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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The central bank of Indonesia (Bank Indonesia) announced that the foreign exchange reserves of Indonesia climbed slightly in August 2014. At the end of that month, the assets stood at USD $111.2 billion, up from USD $110.5 billion at the end of the previous month, fueled by strong oil and gas export revenue. These reserve assets can now adequately cover 6.5 months of imports or 6.3 months of imports and servicing of government external debt repayment, well above the international standards of reserves adequacy at three months of imports.

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Nanang Hendarsah, Deputy of Bank Indonesia’s financial task force, said that the central bank of Indonesia will issue two new regulations this week in an attempt to boost foreign exchange (FX) transactions in Indonesia by simplifying the bank’s previous regulations issued in 2005 and 2008 (PBI No. 10/28 on FX purchase at banks and PBI No. 10/37 on netting restrictions). Recent data from Bank Indonesia show that the amount of FX transactions in Indonesia has been lower compared to those recorded by its regional peers.

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The latest Bank Indonesia survey on the topic of inflation suggests that Indonesia’s inflation pace in August 2014 is still relatively safe. Based on the survey, which monitored inflation in Southeast Asia’s largest economy up to the third week of the month and which usually forms a good indicator for the inflation figure at the month-end, Indonesian inflation in August will be lower than the 0.93 percentage point (month-to-month) of inflation recorded in the previous month. Inflation in Indonesia always shows a peak around in the period June to August.

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The central bank of Indonesia (Bank Indonesia) indicated that it will only loosen its monetary policy provided that the country’s current account deficit narrows to a level of 2.5 percent of gross domestic product (GDP), which is considered sustainable, and inflation is kept within the range of 3.5 to 5.5 percent (year-on-year) in line with the central bank’s target range. The current account deficit is one of the main problems being faced by Southeast Asia’s largest economy today and causes concern among foreign and domestic investors.

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The central bank of Indonesia (Bank Indonesia, BI) is expected to keep its benchmark interest rate (BI rate) at 7.50 percent at Thursday’s Board of Governors’ Meeting (14/08) as inflation has eased to 4.53 percent (year on year) in July while the country’s current account deficit may nearly double in the second quarter of 2014 to four percent of gross domestic product (GDP) from 2.06 percent of GDP in the previous quarter. Most analysts expect that Bank Indonesia will maintain the current BI rate for the remainder of 2014.

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The central bank of Indonesia (Bank Indonesia) announced today (08/08) that the country’s foreign exchange reserves increased to USD $110.5 billion at the end of July 2014 (from USD $107.7 billion at the end of the previous month). Bank Indonesia said that the rising reserves were mainly due to receipts from the Euro bonds issued by the Indonesian government and foreign exchange earnings from oil and gas exports. In addition, buoyant foreign capital inflows also had a positive impact on the accumulation of the official reserve assets.

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Indonesia’s gross domestic product (GDP) growth in the second quarter of 2014 slowed to 5.12 percent (year-on-year, yoy), thus decelerating compared to the nation’s GDP growth in the previous quarter (5.22 percent yoy). The Q2-2014 GDP growth result was lower than the figure that was projected by the central bank of Indonesia (Bank Indonesia). The institution previously stated that it expected Q2-014 economic growth to reach 5.3 percent (yoy). Below are some comment of Bank Indonesia on economic growth in the second quarter.

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On Monday (04/08), Statistics Indonesia (BPS) announced that the July 2014 inflation figure was 0.93 percent (month-on-month), considerably higher than the 0.43 percent of inflation in the previous month but significantly lower than the 3.29 percent inflation recorded in July last year (when inflation accelerated sharply due to higher subsidized fuel prices implemented by the government in June 2013). Head of BPS Suryamin stated that food prices contributed most to the July inflation pace, followed by instant food, drinks, cigarettes and tobacco.

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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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The central bank of Indonesia expects that Indonesia’s current account deficit will decline to below the three percent of gross domestic product (GDP) mark by the end of this year supported by sharply falling global oil prices and Indonesia’s recent subsidized fuel price hike. Hendar, Deputy Governor of the central bank, said that for every USD $1 decline in global oil prices, the country’s current account deficit narrows by about USD $170 million. Indonesia’s current account deficit fell to 3.1 percent of GDP in Q3-2014 (from 4.06 percent of GDP in Q2-2014).

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The Governor of Indonesia’s central bank, Agus Martowardojo, said that he expects inflation to accelerate to 6.1 percent year-on-year (y/y) in November 2014, significantly up from 4.83 percent y/y in the previous month. Accelerated inflation is caused by the multiplier effect triggered by the recent subsidized fuel price hike in Southeast Asia’s largest economy. On 18 November 2014, the government introduced higher prices for subsidized fuels in a bid to reallocate public spending from fuel consumption to structural development.

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The Indonesian rupiah exchange rate depreciated 0.09 percent to IDR 12,164 per US dollar on Tuesday (25/11) according to the Bloomberg Dollar Index. The performance is caused by local companies’ month-end US dollar demand as well as US dollar buying by Indonesia’s central bank. Although unconfirmed, it is speculated that the central bank is boosting its foreign exchange reserves ahead of a looming external shock triggered by higher US interest rates in the second or third quarter of 2015.

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Total foreign outstanding debt of Indonesia continues to grow at a robust pace. Based on data from the country’s central bank, total external debt rose 11.2 percent year-on-year to USD $292 billion at the end of September 2014 as private Indonesian companies have been eager to seek lower interest rates abroad. Privately-held foreign debt was up 14 percent y/y to USD $159.3 billion at end-September. Central Bank official Tirta Segara said that private sector debt is concentrated in the financial, manufacturing and mining sectors.

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Non-bank corporations in Indonesia that hold external (foreign-denominated) debt will be forced to hedge their foreign exchange holdings against the Indonesian rupiah with a ratio of 20 percent in the period 1 January 2015 to 31 December 2015 in an effort to limit risks stemming from increased private sector external debt. At end-August 2014, privately-held foreign debt stood at USD $156.2 billion (53.8 percent of the country’s total external debt), increasing three-fold from end-2005 and thus jeopardizing macroeconomic stability.

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The wide current account deficit of Indonesia is expected to have eased in the third quarter of 2014. According to information from the country’s central bank, the current account deficit narrowed to 3.1 percent of gross domestic product (GDP) in Q3-2014 from 4.27 percent of GDP in the previous quarter. A deficit below the level of 3 percent of GDP is generally regarded as a sustainable level. The improvement in Q3-2014 is mainly due to resumed mineral exports after the government and several miners managed to finalize renegotiations.

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Bank Indonesia decided to hold the key interest rate (BI rate) at 7.50 percent in October, with the Lending Facility and Deposit Facility rates kept at 7.50 percent and 5.75 percent, respectively. This level is expected to help control inflation at 4.5±1 percent in 2014 and 4.0±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level. Despite stable domestic conditions, Bank Indonesia sees risks: contagion risk stemming from US monetary tightening and possible higher subsidized fuel prices.

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Bank Indonesia Governor Agus Martowardojo said that although the recent weakening trend of the Indonesian rupiah exchange rate is in line with the performance of other Asian currencies, the central bank is prepared to intervene in the market in an effort to support the currency and keep it in a comfortable range. On Monday (06/10), Bank Indonesia Executive Director Tirta Segara already stated that foreign exchange intervention was conducted in September 2014 in order to stabilize the rupiah exchange rate.

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