The macroeconomic condition of Indonesia has been experiencing a turbulent time recently as GDP growth cooled to the slowest pace since Q3-2010 (5.81 percent year on year in Q2-2013), while inflation grew to a four-year high (at 8.61 percent year on year). Underlying reasons for these developments are continued weak global demand for Indonesian commodities resulting in weak exports (please note that commodities account for around 60 percent of the country's total exports), a cooling of investments in the country, and a cooling of domestic consumption as interest rates have been raised after the increase in prices of subsidized fuels in June 2013. Imports, however, have been relatively strong, thus resulting in Indonesia's widening trade deficit.

Market participants are still concerned that inflation in August will be higher than expected. In July 2013, the country was shocked by a 3.29 percent (month to month) inflation rate as a result of the combined impact of higher subsidized fuel prices, the Ramadan and Idul Fitri celebrations, problematic food products supplies due to government policies, and the new school year. Bank Indonesia expects inflation to ease below the one percent mark in August. However, market players are not yet relieved by this statement as Bank Indonesia's projection for inflation in July was far from perfect (the Bank targeted an increase of about 2.2 percent month to month, but inflation accelerated to 3.29 percent).

Indonesia's current account deficit in Q2-2013 widened to USD $9.8 billion or 4.4 percent of the country's gross domestic product. The country has now posted a deficit for seven consecutive quarters (overseas sales decreased for a 15th month in June due to weakening commodity prices). However, Finance minister Chatib Basri expects the deficit to ease in Q3-2013 as oil imports will reduce after prices of subsidized fuels have been raised in June 2013, and which are expected to lessen domestic oil consumption.

Wednesday (21/08), America's Federal Reserve will publish the minutes of the latest policy meeting. This publication is expected to shed some more light on the board members' thoughts on the phasing out of its quantitative easing program. The Fed is still pumping monthly additional liquidity of USD $85 billion into the market, but more and more economists expect a tapering of the pace of the program next month.

The Indonesian rupiah continues its weakening trend. The current turmoil in Indonesian markets results in more demand for US dollars and thus cause a weakening rupiah. Indonesia's currency has now reached its lowest level in four years.

| Source: Bank Indonesia

¹ The Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.