One day after the surprise interest rate cut by Indonesia’s central bank, Indonesian stocks surge to a new record level led by interest rate sensitive stocks (such as financial institutions, construction firms and property firms) while the rupiah and government bonds are weakening. Yesterday (17/02), Bank Indonesia shocked markets by lowering its key interest rate (BI rate) and deposit facility rate (Fasbi) by 25 basis points, each, to 7.50 percent and 5.50 percent, respectively. Easing monetary policy is back in fashion among the region’s central banks.

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In line with most Southeast Asian stock markets and currencies, Indonesian stocks and the rupiah were rather flat with a tendency to weaken slightly on Tuesday (17/02). Most investors seem to avoid trading in this short trading week (On Thursday 19 February markets will be closed due to Chinese New Year celebrations). Moreover, market participants in Indonesia are waiting for the central bank’s interest rate decision later today. Lastly, failed talks between Greece and its creditors on Monday dented sentiment across Asia.

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The Indonesian rupiah exchange rate is depreciating sharply on Thursday (12/02). By 12:10 pm local Jakarta timezone, the currency had fallen 1.11 percent to IDR 12,865 per US dollar (Bloomberg Dollar Index). Market participants have become increasingly concerned about a Greek default or exit from the Eurozone and react by selling emerging market assets in search of safe havens such as the US dollar. Yesterday (11/02), the Eurozone’s finance ministers could not reach agreement on the Greek debt situation.

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The benchmark stock index of Indonesia (Jakarta Composite Index) hit a record high on Friday (06/02) on the back of rising palm oil-related stocks (palm oil demand is expected to grow due to the Indonesian government’s proposal to increase biodiesel subsidies) and an improvement in the country’s foreign exchange reserves which shows that economic fundamentals remain strong in current global uncertain times. Corporate earnings results of Indonesian companies also provide positive market sentiments.

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Indonesia’s rupiah exchange rate weakened on Friday’s trading day (30/01) in line with the performance of several other Asian currencies. South Korea’s won fell on strengthening expectations of an interest rate cut and Japan’s yen declined on the slowdown of government bond sales. For market participants these were reasons to purchase US dollars at the expense of the rupiah. Indonesia’s currency had depreciated 0.41 percent to IDR 12,633 per US dollar based on the Bloomberg Dollar Index at 2:35 pm local Jakarta time.

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The Indonesian government, central bank (Bank Indonesia) and Commission XI of the House of Representatives (DPR) agreed to revise several macroeconomic targets in the Revised 2015 State Budget (APBN-P 2015). The revisions include the country’s economic growth (GDP) pace, the average rupiah exchange rate, and inflation target. In essence, the revisions indicate that Indonesian authorities have become less optimistic about the Indonesian economy in 2015 amid external pressures.

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On 25 January 2015, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website in the last seven days. Most of the topics involve economic matters such as the impact of the Eurozone’s quantitative easing program on Indonesia’s stocks and currency, the global challenges that are being faced by Indonesia, an infrastructure update, international relations, and more.

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The central bank of Indonesia (Bank Indonesia) decided to keep its benchmark interest rate (BI rate) at 7.75 percent at its Board of Governors’ Meeting on Thursday (15/01). The country’s Lending Facility and Deposit Facility were maintained at 8.00 percent and 5.75 percent, respectively. According to the bank this interest rate environment is sufficient to push inflation, which has accelerated to 8.36 percent year-on-year (y/y) in December due to fuel subsidy reforms, back towards its target of 3 to 5 percent (y/y) in 2015.

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Despite pressures on the rupiah exchange rate amid a bullish US dollar ahead of monetary tightening in the USA, the Deutsche Bank, one of the world's leading financial service providers, holds a positive view on Indonesian bonds due to Indonesia’s recent fuel subsidy reforms and solid macroeconomic fundamentals. According to the German lender, Indonesian bond yields seem to have decoupled from the currency’s recent depreciating trend although “continued foreign exchange stress could eventually lead to capitulation from bond investors.

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On 11 January 2015, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website in the last seven days. Most of the topics involve economic matters such as the performance of Indonesian stocks and the rupiah, an update on palm oil and coal, Indonesia’s subsidized fuel policy, but also topics such as flight schedule violations and Islamic radicalism.

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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 February 2014 edition, a number of important topics 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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On the last day of the week (07/03), Indonesia's benchmark stock index (Jakarta Composite Index or IHSG) fell 0.04 percent to 4,685.89 points as market participants engaged in profit taking (cashing in on the recent strong performance of the IHSG) amid resurging concerns about the situation in Ukraine. On the other hand, losses were limited as investors are upbeat about the improved outlook for the global economy. US data were good as the number of people who filed for unemployment benefits fell to the lowest level in three months.

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Although the gap on 4,575-4,579 was closed, Indonesia's benchmark stock index (Jakarta Composite Index or IHSG) was given limited room to go up further as the performance of global stock indices did not support a bigger rebound. On the contrary, despite the 0.37 percent rise of the IHSG to 4,601.28 points on Tuesday (04/03), there are still pressures that may push the index down in the days ahead. Amid the political conflict in the Ukraine, Wall Street fell on Monday (03/03), which led to profit taking in the first trading session.

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The Indonesian rupiah exchange rate had depreciated (0.15 percent) to IDR 11,665 per US dollar on Thursday (27/02), 15:00 local Jakarta time, based on the Bloomberg Dollar Index. Governor of Bank Indonesia Agus Martowardojo stated yesterday to expect the currency to stabilize near current levels in line with its economic fundamentals ahead of looming further Federal Reserve tapering. Analysts estimate that Indonesia's trade balance might deteriorate in January 2014 as the impact of the mineral-ore export ban kicks in.

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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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Foreign confidence in Indonesia's capital markets seems to be growing further after foreign investors continued to expand their stock portfolios last week. In February 2014 (up to Friday 21/02), foreigners purchased IDR 36.0 trillion (USD $3.1 billion) worth of stocks and sold IDR 29.3 trillion (USD $2.5 billion), resulting in net foreign buying of 6.7 trillion (USD $570.2 million) in the first three weeks of February 2014. When foreign net buying of January 2014 is added, total net foreign buying reached IDR 9.0 trillion (USD $766.0 million).

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Only 50 days since the start of the fiscal year 2014 have passed and the government has already shown that it is not convinced to meet targets of basic macroeconomic assumptions set in the 2014 State Budget (APBN 2014). Therefore, the Indonesian government has lowered the outlook for all basic macroeconomic assumptions in the 2014 State Budget. On Thursday 19 February 2014, the government formally presented the downward revision of economic targets in the State Budget to the House of Representitative's Budget Agency.

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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 current account deficit of Indonesia is expected to ease further in the first quarter of 2014 due to a possible slowdown of imports according to Deputy Finance Minister Bambang Brodjonegoro. This slowdown is estimated to be caused by the implementation of Indonesia's higher income tax on the import of durable consumer goods, effective from January 2014. However, the deficit will not ease markedly from the USD $4 billion deficit (equivalent to 1.98 percent of the country's gross domestic product) recorded in the fourth quarter of 2013.

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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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