Central Bank of Indonesia Outlines its Macroeconomic Assumptions
Indonesia's central bank (Bank Indonesia) expects that economic growth of Indonesia in 2013 will not meet the government's target as has been set in the revised State Budget (APNB-P). Last month, both government and parliament of Indonesia agreed on a revised GDP growth assumption of 6.3 percent. However, Bank Indonesia believes that, due to slowing domestic consumption and investments in the current global economic context, the growth is more likely to fall between 5.8 and 6.2 percent.
Bank Indonesia governor Agus Martowardojo stated that total investments in Indonesia, which had grown 9.8 percent in 2012 (YoY), are expected to fall to 6.5 percent in 2013. Being a pillar of the country's economic growth, slowing investment will thus result in a lower GDP growth rate.
The downward revision of Bank Indonesia's initial GDP growth forecast, which had ranged between 6.2 and 6.6 percent, implies that the central bank follows the same line as the World Bank. The latter had downgraded its outlook for economic growth in Indonesia to 5.9 percent from its previous estimate of 6.2 percent, citing higher inflation, slowing domestic demand, a lack of improvement in global commodity prices, as well as concerns about the country's financial and capital markets ahead of a possible stop to the Federal Reserve's quantitative easing program.
Indonesia's IDR rupiah has been under serious pressure for a long time. In June 2013, the rupiah depreciated 1.2 percent against the US dollar. Martowardojo stated that up to USD $7 billion of the country's foreign exchange reserves have been used to support the rupiah. This has caused that Indonesia's forex reserves have fallen to USD $98.1 billion in late June from USD $105.1 billion at end May. The central bank reassures that "foreign currency reserves are still sufficient to back imports and to maintain the stability of the rupiah because they are still well above international standards." Indonesia's foreign exchange reserves are now equivalent to 5.4 months of imports and foreign debt repayments.
The central bank also believes that inflation in 2013 can go up to between 7.2 and 7.8 percent due to the government's decision to raise prices of subsidized fuels and the the start of the holy fasting month (Ramadan) and subsequent Idul Fitri festivities, which usually bring about one percentage point of inflation. According to the central bank, if Indonesia's central and regional governments manage to maintain coordination and build up sufficient food stockpiles then inflation in 2013 may be reduced to 7.2 percent. Month on month inflation in July 2013 is expected to exceed 2.0 percent but from August onwards the rate is believed to fall below 1.0 percent.
Considering the current context, analysts assume that the central bank will raise its key interest rate (BI rate) by 25 bps soon. In June 2013, for the first time in 16 months the central bank raised its BI rate by 25 bps to 6.00 percent to support the rupiah amid concerns about the inflationary impact of the hike in subsidized fuel prices as well as increased uncertainty in global financial markets as central banks' may scale back stimulus programs.