Today (08/01), Indonesia's central bank (Bank Indonesia) announced that Indonesia’s official reserve assets stood at USD $99.4 billion at the end of December 2013, implying an USD $2.4 billion growth from the foreign exchange reserves at the end of the previous month (USD $97.0 billion). According to Bank Indonesia, these assets cover 5.6 months of imports or 5.4 months of imports and servicing of government external debt (well above the international standards of reserve adequacy).

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The Indonesia rupiah exchange rate is moving sideways on Wednesday's trading day (08/01). At 13:00 local Jakarta time, the rupiah was down 0.02 percent to IDR 12,240 per US dollar based on the Bloomberg Dollar Index. This morning the US dollar slightly depreciated against most Asian currencies after the International Monetary Fund (IMF) said to plan to upgrade its forecast for global economic growth as the US economy improves. Yesterday, Indonesia held Asia's largest US dollar-denominated bonds since 1998.

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In line with most other Asia-Pacific currencies, the Indonesia rupiah exchange rate continued its depreciating trend against the US dollar on Tuesday morning (07/01). Market participants tend to avoid the rupiah and prefer to wait & see for international data first. For example, today's release of the minutes of the Federal Open Market Committee (FOMC). This will inform about the stance of Federal Reserve officials on the winding down of the quantitative easing program (planned for this January).

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Supported by legislative and presidential elections, car sales in Indonesia are expected to grow between five and ten percent to 1.30 million total vehicles in 2014. These elections are estimated to boost the domestic money flow due to increased economic activity in Southeast Asia's largest economy. Consumption goods such as cars and food & beverage products are expected to feel the impact of this development and may offset the negative impact brought on by the weak rupiah, high inflation and the high interest rate environment.

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On Thursday (02/01), Statistics Indonesia (BPS) released the December 2013 inflation figure of Indonesia as well as the calender inflation rate for full-year 2013. Higher food prices and house prices were the main contributors to the 0.55 percent inflation rate in December 2013. Seasonal celebrations, like Christmas and New Year, always translate into higher inflationary pressures in Southeast Asia's largest economy. Higher fuel prices were the main contributor to the 8.38 percent inflation rate in full-year 2013.

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In order to support Indonesia's sharply depreciated rupiah exchange rate, the central bank of Indonesia (Bank Indonesia or BI) improved provisions for Hedge Swap Transactions through Bank Indonesia Regulation No.15/17/PBI/2013 (which takes effect as of 3 February 2014). Through this arrangement, Indonesian banks can sell their US dollars to BI at the current spot rate and promise to buy the amount at a later date on an agreed rate. This protects banks against fluctuations in the rupiah exchange rate.

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Ahead of the new year, the Indonesia rupiah exchange rate continues its downward trend on Monday (30/12). Bank Indonesia's Jakarta Interbank Spot Dollar Rate (JISDOR) fell to IDR 12,270 per US dollar from IDR 12,260 on the previous trading day. Due to the improving US economy, the US dollar keeps appreciating against the majority of emerging currencies. At most local Indonesian banks, the rupiah is traded significantly above the psychological level of IDR 12,000 per US dollar.

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The Indonesia rupiah exchange rate continued its downward trend on Monday (23/12). Both Bank Indonesia's Jakarta Interbank Spot Dollar Rate (JISDOR) and Bloomberg's Dollar Index showed a depreciating rupiah. The JISDOR, which was launched by Bank Indonesia in May to manage exchange rate fluctuations, fell 0.01 percent to IDR 12,246 per US dollar, while the Bloomberg Dollar Index indicated a 0.29 percent decline of the rupiah to IDR 12,250 per US dollar at 14:10:09 afternoon, local Jakarta time.

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Deputy Trade Minister Bayu Krisnamurthi said that the Indonesian government is preparing two strategic steps to anticipate the negative impact of the winding down of the Federal Reserve's quantitative easing program. In January 2014, the Fed's bond-buying program will be reduced from USD $85 billion to USD $75 billion per month. The two strategic steps, which will enhance financial stability in Southeast Asia's largest economy, involve the curtailing of Indonesia's current account deficit and high inflation.

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Indonesia's Finance Minister Chatib Basri expects that Indonesia's economic growth in 2013 will reach 5.7 percent, significantly below the government's initial target of 6.3 percent. Basri announced his expectation at the government's economic evaluation and projection meeting. According to Basri, Indonesia's economic growth is stable, despite its slowing trend. Among the G20 member countries, only China will post higher GDP growth (7.8 percent up to the third quarter). Indonesia's inflation rate is expected to reach 8.5 percent (yoy) at the year-end.

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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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