The economy of Indonesia, which has been slowing since 2011, will have difficulty to rebound in 2015 as the central bank’s key interest rate (BI rate) is expected to be raised again to avert capital outflows brought on by higher interest rates in the US and to combat accelerated inflation after domestic subsidized fuel prices have been raised by the new government led by president-elect Joko Widodo (Jokowi). After a GDP growth pace of 6.5 percent (y/y) in 2011, economic growth in Southeast Asia’s largest economy fell to 5.8 percent (y/y) in 2013.

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The most controversial and heatedly debated news story from Indonesia in the past week was parliament’s approval of a new bill that puts an end to direct voting in the regions. This means that it are not the people but instead the regional legislatures that will elect mayors, district heads and governors. Critics say this is a major setback for the democracy process of Indonesia and will make local elections prone to corruption, collusion and nepotism as Indonesia’s legislatures - both at the national and regional level - are believed to be corrupted to a high degree.

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Indonesian stocks and rupiah exchange rate weakened considerably on Friday (26/09) after Indonesian parliament approved a new bill that puts an end to direct local elections. Moreover, market sentiments were negative after stocks on Wall Street plunged on Thursday because of increasing concern about the global economy as well as consumers’ problems with Apple's latest software updates and new product launches (iPhone 6 and iPhone 6 Plus) resulting in a 3.8 percent slide of Apple shares.

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A new Asian Development Bank (ADB) report says that the Indonesian economy is expected to slow on weak export performance in 2014 before picking up in 2015 as external demand improves and the new government’s reform agenda takes hold. In an update of its Asian Development Outlook 2014, the ADB trimmed its forecast for 2014 growth in Indonesian gross domestic product (GDP) to 5.3 percent from 5.7 percent expected in April. The ADB expects a growth pace of 5.8 percent in 2015, down from 6.0 percent in April.

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Low cost carrier Indonesia AirAsia, the Indonesian unit of Malaysia's AirAsia, carried 4.08 million air passengers in the first half of 2014, a growth of 12 percent from the same period last year (3.64 million passengers). However, this growth figure failed to achieve the company’s initial target as it had to reduce flights and routes in an effort to cut back on expenses amid high operational costs. Although the firm managed to pass on part of expensive fuel costs to passengers (fuel surcharge), operational costs for specific routes are high.

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Ahead of the Federal Reserve’s Federal Open Market Committee (FOMC) meeting, the Indonesian rupiah exchange rate depreciated 1.26 percent to IDR 11,971 per US dollar based on the Bloomberg Dollar Index on Monday (15/09). Indonesia’s currency depreciated sharply ahead of the FOMC’s two-day meeting as investors are awaiting for the results on Thursday. As August US retail sales rose at the fastest pace in four months, a winding down of the US bond-buying program and looming US interest rates have resulted in a strong US dollar.

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On 14 September 2014, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website in the last seven days. Most of the topics involve economic topics such Indonesia’s fuel subsidies, economic growth in 2015, monetary policy of Bank Indonesia, the Anas Urbaningrum corruption case, emerging Indonesian companies on a global scale, and more.

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Indonesia has jumped four places in the World Economic Forum’s Global Competitiveness Index 2014-2015. In the latest edition Southeast Asia’s largest economy is ranked 34th (from 38th in last year’s edition of the index). Since the 2012-2013 edition, when Indonesia was ranked 50th, the country has risen steadily. The Global Competitiveness Index measures the institutions, policies, as well as factors that set the sustainable current and medium-term levels of economic prosperity among 144 countries around the world.

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Newly elected presidential pair Joko “Jokowi” Widodo and running mate Jusuf Kalla, the pair that will guide Indonesia for the next five years starting from October 2014, propose to raise the target for economic growth in Southeast Asia’s largest economy from 5.6 percent to 5.8 percent in 2015. Furthermore, the pair would like to set a stronger average rupiah rate at IDR 11,600 per US dollar over 2015 (from IDR 11,900 as set in the Revised 2015 State Budget). Several reasons are behind these ambitious targets.

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On 17 August 2014, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website in the last seven days. Most of the topics involve economic topics such as the performance of the rupiah exchange rate, plantations, Freeport Indonesia, economic growth, electricity, property, guidelines for the construction of a PT PMA, and more.

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Indonesian stocks and the rupiah exchange rate showed great volatility on Tuesday’s trading day (22/07). In the first part of the day the benchmark stock index of Indonesia (known as Jakarta Composite Index of IHSG) and rupiah strengthened on speculation that market favourite Joko “Jokowi” Widodo would win the presidential election without riots or other incidents that could trigger political uncertainties. On Tuesday evening, the General Elections Commission (KPU) indeed officially declared Jokowi the winner of the election.

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One day ahead of the official result of the Indonesian presidential election, the benchmark stock index of Indonesia (known as Jakarta Composite Index or IHSG) showed a good performance as market participants seem to speculate not only on a Joko Widodo win, but also on a peaceful and orderly course of events (no large scale demonstrations or riots). On Sunday, president Yudhoyono received both presidential candidates at the State Palace for dinner. This may have helped to cool some of the tension between supporters of both sides.

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Both the Indonesian rupiah exchange rate and Indonesian stocks posted a good performance on Monday (21/07). Main reason for this positive performance is increased speculation that presidential hopeful Joko Widodo has won the election. Based on information originating from the General Elections Commission (KPU), Widodo has won the election by a safe margin of five percentage points. On Tuesday 22 July 2014, the KPU will officially release the result. However, rival Prabowo Subianto will probably challenge the result.

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Despite China’s positive economic growth of 7.5 percent in the second quarter of 2014, most Asian stock indices were down. Only Hong Kong's Hang Seng Index (HSI) managed to show a slight gain as large cap stocks were sought after. The HSI impacted positively on the benchmark stock index of Indonesia (known as the Jakarta Composite Index or IHSG) on Wednesday (16/07) which climbed 0.85 percent to 5,113.93 points on Wednesday (16/07). Foreign investors recorded net buying.

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The Indonesian rupiah exchange rate appreciated 0.33 percent to IDR 11,698 per US dollar on Wednesday (16/07) according to the Bloomberg Dollar Index. Although at the start of the trading day the rupiah weakened due to commentary of Federal Reserve Head Janet Yellen who said that US interest rates may increase sooner than expected provided that the US job market improves faster than anticipated, at the end of the trading day Indonesia's currency strengthened on improved economic growth in China, the world’s second-largest economy.

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Bank Indonesia Governor Agus Martowardojo expects the country’s July 2014 inflation pace to come in the range of 0.80 to 1.20 percent (month-to-month). This relatively high inflation figure is caused by seasonal factors: the holy fasting month of Ramadan and Idul Fitri celebrations. Ahead and during these festivities, consumers tend to spend more, thus resulting in higher prices in the context of these Islamic celebrations. A recent Bank Indonesia survey showed that inflation already reached 0.80 percent in the first week of July.

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Although the benchmark stock index (known as Jakarta Composite Index or IHSG) started the day in the green zone, it ended down due to profit taking as market participants prefer to wait for the official result of the Indonesian presidential election first. Both presidential candidates (Joko Widodo and Prabowo Subianto) declared a victory based on different unofficial quick count results. This has resulted in political uncertainty in Southeast Asia’s largest economy and thus investors refrain from buying Indonesian assets.

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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 June 2014 edition, a number of important topics that are monitored include Indonesia's inflation rate, the trade balance, the BI rate, the IDR rupiah exchange rate, and gross domestic product (GDP) growth. Below is an excerpt of the newsletter:

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Initially we were concerned that Indonesia’s benchmark stock index (Jakarta Composite Index) would experience a sudden change of direction - after two days of strong gains at the start of the week - because the preliminary results of the 2014 Indonesian presidential election (based on unofficial quick counts) was mixed at first glance and thus triggers political uncertainty (something which is seriously disliked by investors). However, the index performed remarkably well and rose 1.46 percent to 5,098.11 points on Thursday (10/07).

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Although Asian stock indices tended to decline on Monday’s trading day (07/07) due to profit taking amid expectation that corporate earnings in the first half of 2014 are disappointing, the benchmark stock index of Indonesia (known as Jakarta Composite Index or IHSG) performed remarkably well as foreign investors recorded net buying and the Indonesian rupiah exchange rate appreciated sharply. The main reason why markets were positive in Indonesia on Monday was the strong performance of Joko Widodo in Saturday’s presidential debate.

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