipulated in the 2013 State Budget). Yesterday (06/11), it was announced by Statistics Indonesia that Indonesia’s GDP growth figure in the third quarter of 2013 was recorded at 5.62 percent (year-on-year, yoy), the weakest quarterly growth figure since 2009 when the global financial crisis impacted on Southeast Asia’s largest economy. In 2013, Indonesia feels the global impact again, in combination with domestic factors.

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Last week, the Jakarta Composite Index (IHSG) weakened. The benchmark stock index of Indonesia was affected by negative market sentiments brought on by domestic factors. Most importantly, the large-scale demonstrations across Indonesia by Indonesian workers who demanded for higher minimum wages as annual inflation has surged since June 2013 after prices of subsidized fuels were raised. These demands, however, jeopardize the attractiveness of Indonesia's investment climate.

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Indonesia's October inflation rate was well-received by investors. On Friday (01/11), Statistics Indonesia (BPS) announced that the country's inflation in October 2013 grew 0.09 percent. Easing inflation was mainly due to falling prices of raw foods and clothes. Year-on-year (yoy), however, Indonesia's inflation is still high at 8.32 percent, although showing a moderating trend from 8.40 percent (yoy) in September 2013 and 8.79 percent (yoy) in August 2013. Inflation had skyrocketed after subsidized fuel prices were raised by an average 33 percent in June.

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Forecasts for Indonesia’s gross domestic product (GDP) growth in 2013 and beyond have been revised down by all institutions, including the Indonesian government and central bank as well as international organizations such as the World Bank and the International Monetary Fund (IMF). Initially, the country’s economic growth was expected to reach around 6.5 percent in 2013. However, most institutions have downgraded forecasts for the country’s economic growth to below the 6.0 percent mark.

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The benchmark stock index of Indonesia (IHSG) was down 0.61 percent to 4,492.26 on its first trading day after the Idul Adha celebrations (when Muslims remember that Abraham was willing to sacrifice his son to God). The main reason why the IHSG was down on Wednesday (16/10) was due to continued uncertainty about the US debt ceiling issue, while the deadline (17/10) is closing in. Fitch Ratings put US Treasury bonds on Rating Watch Negative, which might be a first step before a downgrade.

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According to the Indonesian Cement Association (ASI), cement sales in Indonesia reached 41.6 million tons in the first three quarters of 2013, a 5.3 percent increase compared to domestic cement sales in the same period in 2012 (39.5 million tons), while Indonesia's cement exports jumped by 187 percent to 503 thousand tons. As such, total cement sales from January to September 2013 grew 6.2 percent to 42 million tons. Meanwhile, Semen Indonesia, Indonesia's largest cement producer, managed to expand its market share.

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