Today (08/12), the latest edition of our newsletter was published. Our newsletter contains the most important economic, political and social news stories from Indonesia that were reported on in the last seven days. This is of especial importance for those that engage in business in Indonesia or those that are interested to invest in Southeast Asia's largest economy as it will provide a thorough update about Indonesia's macroeconomy. Occasionally, our newsletter also contain event announcements.

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The central bank of Indonesia (Bank Indonesia) announced that Indonesia’s official reserve assets totaled USD $97.0 billion at the end of November 2013 thus unchanged from the end of the previous month. Bank Indonesia stated that this amount is equivalent to 5.5 months of import or 5.3 months of import and servicing of government external debt. After having grown sharply in recent years, Indonesia's foreign exchange reserves have fallen from USD $112.8 billion at end-2012 as Bank Indonesia tried to support the depreciating rupiah exchange rate.

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Inflation in November 2013 continued to show a decelerating trend at 0.12 percent (month-to-month) or 8.37 percent (year-on-year). Although higher compared to October 2013 inflation (0.09 percent), November inflation was lower than its historical pattern in the last five years. The low inflation rate was influenced by deflation in the volatile food group with deflation of 0.57 percent (mtm), a result of the correction in chilli prices, especially in Java and eastern region of Indonesia as well as the decline in the chicken meat price in almost all areas of Indonesia.

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The Indonesian rupiah exchange rate maintained its downward trend on Wednesday (27/11). Bank Indonesia's mid rate depreciated 0.41 percent to IDR 11,813 per US dollar. Investors remain concerned about Indonesia's wide current account deficit. Today, Finance Minister Chatib Basri said that the current account deficit will be around USD $30 billion by the end of 2013, significantly up from USD $24 billion at the end of 2012. In the third quarter of 2013, the current account deficit was USD $8.4 billion (3.8 percent of Indonesia's GDP).

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Indonesia's biodiesel consumption has risen considerably during the last three months after the Indonesian government raised the mandatory amount of palm oil (fatty acid methyl ester) blended in biodiesel from 7.5 percent to 10 percent. For power plants that use biodiesel the amount has been increased to 20 percent. Biodiesel consumption in Southeast Asia's largest economy jumped from 57,871 kiloliters in August 2013 to 101,857 kiloliters in September and to 116,281 kiloliters in October.

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The Indonesian rupiah continued its downward spiral on Monday morning (25/11). The central bank's mid rate fell 0.14 percent to IDR 11,722 per US dollar. Last week, the rupiah fell amid negative market sentiments brought on by the result of the Federal Reserve's FOMC meeting. The result seems to indicate that it will not take long before the quantitative easing program will be wound down. Contrary to the Australian dollar as well as the Indian rupee, news about the forthcoming financial reformation in China is unable to the support the rupiah.

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In order to improve the country's trade balance (particularly to curb the large current account deficit), the government of Indonesia will raise income tax on imported products through the issuance of a new ministerial regulation (issued by the Finance Ministry). Currently, there are two income tax tariffs on imported goods (see below). According to Finance Minister Chatib Basri, goods that will fall under the new regulation are consumption goods (except for food products). The new income tax tariff is expected to be implemented next week.

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Several analysts expect that the central bank of Indonesia (Bank Indonesia) will raise its key interest rate (BI rate) again in the first Semester of 2014 in order to anticipate the winding down of the Federal Reserve's monthly USD $85 billion stimulus program (quantitative easing). Currently, the BI rate is set at 7.50 percent but analysts say that the market should be prepared for a hike to 8.0 percent in the first half of 2014. Between June and November 2013, Bank Indonesia has already raised its benchmark interest rate from 5.75 to 7.50 percent.

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Fitch Ratings, one of the three major global rating agencies, affirmed Indonesia's sovereign credit rating at BBB- with a stable outlook. In a press release, the rating agency mentioned four key factors that led to the affirmation of the sovereign rating. These are: good policy management by Indonesia's central bank (Bank Indonesia) and government amid external pressures, relatively high economic growth, prudent fiscal management (resulting in low public debt), and a strong banking sector (confirmed by multiple stress tests).

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Agus Martowardojo, Governor of Indonesia's central bank, expects the Indonesian economy to consolidate in 2014. The country is currently experiencing an economic correction with GDP growth slowing to 5.62 percent in the third quarter of 2013. Martowardojo said that the current account deficit still needs time to reach a healthy level. Indonesia's current account deficit stood at USD $8.4 billion (equivalent to 3.8 percent of the country's GDP) in the third quarter of 2013, down from USD $9.8 billion (4.4 percent of GDP) in the second quarter.

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In Bank Indonesia's board of governors' meeting, which was held on Thursday (12/12), it was decided to maintain the country's benchmark interest rate (BI rate) at 7.50 percent. This decision was in line with market expectation but was unable to support the Jakarta Composite Index and rupiah exchange rate. The lending facility and deposit facility interest rates were also maintained at 7.50 percent and 5.75 percent respectively. Bank Indonesia decided not to change the rate as Indonesia's inflation outlook for 2014 is still within target.

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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 November 2013 edition, a number of important issues that are monitored include Indonesia's inflation rate, the trade balance, the current account deficit, the IDR rupiah exchange rate, and gross domestic product (GDP) growth. Below is an excerpt of the newsletter:

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Indonesia's Finance Minister Chatib Basri stated that the government of Indonesia is busy preparing three new policies that aim to restore financial stability as well as attract foreign direct investments. These three new policies involve the higher sales tax on imported luxury cars, a revision of Indonesia's negative investment list, and the higher income tax on imported consumption goods. These three new policies are in addition to the policy package that was introduced by the Indonesian government in August 2013.

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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 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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Currently, one of Indonesia's main financial issues (and one which puts serious pressures on the Indonesian rupiah exchange rate) is the country's wide current account deficit. According to data from Statistics Indonesia, Indonesia's current account deficit totaled USD $8.4 billion in the third quarter of 2013. This figure is equivalent to a whopping 3.8 percent of Indonesia's gross domestic product (GDP). Generally, a current account deficit that exceeds 2.5 percent of GDP is considered unsustainable.

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The government of Indonesia will release two additional fiscal policy packages at the end of November or start of December that both aim to heal Indonesia's current account deficit. The two packages constitute follow ups of the policy package that was released in August 2013. Previously, deputy minister of Finance, Bambang Brodjonegoro, announced that an additional package would be released in October. However, it turned out that the government needed some more time to prepare the two additional packages.

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On Thursday 14 November 2013, Agus Martowardojo, Governor of Indonesia's central bank (Bank Indonesia), delivered his end-of-the-year speech at the Annual Bankers’ Dinner. The meeting was attended by leaders from Indonesia's House of Representatives (DPR), economic ministers, leaders of the country's banking industry and business community, non-ministerial government agencies as well as a number of international institutions, thus representing a strategic forum in terms of the national economy.

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Indonesia's benchmark stock index (IHSG) was not able to continue its rebound. On Friday (15/11), the IHSG fell 0.73 percent to 4,335.45 points amid widespread profit taking. Foreign investors recorded net selling of IDR 193 billion (USD $16.9 million) on today's trading day. Moreover, investors are concerned about the impact of the higher interest rate of the central bank (7.50 percent), particularly on the property and banking sectors in the fourth quarter of 2013.

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