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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One of the main problems of Indonesia's benchmark stock index (IHSG) is the profit taking that immediately happens after a day of strong growth. On Wednesday (11/12), the IHSG index was plagued by profit taking since the start of the first trading session. Moreover, the index was impacted by mostly falling Asian stock indices as well as the Indonesia rupiah exchange rate which went above the IDR 12,000 per US dollar level again. The only support the IHSG received was just before its closing when European indices opened up.

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Indonesia's benchmark stock index (the Jakarta Composite Index or IHSG) continued yesterday's rise on today's trading day (10/12), supported by indices on Wall Street that climbed due to the lower VIX index (Chicago Board Options Exchange Market Volatility Index) although Asia's stock indices were mixed, while the Indonesia rupiah exchange rate continued its decline. Indonesia's manufacturing stocks were up along with consumer, automotive and processed foods stocks.

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After appreciating on Monday morning (09/12), the Indonesia rupiah exchange rate started to weaken against the US dollar in the afternoon. At 15:10:29 local Jakarta time, the rupiah stood at IDR 11,970 per US dollar in the Bloomberg Dollar Index, a 0.05 percent depreciation from the start of the day. The rupiah exchange rate is fluctuating due to positive sentiments caused by Indonesia's October trade surplus as well as China's low inflation and negative sentiments brought on by the looming end of the Federal Reserve's quantitative easing program.

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In the morning of Thursday (05/12), Indonesia's rupiah exchange rate depreciated beyond the psychological level of IDR 12,000 per US dollar. In the Bloomberg Dollar Index, the rupiah fell 0.2 percent to IDR 12,011 as of 09:19:49. The main factor behind this decline is market participants' concerns about the end of the Federal Reserve's monthly USD $85 billion bond buying program. It is increasingly speculated that the winding down of this program will start sooner than expected.

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The continued presence of negative market sentiments made it impossible for Indonesia's Jakarta Composite Index (IHSG) to rebound. The looming end of the FED's quantitative easing program - which may be wound down sooner than expected - is a big cause for concern. The depreciating Indonesia rupiah exchange rate intensifies these concerns, particularly regarding companies that have exposure to volatile US dollar movements. Furthermore, investors are waiting for further US economic data as well as for Bank Indonesia's next meeting.

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Apparently positive market sentiments brought on by the macroeconomic data released on Monday (02/12) did not last long. Yesterday, Indonesia's benchmark stock index (IHSG) was lifted by the October 2013 trade surplus and limited November inflation. However, investors are now back to reality and prefer to wait for results of Bank Indonesia's Board of Governor's meeting (12/12) and the Federal Reserve's FOMC meeting (17-18/12). The former will inform about Indonesia's interest rate, the latter about the future of quantitative easing.

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The inflation rate of Indonesia rose slightly in November 2013 (month-to-month) and confirms estimations that inflation in Southeast Asia's largest economy is under control after having accelerated sharply due to the introduction of higher subsidized fuel prices June 2013. In recent months, inflation moved sideways and is expected to ease considerably in the first quarter of 2014. Indonesia's consumer price index rose 0.12 percent in November due to rising electricity, processed foods and health care costs.

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After five consecutive days of depreciation, the Indonesian rupiah exchange rate finally managed to strengthen against the US dollar. Bank Indonesia's Jakarta Interbank Spot Dollar Rate rose 0.26 percent to IDR 11,946 per US dollar on Monday (02/12). According to Bloomberg data, the rupiah rose 1.85 percent to IDR 11,744 as of 02:25:50 ET as market participants have reacted positively to Indonesian trade and inflation data that were released today: October showed a trade surplus, while in November inflation was kept at 0.12 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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