Bank Indonesia considers recent developments in the economy of Indonesia as favourable and in line with previous projections, marked by lower inflation and a balance of trade that has returned to record a surplus. Looking ahead, Bank Indonesia will continue to remain vigilant of a variety of risks, globally and domestically, as well as implement anticipatory measures to ensure economic stability is preserved and stimulate the economy in a more balanced direction. This includes to control the rate of inflation and reduce the current account deficit, as well as to bolster the structure of the economy and manage external debt, in particular private external debt.

The global economic recovery continues, albeit at a moderate pace. The global recovery is primarily supported by economic improvements in advanced markets, in line with the perpetuation of monetary stimuli. In emerging market countries, especially China, the economic slowdown is the result of economic rebalancing policy. Such conditions have the potential to influence international commodity prices that remain low. Meanwhile, the economic growth momentum is picking up in other trade partners of Indonesia, like India. Looking ahead, Bank Indonesia will continue to monitor risks stemming from global economic growth as well as other external risks, like the planned normalisation policy of the US Federal Reserve as well as conditions in a number of other vulnerable emerging market countries.

Bank Indonesia expects the ongoing episode of domestic economic moderation to continue, leading to a more balanced and sound economic structure. External demand is improving and substituting moderating domestic demand as a source of economic growth. Several latest indicators and leading indicators demonstrate that household consumption surged in the first quarter of 2014 in the run up to the 2014 General Election, among others. Exports are also following a more favourable trend on the back of exports from the manufacturing sector in harmony with the economic recoveries reported in advanced countries. Meanwhile, private investment growth in the first quarter of 2014 remained limited and is not expected to pick up until the second semester. Economic growth in Indonesia for 2014 remains in the range projected previously by Bank Indonesia at around 5.5 to 5.9 percent.

More balanced economic growth is further buttressed by improvements in the country's external sector from the standpoint of the trade balance and the financial account. The balance of trade of Indonesia in February 2014 rebounded to record a surplus of USD $0.79 billion, bolstered by a burgeoning surplus in the non-oil & gas trade account. The growing surplus in the non-oil & gas account stemmed from a contraction in non-oil & gas imports in line with moderating domestic demand along with a surge in non-oil & gas exports, primarily from the manufacturing sector as the economies of advanced countries continue to recover. The trade surplus also emanated from reductions in the oil and gas trade deficit as a result of rising oil and gas exports due to increased oil lifting as well as a decline in oil and gas imports in accordance with the mandatory use of biodiesel as fuel in the transportation sector and the electricity sector. In terms of the financial account, foreign capital inflows continued unabated in March 2014, thus foreign portfolio inflows to financial markets in Indonesia reached USD $5.8 billion accumulatively in the first quarter of 2014. Against this auspicious backdrop, foreign exchange reserves held in Indonesia at the end of March 2014 topped USD $102.6 billion, equivalent to 5.9 months of imports or 5.7 months of imports and servicing external debt, which is well above international adequacy standards of around three months of imports. Looking forward, Bank Indonesia expects improvements in the external sector to continue, underpinned by a current account deficit in 2014 that can be brought down to below 3.0 percent of GDP and a deluge of foreign capital inflows. To this end, Bank Indonesia continues to monitor a plethora of risks, global and domestic, which could undermine external sector resilience and its pertinent response, including the performance of external debt, in particular private eternal debt.

A more balanced domestic economic structure along with improvements in external sector performance are helping to strengthen the rupiah exchange rate. In March 2014, the rupiah closed at a level of IDR 11,360 per US dollar, appreciating 2.19 percent compared to the level at the end of February 2014. On average, the value of the rupiah in March 2014 was IDR 11,420 per US dollar, which is 4.38 percent stronger than the average in the previous month of February 2014 at IDR 11,919 per US dollar. Consequently, the rupiah appreciated 7.13 percent up to the end of March 2014 compared to the level reported at year-end 2013, or 2.85 percent compared to the average value for 2013 overall. Looking ahead, Bank Indonesia will consistently maintain rupiah exchange rate stability according to its fundamental value, supported by efforts to deepen the money market. A number of advancements have been accomplished in terms of rupiah and foreign exchange money market deepening, like the mini Master Repurchase Agreement (MRA), while hedging transactions will be improved and constitute the focus of future policy.

The rate of inflation continued a downward trend in March 2014, which further supports the prospect of achieving the inflation target of 4.5±1 percent in 2014. The rate of headline inflation was low in March 2014 at 0.08 percent month-to-month (mtm) or 7.32 percent year-on-year (yoy), down on that posted in February 2014 at 0.26 percent (mtm) or 7.75 percent (yoy). Furthermore, inflation in March was also lower than the average rate over the past six years. Inflationary pressures eased as a result of lower core inflation, which dropped in line with exchange rate appreciation, moderating domestic demand and well-anchored inflation expectations. Furthermore, food prices also experienced deflation due to greater supply of several food commodities at the onset of the harvest season. In future, Bank Indonesia will continue to monitor the array of risks that could potentially undermine achievement of the inflation target, like corrections to administered prices and potentially rising food prices as various regions enter the dry season, including possible indications of a weak El Nino episode forecast for August 2014.

Banking system resilience and better financial market performance helped maintain financial system stability. Tenacious banking industry resilience to credit risk, liquidity risk and market risk was preserved and supported by a solid capital structure. Credit growth to the private sector cooled off from 20.9 percent (yoy) in January 2014 to 19.9 percent (yoy) in February 2014, as domestic demand moderated. Bank Indonesia will continue to coordinate with the Financial Services Authority (OJK) to steer future credit growth thereby promoting a more sustainable and sound direction of domestic economic growth. Meanwhile, capital market performance in March 2014 improved, as corroborated by gains on the IDX Composite Index and lower yields of tradeable government securities (SBN). Improvements on the capital market have driven investor optimism concerning the domestic economic outlook.

Jakarta, 8 April 2014
Communication Department
Bank Indonesia
Tirta Segara
Executive Director