Global credit rating agency Fitch Ratings reminded the investor community about the ongoing risk of a sudden reversal of capital inflows in Indonesia. In the first two months of 2014, capital inflows have been strong, reaching a total of USD $2.3 billion, a 16 percent increase from the same period last year, backed by renewed confidence in Indonesia's economic fundamentals as the current account deficit and inflation have moderated since the end of last year. However, several risks are looming causing potential volatility of capital flows.

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It was decided at the Board of Governors' Meeting (on 13 March 2014) to hold the benchmark interest rate (BI rate) at 7.50 percent, the lending facility rate at 7.50 percent and the deposit facility rate at 5.75 percent. The policy is consistent with ongoing efforts to guide inflation back towards its target corridor of 4.5±1 percent in 2014 and 4.0±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level. Recent developments indicate that the rate of inflation is under control and the current account deficit is shrinking.

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Credit growth in Indonesia's banking sector slowed in January 2014 to a growth pace of 20.9 percent (year-on-year), down from 21.4 percent (yoy) in the previous month. Total disbursed credit in January 2014 stood at IDR 3,287 trillion (USD 285 billion). The slowing pace of credit disbursement in Southeast Asia's largest economy is in accordance with the central bank's target to reduce credit growth in the banking sector to between 15 and 17 percent (yoy), said Agus Martowardojo, Governor of Bank Indonesia.

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Tomorrow (13/03), Bank Indonesia will hold its next Board of Governor's Meeting to discuss general policies in the monetary field. As usual, market participants are highly interested in the central bank's assessment of the country's economic fundamentals and interest rates policy. However, predictions about Bank Indonesia's stance toward its benchmark interest rate (BI rate) are mixed. Some expect it to be kept at 7.50 percent as inflation has been under control. Others anticipate a 0.25 percent hike due to the country's weak exports.

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The latest survey of Indonesia's central bank (Bank Indonesia) indicates that domestic private consumption and household consumption in Indonesia remain strong, evidenced by a 28.4 percentage growth (year-on-year) of retail sales in January 2014. This growth was particularly supported by strong sales of information and communication equipment. These sales rose 75 percent (yoy). Traditionally, Indonesia's private consumption accounts for about 55 percent of the country's total annual economic expansion.

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According to a recent survey of Schroder Investment Management Indonesia, subsidiary of the British multinational asset management firm and a leading independent international asset management and private banking group, Indonesian investors feel more confident to invest in Indonesia in 2014. Director of Schroder Indonesia Michael Tjoajadi stated that confidence of Indonesian investors has increased due to improving economic conditions and the long-term prospects of Southeast Asia's largest economy.

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Minister of National Development Planning (Bappenas) Armida Alisjahbana is optimistic that Indonesia's inflation rate will stay below the six percent mark in 2014. After seeing inflation ease to 7.75 percent (year-on-year) in February (from 8.22 percent in January), Alisjahbana in fact believes that inflation can be kept below 5.5 percent (just within the target range of Bank Indonesia). Limited inflation is important in the context of poverty eradication. The country's poverty rate is targeted to ease to 10.5 by the year-end.

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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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On Monday (03/03, Statistics Indonesia announced that inflation in Indonesia stood at 0.26 percent in February 2014. The largest inflationary pressures in this month were caused by higher prices of instant food products, drinks, cigarettes and tobacco. The country's February inflation rate was much lower than the 1.07 percent inflation recorded in the previous month (which was brought on by severe floods that disrupted distribution networks). Year-on-year (yoy) inflation eased to 7.75 percent from 8.22 percent in January 2014.

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On 2 March 2014, 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 G20 meeting in Sydney, foreign investment, Inflation, rupiah exchange rate performance, economic growth, ANTV's IPO, natural disasters, the presidential election, and more.

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After continuously reaching new record-high levels last week, the Indonesia Stock Exchange (IHSG) finally had to give up some of its gain and closed 1.04 percent lower. Declining Asian stock markets (excluding Japan's main index) and fears that the IHSG had already reached a (too) high level impacted on today's result. Market participants, who recently confirmed good corporate annual results of many companies by buying, now engaged in profit taking.

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Apparently, yesterday's decline was only a small stumbling block for the Indonesia Stock Exchange (IHSG). Indonesia's main indicator rebounded strongly after feeling the effects of stronger American stock indices that were positively influenced by a rise in Housing Index and Consumer Confidence. Moreover, the IHSG accelerated its gain after Asian stock markets and the opening of Europe's stock indices were positive.

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