As had been confirmed by Agus Martowardojo, Governor of Bank Indonesia, earlier this week, Indonesia's foreign exchange reserves rose 2.1 percent to USD $102.74 billion at the end of February 2014, particularly due to strong capital inflows. According to Martowardojo, capital inflows in the first two months of 2014 exceed net capital inflows throughout 2013. Bank Indonesia regards the current foreign exchange reserves sufficient to underpin external sector resilience and maintain sustainable economic growth in Indonesia looking ahead.

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Yesterday (06/03), the central banks of Indonesia (Bank Indonesia) and the Korea established a bilateral local currency swap arrangement. The arrangement allows for the exchange of local currencies between the two central banks of up to KRW 10.7 trillion or IDR 115 trillion. The effective period of the facility will be three years, and could be extended by mutual consent of both sides. This arrangement is designed to promote bilateral trade and further strengthen financial cooperation for the economic development of the two countries.

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Indonesia's February 2014 HSBC manufacturing purchasing managers' index (PMI), which measures the performance of the country's manufacturing industry, slipped to 50.5 from 51.0 in the previous month, thus indicating slowing growth (a reading above 50 indicates expansion in manufacturing activity, while a reading below 50 indicates contraction). Despite continued strong export orders, domestic demand weakened amid massive floods and volcanic eruptions at the start of the year.

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Indonesia Investments updated the analysis of Indonesia's inflation rate in our Macroeconomic Indicators section. Indonesian inflation, which is traditionally more volatile and higher (due to robust economic growth) than in advanced countries or other emerging markets, accelerated recently after administered price adjustments in mid-2013 (particularly higher fuel prices). As a result, Bank Indonesia required to raise its benchmark interest rate (BI rate) gradually from 5.75 percent in June 2013 to 7.50 percent in November 2013.

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Indonesia's central bank (Bank Indonesia) has sent a clear signal to those market participants that hope to see a lower benchmark interest rate (BI rate) in Southeast Asia's largest economy in the near future. Governor of Bank Indonesia Agus Martowardojo stated that there will be no lower BI rate as long as there is looming global uncertainty. On the contrary, the possibility of another BI rate hike is still there. In 2013, Bank Indonesia raised its BI rate on five occassions in order to combat inflation and curb the country's wide current account deficit.

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Following a meeting of the G20 Finance Ministers, Indonesia's Finance Minister Chatib Basri said in an interview that this year's economic growth in Indonesia may slow to the lowest level since 2009 as the government and central bank implemented various measures aimed at curbing GDP growth in order to safeguard financial stability. Basri said that GDP growth in the range of 5.5 to 5.8 percent is a more realistic forecast. Slower growth will help to realize the government's aim to reduce the current account deficit to between 2.0 and 2.5 percent of GDP.

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Deputy Governor of Indonesia's central bank (Bank Indonesia) Perry Warjiyo said that as a consequence of the legislative and presidential elections, scheduled for April and July 2014, household consumption in Indonesia will grow an extra 0.2 percent. Domestic consumption, particularly household consumption accounts for around 55 percent of the country's gross domestic product (GDP). Bank Indonesia has curbed further growth of household consumption by raising the benchmark interest rate (BI rate) last year.

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Indonesia's rupiah exchange rate continues its sharp appreciation on Valentine's day (14/02). Based on the Bloomberg Dollar Index, the currency was up 0.80 percent to IDR 11,880 per US dollar at 9:56 local Jakarta time. Yesterday (13/02), the rupiah had recorded a 0.89 pecent gain. This recent appreciating trend of the rupiah is caused by international investors' renewed confidence in Indonesia's macroeconomic fundamentals. Particularly the improvement in the country's current account deficit is well received by investors.

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The central bank of Indonesia (Bank Indonesia/BI) left its benchmark interest rate (BI rate) unchanged at 7.50 percent in the Board of Governor's Meeting on Thursday (13/02/14). This decision was in line with market expectations as several economic indicators have improved. In recent days, the rupiah exchange rate has shown a marked improvement to IDR 12,055 per US dollar (Bloomberg Dollar Index) as pressures on Indonesia's current account balance are easing and Bank Indonesia's foreign exchange reserves are rising.

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Indonesians' consumer confidence has increased in January 2014 according to the latest survey conducted by Indonesia's central bank (Bank Indonesia). The outcome of the survey indicated a rise of Indonesia's Consumer Confidence Index (CCI) from 116.5 in December 2013 to 116.7 in January 2014¹. This index illustrates consumer perceptions of current economic conditions compared to conditions in the previous six months as well as the expectations of Indonesian consumers for economic conditions in the next six months.

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The central bank of Indonesia (Bank Indonesia) is optimistic that the country's currency will continue to appreciate against the US dollar in the first quarter of 2014. Executive Director at the Economic and Monetary Policy Department of Bank Indonesia Juda Agung said that there are two factors that impact positively on the performance of the Indonesian rupiah exchange rate: the improved global economy and strengthening domestic economic fundamentals. However, Agung declined to estimate the value of the rupiah by the end of Q1-2014.

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The central bank of Indonesia (Bank Indonesia) believes that Indonesia's recently introduced ban on the export of unprocessed minerals, in effect since 12 January 2014, will result in slowing economic growth in several regions in the eastern part of Indonesia as these regions are main sources of mineral production. Doddy Zulverdi, Head of the Economic Assessment Group in Bank Indonesia's Department of Economic and Monetary Policy, said that Sulawesi and Kalimantan will post slowing economic growth this year.

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The Jakarta Composite Index (Indonesia's benchmark stock index, also known as IHSG) continued its upward rally on Monday (17/02) even though it had concerned us that the index almost touched its 'overbought' level. Especially as the index posted limited gain by the end of last week, it made us unsure about its performance on Monday. And while there are several factors that caused positive market sentiments, we still warn for potential weakening of the index due to profit taking. On Monday (17/02), the IHSG rose 1.05% to 4,555.37 points.

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The Indonesian rupiah exchange rate continued its recent appreciating trend on Monday (17/02). Based on the Bloomberg Dollar Index, the currency strengthened 0.39 percent to IDR 11,785 per US dollar at 16:00 local Jakarta time. Main reason for this renewed confidence in the rupiah is Indonesia's current account deficit, which eased significantly by the end of 2013. According to Bank Indonesia, the deficit eased from 4.4 percent of gross domestic product (GDP) in the second quarter of 2013 to 1.98 percent of GDP in Q4-2013.

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The weakening Dow Jones Index on Wednesday (12/02) caused negative market sentiments in Asia the following day. Most Asian indices, including Indonesia's Jakarta Composite Index (IHSG), were down. Not even the announcement that Bank Indonesia decided to maintain its benchmark interest rate (BI rate) at 7.50 percent was able to push the IHSG back in the green zone. Investors probably already anticipated the central bank's decision as it was in line with the market's expectation.

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At Bank Indonesia's Board of Governors’ Meeting today (13/02), it was decided to maintain the country's benchmark interest rate (BI rate) at 7.50 percent as well as the interest rates on the Lending Facility and Deposit Facility at 7.50 percent and 5.75 percent respectively. The policy is consistent with the tight monetary policy stance currently adopted in order to steer inflation back towards its target corridor of 4.5±1 percent in 2014 and 4±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level.

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The pace of Indonesia's monthly January inflation rate was higher in 2014 than in the same month during the past five years. This relatively high inflation rate this year, recorded at 1.07 percent, was caused by severe rainfall and floods in several parts of Indonesia (particularly in the cities of Jakarta and Manado) amid the peak of the rainy season. These weather-related circumstances impacted on prices of food products as distribution channels were disrupted, thus giving rise to increasing prices. Annual inflation, however, slightly eased.

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On Wednesday 5 February 2014, Statistics Indonesia (BPS, a non-departmental government institute) is expected to release Indonesia's official GDP growth figure for the year 2013. It is estimated that the outcome will be the lowest GDP growth figure since 2009 when Southeast Asia's largest economy grew 4.6 percent after feeling the impact of the global financial crisis. In 2013, again, Indonesia felt the negative influence of external troubles. And in combination with domestic factors, Indonesia's economic growth is expected to be around 5.7 percent in 2013.

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The Indonesia rupiah exchange rate depreciated 0.18 percent to IDR 12,165 at 16.30 local Jakarta time on Thursday (23/01), based on the Bloomberg Dollar Index. Main reason for this decline is concern that Indonesia's central bank (Bank Indonesia) will maintain its benchmark interest rate (BI rate) at 7.50 percent despite an expected increase in January inflation due to massive floods as well as higher industrial electricity and LPG prices. Indonesia's January inflation rate is estimated to be around 1 percent.

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According to Fauzi Ichsan, Managing Director at Bank Standard Chartered Indonesia, there is a possibility that Indonesia's central bank (Bank Indonesia) will raise its benchmark interest rate (BI rate) from 7.50 percent to 8 percent at the next Board of Governor's Meeting as the country's current account deficit has not improved markedly yet. The deficit stood at about 3.5 percent of the country's gross domestic product (GDP) at the end of 2013. Bank Indonesia intends to lower the deficit to a sustainable level of below 3 percent in 2014.

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