The central bank of Indonesia announced on Friday (07/11) that the country’s foreign exchange reserves grew slightly in October 2014. At the end of the month, the reserves stood at USD $112 billion (from USD $111.2 billion at the end of the previous month). The central bank said that these reserves increased mainly on government export receipts in the oil & gas sector, as well as growth of banks’ foreign currency deposits at Bank Indonesia. This growth exceeded government external debt payments.

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Having the world’s largest Muslim population and experiencing sustained economic growth at a pace of +5 percent implies that Indonesia harbours great potential for Islamic finance (sharia banking). However, Indonesia is yet to tap the full potential of the Islamic financial services market. As an illustration, with a figure of USD $24 billion, Indonesia’s Islamic banks only held 4.9 percent of the country’s total banking assets in 2013. This is small compared to Malaysia (where Islamic banking holds a 20 percent market share).

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Economic growth in Indonesia is expected to continue to slow in the third quarter of 2014 according to the country’s central bank. Bank Indonesia Deputy Governor Perry Warjiyo said on Thursday (30/10) that the institution believes gross domestic product (GDP) growth of Southeast Asia’s largest economy to reach 5.1 percent year-on-year (y/y) in Q3-2014, similar to the GDP growth result in the previous quarter (5.12 percent, y/y). Main reason for this slowing pace is the sluggish global economy and particularly the case of China.

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Agus Martowardojo, Governor of Bank Indonesia, is highly supportive of president-elect Joko Widodo’s plan to increase prices of subsidized fuels before the end of the year as this move would help to diminish the country’s structural current account deficit as well as improve the trade balance. Widodo, who will assume office on 20 October 2014, is expected to raise prices of subsidized fuels by between IDR 1,000 and 3,000 per liter, and relocate state funds to social and economic development.

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The official foreign exchange reserve assets of Indonesia’s central bank (Bank Indonesia) at end September 2014 were unchanged (from the preceding month) at USD $111.2 billion. Based on a Bank Indonesia statement, the reserves were under pressure due to an increase in foreign exchange demand (for government foreign debt payments and foreign exchange intervention in order to stabilize the Indonesian rupiah exchange rate), but supported by a global Islamic bonds issuance, oil & gas export revenue and growth of bank forex deposits.

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A survey of Indonesia’s central bank (Bank Indonesia) shows that Indonesian consumer confidence declined slightly to 119.8 points in September 2014 (from 120.2 points in the previous month) on concerns that price increases will limit people’s purchasing power. These concerns are triggered by president-elect Joko Widodo’s plans to raise prices of subsidized fuels before the year-end in an effort to safeguard the country’s financial fundamentals. Widodo (popularly known as Jokowi) will be inaugurated on 20 October 2014.

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Statistics Indonesia (BPS) released various economic data today (01/10) - including inflation, the trade balance and manufacturing activity - that give a good indication about the state of the Indonesian economy. Although not all data was positive, market participants were content, evidenced by an appreciating rupiah exchange rate and rising Indonesian stocks. Based on the Bloomberg Dollar Index, the rupiah appreciated 0.43 percent to IDR 12,135 per US dollar, while the Jakarta Composite Index climbed 0.06 percent on Tuesday (01/10).

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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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Although Deputy Governor of the central bank of Indonesia (Bank Indonesia), Halim Alamsyah, said that the non-performing loan (NPL) level in Indonesia’s banking sector is currently safe at 2.24 percent (well below the five percent threshold which is considered safe), the institution has been monitoring the high level of NPLs in four sectors: construction, trade, mining and social services. The bank will study why the ratio has been growing - whether it is a temporary phenomenon or not - and search the correct policy approach to address this issue.

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There are mixed opinions about the interest rate policy of the central bank of Indonesia (Bank Indonesia). Tomorrow (11/09), at the Board of Governor’s Meeting, the central bank will decide whether or not to change the country’s interest rates. Indonesia’s benchmark interest rate (BI rate) has been held at 7.50 percent for ten consecutive months. This relatively high figure managed to ease high inflation (which emerged after prices of subsidized fuel prices were raised in June 2013). However, it also further slowed economic growth.

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At the Indonesia Investment Summit 2015, organized in Jakarta on 15-16 January 2015, Bank Indonesia official Arief Mahmud presented several views of the central bank on the current Indonesian economy and the global and domestic challenges that it faces. As is widely known, Indonesia has been experiencing a process of slowing economic growth since 2011 due to sluggish global economic growth in combination with the rebalancing of the domestic economy. However, growth is expected to accelerate in 2015.

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In line with the performance of other Asian emerging currencies, Indonesia's rupiah exchange rate appreciated on Monday (12/01) as the fall in US wages (released late last week) caused speculation that the Federal Reserve will - for now - delay its plan to start raising US borrowing costs. Despite solid growing US non-farm payrolls in December 2014, US wages (average hourly earnings) fell the most in eight years. Indonesia’s rupiah appreciated 0.38 percent to IDR 12,599 per US dollar according to the Bloomberg Dollar Index.

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The central bank of Indonesia recently issued new regulations (Bank Indonesia Regulation No. 16/21/PBI/2014 and External Circular No. 16/24/DKEM) that aim to safeguard Indonesia’s financial fundamentals. These new regulations, which are an improvement of Bank Indonesia Regulation No. 16/20/PBI/2014 dated Oct. 28 2014, force Indonesian non-bank corporations to apply prudent fiscal management regarding foreign-denominated debt. Bank Indonesia felt these rules are needed as privately-held foreign debt rises continuously.

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The latest survey of Indonesia’s central bank indicates that consumer confidence fell in December 2014. The central bank’s Consumer Confidence Index fell 3.6 points to 116.5 in the last month of 2014 (a score above 100 signals optimism among consumers) due to the impact of higher subsidized fuel prices implemented in November 2014. This move triggered higher prices of products and services. The central bank’s Consumer Confidence Index is based on interviews with 4,600 households in 18 Indonesian cities.

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Indonesia’s inflation pace accelerated in December 2014, exceeding estimations of analysts and Indonesia’s central bank. December inflation, 2.46 percent (m/m) or 8.36 percent (y/y), accelerated due to the impact of higher subsidized fuel prices (introduced in November) and volatile food prices (fluctuating rice and chili prices at the year-end). Other factors that contributed to high inflation in 2014 were higher electricity tariffs for households and industries, the higher price of 12 kg LPG, and an airfare adjustment.

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Bank Indonesia (the central bank of Indonesia) and the Financial Services Authority (OJK) signed an agreement (the ASEAN Banking Integration Framework, abbreviated ABIF) with Malaysia’s central bank to support banking integration in the ASEAN region. The website of Bank Indonesia states that ABIF “provides an operating framework for ASEAN member states to implement principles and the integration process in the banking sector to support the ASEAN Economic Community (AEC) [which is to be implemented later this year]”.

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A team of the International Monetary Fund (IMF), led by David Cowen (advisor at the IMF’s Asia and Pacific Department), visited several Indonesian cities in the first three weeks of December 2014 to conduct research on the economic fundamentals of Southeast Asia’s largest economy. This research included the study of recent macroeconomic developments as well as the formulation of prognosis scenarios for the short and middle term. The IMF team held discussions with the government, Bank Indonesia, private entrepreneurs and scholars.

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External debt of Indonesia grew at a pace of 10.7 percent year-on-year (y/y) in October 2014, slightly slower than the 11.2 percentage point (y/y) growth pace in the previous month, according to a statement of Indonesia’s central bank (Bank Indonesia). Total outstanding external debt of Indonesia reached USD $294.5 billion in October (from USD $292.3 billion in the previous month). While growth of public sector external debt slowed in October, private sector external debt accelerated.

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Contrary to the previous trading day, most emerging Asian currencies strengthened against the US dollar on Tuesday (09/12) supported by the yen’s advance as falling oil prices dented risk appetite. Based on the Bloomberg Dollar Index, Indonesia’s rupiah appreciated 0.47 percent to IDR 12,331 per US dollar today. Despite local firms’ increased US dollar demand to settle debt before the year-end, market participants were happy to learn that Indonesia’s central bank is active in the foreign exchange market to guard the currency.

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Despite positive stock indices in the USA and Europe at the end of last week as well as mostly positive indices in Asia today (08/12), the benchmark stock index of Indonesia (Jakarta Composite Index, abbreviated IHSG) fell due to investors’ appetite for profit taking. Several matters made investors decide to sell their Indonesia shares, including the World Bank’s downward revision of Indonesia’s economic growth in 2015, Japan’s recession, weakening Chinese exports, and the sharply depreciating rupiah exchange rate.

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