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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In line with expectations, the central bank of Indonesia (Bank Indonesia) left its interest rates unchanged at the last monetary policy meeting of 2018 (held on 19-20 December 2018). The benchmark BI 7-Day Reverse Repo Rate was held at 6.00 percent, while the deposit facility and lending facility rates were kept at 5.25 percent and 6.75 percent, respectively.

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Robust rupiah appreciation in the month of November 2018 has taken many people – such as policymakers, businessmen, and analysts, including us – by surprise.

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It are challenging times for businessmen and investors in Indonesia. An escalating trade war between the United States and China is felt by emerging markets including Indonesia. For example, the rupiah has weakened to a 20-year low against the US dollar. Meanwhile, Indonesia's legislative and presidential elections are scheduled for April 2019 and the results can have big consequences for the country's investment climate.

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Based on the latest reports - and contrary to earlier plans - the Indonesian government will not postpone the development of 15,200 MW of power projects. Earlier the government said it wanted to delay various power projects in an effort to curtail imports, thus improve the country's current account balance and ease heavy pressures on the rupiah exchange rate.

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Concerns about Indonesia's current account balance increased after Bank Indonesia announced last week that the country's current account deficit widened to USD $8.02 billion, or 3.0 percent of gross domestic product (GDP), in the second quarter of 2018. It is Indonesia's highest quarterly deficit since Q3-2014, thus putting additional pressures on the rupiah exchange rate.

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There are doubts whether Indonesia's gross domestic product (GDP) growth can reach 5.2 percent year-on-year (y/y) in full-year 2018 as Indonesia is experiencing a couple of major challenges. Challenges include the global trade war, the fragile rupiah, Bank Indonesia's higher benchmark interest rate, the current account deficit, and political tensions ahead of the 2019 legislative and presidential elections. Currently, Indonesia Investments' forecast for Indonesia's economic growth is set at 5.2 percent (y/y) in 2018.

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Chief executive officers (CEOs) in Indonesia have become slightly less optimistic about the Indonesian economy and politics. This makes sense considering the presence of simmering global trade tensions, sharp rupiah depreciation against the US dollar, and Bank Indonesia's recent series of interest rate hikes.

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One of the national industries that is heavily affected by the weak rupiah exchange rate is Indonesia's pharmaceutical industry. Considering around 90 percent of raw materials in the pharmaceutical industry need to be imported from abroad (in US dollars), production costs rise sharply in times of significant rupiah depreciation. It is estimated that materials imported from abroad account for about 75 percent of pharmaceutical companies' total production costs.

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In an ad hoc press conference on Thursday (26/04) Bank Indonesia Governor Agus Martowardojo provided an update on the performance of the Indonesian rupiah as well as an update on the strategies that are - or can be - used by the central bank to safeguard a stable rupiah. When the ad hoc press conference was announced we initially expected to see an interest rate hike. However, based on a statement from Bank Indonesia, this seems to be the last option the central bank wants to use.

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Indonesia's benchmark Jakarta Composite Index fell 1.24 percent to 6,229.63 points on Tuesday (24/04). The performance of Indonesian stocks were in line with the general trend in Southeast Asia. Due to rising US treasury yields (touching nearly 3 percent, its highest level since January 2014) investors withdraw their funds from riskier assets in emerging markets. Concerns over US inflation and the fiscal deficit are behind the rising US treasury yield.

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