Concerns about the looming end of the Federal Reserve's monthly USD $85 billion stimulus program (known as quantitative easing or QE3) in combination with the deteriorating domestic economy of Indonesia has caused Indonesia's benchmark stock index (IHSG) to plunge 1.95 percent in the first trading session of 13 November 2013. The Indonesian rupiah exchange rate depreciated 0.28 percent to IDR 11,600 according to Bloomberg. These developments happen one day after the decision of Indonesia's central bank to raise the BI rate to 7.50 percent.

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Agus Martowardojo, Governor of Indonesia's central bank (Bank Indonesia), stated that the country's economy is expected to grow 5.7 percent in 2013. Bank Indonesia believes GDP growth in the fourth quarter of 2013 to fall below the growth figure realized in Q3-2013 (5.62 percent). Martowardojo said that the government needs to continue measures to improve the country's exports, while trying to curtail imports of oil and gas as domestic demand for fuels remained high, even after the increase in prices of subsidized fuels in June 2013.

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The central bank of Indonesia (Bank Indonesia) sees a continued easing trend in inflationary pressures in October 2013. Indonesia's inflation in October 2013 was recorded at 0.09 percent (month-to-month), thus confirming the indication that monthly inflation is back to its normal pattern in the last five years. However, the annual inflation pace is still high at 8.32 percent (yoy). Limited inflation in October was influenced by deflation of the food group component (0.80 percent mtm), although commodity prices rose (especially red chili).

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Moody's Investors Service, one of the big credit rating agencies, stated in its 'Credit Analysis: Indonesia' report that - despite the ongoing current account deficit (which is considered to be structural) and a relatively shallow and volatile domestic capital market (which contributes to Indonesia’s reliance on external funding) - the agency is positive about Indonesia's outlook due to its growth prospects, narrow fiscal deficits and low public debt. Indonesian government bonds are rated at Baa3, which is Moody's lowest investment-grade status.

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The government of Indonesia will release a second economic policy package at the end of October. This new package, which aims to provide attractive tax incentives to investors, is in addition to the package that was released in August 2013 when sharp rupiah depreciation and a rapidly falling stock index occurred as panic emerged after the Federal Reserve hinted at an end to its quantitative easing program. In combination with a widening current account deficit and high inflation, it resulted in large capital outflows from Indonesia.

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The Rating and Investment Information Inc (R&I), a rating agency from Japan, kept Indonesia’s Sovereign Credit Rating at BBB- with a stable outlook. In their press release, R&I stated that the four key factors behind the decision are: (a) Indonesia’s capacity to achieve sustainable economic growth in the long term (at around six percent per year); (b) conservative fiscal management (causing a marginal fiscal deficit); (c) a sound banking sector; and (d) a low level of government debt.

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A senior official at Indonesia's central bank (Bank Indonesia) stated that the country's current account deficit is expected to ease to 2.5 - 2.7 percent of Indonesia's gross domestic product (GDP) by 2014. In the second quarter of 2013, the account deficit reached USD $9.8 billion or 4.4 percent of GDP in Q2-2013, an alarmingly high figure that has caused much concern among the investor community. This deficit is particularly brought on by a large deficit in the country's oil & gas sector in combination with strong domestic demand for imports.

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The central bank of Indonesia (Bank Indonesia) announced that Indonesia's foreign exchange reserves have increased slightly in September 2013. On 30 September, the reserves stood at USD $95.67 billion, a 2.88 percent increase from USD $92.99 billion one month earlier. The reserves in September are equivalent to 5.4 months of imports, or 5.2 months when servicing of government external debt is included. Recent US dollar demand for the import of oil is what put pressure on the reserves.

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Indonesia's trade deficit is expected to amount to USD $4 billion by the end of 2013, implying a moderation from the USD $5.54 billion deficit that emerged between January and August 2013. Indonesia's exports are forecast to decline by about 5 percent in the remainder of 2013 due to the weak global environment, particularly with the current ongoing political uncertainties in the USA. As such, in order to combat the deficit, the government intends to limit imports. Next year, Indonesia will most likely continue to post a trade deficit.

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Today, Statistics Indonesia (BPS) released Indonesia's export and import figures for the month August 2013. Exports in August amounted to USD $13.16 billion, implying a 12.77 percent decline compared to exports in July 2013, or a 6.31 decline year-on-year. Imports in August 2013 amounted to USD $13.03 billion, a 25.20 percent fall compared to the previous month, or a 5.69 percent fall year-on-year. As such, Indonesia recorded a trade surplus of USD $130 million in August.

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Indonesia's central bank (Bank Indonesia or BI) announced on Wednesday (15/05/13) that the country's external balance has improved during Q1-2013 as non-oil and gas trade were up. Indonesia's current account deficit stood at USD $5.3 billion (2.4 percent of GDP) in Q1-2013, compared to the previous quarter's deficit of USD $7.6 billion (3.5 percent of GDP). Indonesia has experienced a widening trade deficit, although it recorded a trade surplus of USD $304.90 in March, the first trade surplus since September 2012.

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This week, the World Bank published its Indonesia Economic Quarterly (IEQ, edition March 2013) titled 'Pressures Mounting'. It reports on key developments over the past three months in Indonesia’s economy, and places these in a longer-term and global context. To read the whole report, please visit the World Bank's website at www.worldbank.org or download this edition directly through this link. Below we present the executive summary.

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Recent concerns about a global currency war, which is considered to threaten worldwide economic and financial stability, has prompted Indonesia's Economic minister Hatta Rajasa to ensure that Indonesia will not participate in such a tactic. The Central Bank of Indonesia (Bank Indonesia) has in fact been selling US dollars to support the IDR rupiah, which has been under growing pressure lately due to Indonesia's current account deficit and the risk of capital outflows.

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