Asian stocks and currencies strengthened on Wednesday (29/01) after the central banks of Turkey and India tightened their monetary policies in order to attract capital inflows and restore investors' confidence. The central bank of Turkey raised its overnight lending rate aggresively from 7.75 percent to 12 percent on Tuesday (28/01); a measure which managed to calm down Asian markets. According to the Bloomberg Dollar Index, the Indonesia rupiah exchange rate appreciated 0.20 percent to IDR 12,166 per US dollar on Wednesday.

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On Tuesday (28/01), the Indonesia rupiah exchange rate shows a volatile performance. Around 15:30 local Jakarta time, Indonesia's currency appreciated 0.08 percent against the US dollar. Market participants are waiting for the outcome of the Federal Reserve's FOMC meeting held on 27-28 January 2014. Most analysts expect the Federal Reserve to quicken the winding down (tapering) of its quantitative easing program. This program caused a large capital inflow in emerging economies, including Indonesia, in recent years.

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The sharply depreciated Indonesia rupiah exchange rate in combination with the inability to raise domestic production of crude oil threatens to balloon government subsidy expenditure. Fuel subsidies may increase 20 percent to IDR 252 trillion (USD $20.8 billion) in 2014 as the rupiah currently has about 14 percent less value (based on the Bloomberg Dollar Index) than the value assumed in the 2014 State Budget (APBN 2014). The government assumed a rupiah rate of IDR 10,500 per US dollar in the APBN 2014.

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In 2013, domestic production of heavy equipment in Indonesia fell 30 percent to 6,127 units from the previous year as commodity prices (such as crude palm oil and coal) were still down. This made Indonesian miners reluctant to ramp up production figures, thus having less need to purchase heavy equipment. According to Pratjojo Dewo, Chairman of the Indonesian Heavy Equipment Association (Hinabi), demand for heavy equipment in Indonesia started falling at the end of 2012 and continued into 2013.

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Forecasts for economic growth in Indonesia in 2014 are still optimistic. The government of Indonesia targets a 6 percent growth rate, while the country's central bank (Bank Indonesia) expects GDP growth in the range of 5.8 to 6.2 percent. Although these forecasts clearly fall short of the target set in the country's National Medium Term Development Plan (RPJMN) - which mentions annual GDP growth of between 6.3 and 6.8 percent - the forecasts are still rather positive given the global uncertain and volatile economic context in recent years.

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Both the rupiah exchange rate and the Jakarta Composite Index strengthened significantly on Monday's trading day (13/01) after the government introduced a milder version of its mineral ore export ban on Sunday (12/01). Full implementation of the ban would have burdened the country's already wide current account deficit. The ban immediately pushed up the nickel and copper prices today. The central bank's Jakarta Interbank Spot Dollar Rate (JISDOR) rose 1.75 percent to IDR 12,047 per US dollar on Monday (13/01).

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The central bank of Indonesia (Bank Indonesia) expects that credit growth in Southeast Asia’s largest economy will not exceed 20 percent (year on year) by the end of December 2013. Deputy Governor of Bank Indonesia, Halim Alamsyah, stated that credit growth is likely to slow to between 15 and 17 percent (yoy) in 2013 (based on a fixed rupiah exchange rate). Credit growth especially slowed in Indonesia’s consumption and construction sectors; a trend which is expected to continue in 2014.

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The performance of the Indonesia rupiah exchange rate on Friday morning (10/01) was rather stagnant against the US dollar (the latter's movement was mixed against currencies in the Asia-Pacific) although the rupiah was up 0.12 percent to IDR 12,178 per US dollar at 13:42 local Jakarta time based on the Bloomberg Dollar Index. Positive sentiments are caused by Indonesia's narrowing current account deficit (possibly less than 3 percent of GDP in Q4-2013) and rising foreign exchange reserves at end-December 2013.

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Indonesia's central bank (Bank Indonesia) kept its benchmark interest rate (known as the BI rate) at 7.50 percent in today's Board of Governor's meeting (09/01). The institution decided not to change its interest rate because it estimates that the inflation target for 2014 is not in jeopardy (4.5 percent) while Indonesia's economic growth prospects for 2014 and 2015 remain unchanged. Also the overnight lending facility as well as deposit facility rate (Fasbi) were kept at 7.50 percent and 5.75 percent respectively.

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On Thursday (09/01), the US dollar appreciated after the release of the minutes of the FOMC’s December meeting as well as positive US employment data. The minutes show that Federal Reserve policy makers are confident that the economy is strong enough to start scaling back its quantitative easing program, although the minutes do not provide a clear schedule about the tapering. Yesterday (08/01), it was also released that private-sector payrolls increased by 238,000 positions in December 2013.

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Falling stock indices on Wall Street on Wednesday (04/12) impacted on Asia the following day resulting in the majority of Asian indices being down on Thursday's trading day (05/12), including the benchmark stock index of Indonesia (IHSG). Besides the impact of Wall Street, Asian stock markets are also vulnerable to ongoing concern about the future of the Federal Reserve's quantitative easing program. In the case of Indonesia, negative market sentiments are intensified by the continued depreciation of the rupiah exchange rate.

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In the morning of Thursday (05/12), Indonesia's rupiah exchange rate depreciated beyond the psychological level of IDR 12,000 per US dollar. In the Bloomberg Dollar Index, the rupiah fell 0.2 percent to IDR 12,011 as of 09:19:49. The main factor behind this decline is market participants' concerns about the end of the Federal Reserve's monthly USD $85 billion bond buying program. It is increasingly speculated that the winding down of this program will start sooner than expected.

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The continued presence of negative market sentiments made it impossible for Indonesia's Jakarta Composite Index (IHSG) to rebound. The looming end of the FED's quantitative easing program - which may be wound down sooner than expected - is a big cause for concern. The depreciating Indonesia rupiah exchange rate intensifies these concerns, particularly regarding companies that have exposure to volatile US dollar movements. Furthermore, investors are waiting for further US economic data as well as for Bank Indonesia's next meeting.

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Apparently positive market sentiments brought on by the macroeconomic data released on Monday (02/12) did not last long. Yesterday, Indonesia's benchmark stock index (IHSG) was lifted by the October 2013 trade surplus and limited November inflation. However, investors are now back to reality and prefer to wait for results of Bank Indonesia's Board of Governor's meeting (12/12) and the Federal Reserve's FOMC meeting (17-18/12). The former will inform about Indonesia's interest rate, the latter about the future of quantitative easing.

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The inflation rate of Indonesia rose slightly in November 2013 (month-to-month) and confirms estimations that inflation in Southeast Asia's largest economy is under control after having accelerated sharply due to the introduction of higher subsidized fuel prices June 2013. In recent months, inflation moved sideways and is expected to ease considerably in the first quarter of 2014. Indonesia's consumer price index rose 0.12 percent in November due to rising electricity, processed foods and health care costs.

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Although widespread concerns about Indonesia's prolonged trade deficit (and current account deficit) are far from unfounded, the country's October 2013 trade data show a positive result. On Monday (02/12), Statistics Indonesia announced that Southeast Asia's largest economy posted a small trade surplus of USD $42.4 million in October after having recorded a trade deficit of USD $810 million in the previous month. This calender year (January to October 2013), the trade deficit has accumulated to USD $6.36 billion.

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The benchmark stock index of Indonesia (known as the Jakarta Composite index or IHSG) was able to continue its rise on Monday (02/12), supported by economic data released by Statistics Indonesia. Although Indonesia's November inflation rate (0.12 percent) was slightly higher than previously expected, investors were content with the result. Moreover, Indonesia's October trade balance showed a (limited) surplus of USD $42.2 million, constituting a sharp improvement from the large deficit in the previous month.

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After five consecutive days of depreciation, the Indonesian rupiah exchange rate finally managed to strengthen against the US dollar. Bank Indonesia's Jakarta Interbank Spot Dollar Rate rose 0.26 percent to IDR 11,946 per US dollar on Monday (02/12). According to Bloomberg data, the rupiah rose 1.85 percent to IDR 11,744 as of 02:25:50 ET as market participants have reacted positively to Indonesian trade and inflation data that were released today: October showed a trade surplus, while in November inflation was kept at 0.12 percent.

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The Jakarta Composite Index (Indonesia's benchmark stock index which is also known as the IHSG) gained 0.53 percent on Friday (29/11) and ended on 4,256.43 points. Today's trading day was relatively quiet with a transaction value of only IDR 3.30 trillion (USD $276.50 million). Foreign net buying of Indonesian shares supported the IHSG index to end this month's last trading day on a positive note. Sectors that performed well were agriculture (+2.18 percent), construction (+1.27 percent), and mining (+0.99 percent).

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On Friday (29/11), the last trading day of November 2013, the Indonesian rupiah exchange rate continued its downward spiral. The Jakarta Interbank Spot Dollar Rate¹ fell 0.39 percent to IDR 11,970 per US dollar amid concern about the winding down of the quantitative easing program, Indonesia's wide current account deficit, a disappointing US dollar-denominated bond auction and surging US dollar demand for earnings repatriation as well as foreign debt payment. Considering the full month of November, the rupiah depreciated 6.61 percent.

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