Inflation: There was increasing inflationary pressure during November as the Statistics Office (BPS) reported a higher inflation rate of 0.12 percent month-to-mont (mtm) and 8.37 percent year-on-year (yoy) with year to date inflation now at 7.79 percent. The higher consumer price index (CPI) was due to the raised electricity tariff, house rental, and higher prices of cigarettes as well as other selected foods. The current inflation rate is still lower than the Central Bank’s (BI) target of between 9.0 percent and 9.8 percent. However, there might be higher pressure for CPI in the month of December due to seasonal festivities (Christmas and New Year).

Trade Balance: A slightly higher growth of export activities by 2.6 percent (mtm) to USD $15.72 billion was posted mainly due to robust gas and mineral fuel export. This compared to an import increase of 1.1 percent (mtm) to USD $15.67 billion - dominated by machineries - resulted in a minor trade surplus in October 2013. This surplus is in line with the Central Bank’s tight monetary policy to slowdown the country's economic growth and imports. A trade surplus is expected to drive the rupiah exchange rate to strengthen in the near term. However, year to date, Indonesia actually still posts a trade deficit as total import of USD $156.02 billion is still higher than total export of USD $149.66 billion. Therefore, the policy package of the government is still needed to reduce imports and support both exports and related investments.

Balance of Payment: The weakening capital and financial account surplus impacted to a slight drop on deficit balance of payment to -USD $2.6 billion in the third quarter of this year from -USD $2.5 billion in 2Q13. Portfolio investment dropped significantly to USD $1.9 billion from USD $3.4 billion in the previous quarter. The falling portfolio investment into Indonesia was triggered by concerns over the US government shutdown, debt ceiling and tapering policy. Fortunately, the current account deficit improved to USD $8.5 billion from USD $9.9 billion (2Q13) due to Indonesia's robust oil and gas export as well as declining non-oil and gas import.

Economic growth: Indonesia's economy grew at a slower rate of 5.62 percent yoy (2.96 percent quarter to quarter, qtq) in 3Q13 or lower than the previous quarter at about 5.83 percent yoy. Looking at the quarterly profile, agriculture and its related sectors posted the highest growth of about 6.2 percent qoq sustained by favorable weather conditions. However, other sectors, such as construction and trade & restaurant, grew at a slower pace of around 3.4 percent and 1.5 percent (vs 4.1 percent and 4.4 percent) respectively. This declining growth was in line with the higher inflationary pressures lifting up the interest rates and reducing consumers' purchasing power.

Foreign reserves: Indonesia’s foreign exchange reserves climbed to nearly USD $97 billion in October 2013 - the highest level since June. It was equivalent to 5.5 months of import or 5.3 months of imports and servicing external debt. Stronger forex is expected to provide headroom for the Central Bank to manage the rupiah exchange rate fluctuation in the near term. During this year, the country’s forex reserves dropped to its lowest level in July, hovering about USD $92.67 billion. The declining trend of the forex reserves actually started at the beginning of this year when it dropped to USD $108.8 billion (vs USD $112.8 billion in December 2012).

Unemployment rate: In tandem with the lower economic growth in the third quarter of 2013, BPS also reported a higher unemployment rate, touching 6.25 percent in August 2013 compared to 6.14 percent in the same month last year. According to BPS, total unemployment stood at 7.4 million people in August. In terms of educational background, the highest unemployment rate came from vocational high school (11.2 percent) which is followed by senior high school (9.7 percent) versus 9.9 percent and 9.6 percent, respectively, a year before.

Car & motorcycle sales: Gaikindo reported slowing growth of Indonesia’s car sales in October 2013. Car sales reached about 112,038 units, or grew at a slower rate of about 4.9 percent yoy versus 13.5 percent growth in the previous month. Year to date, total car sales stand at 1.02 million units or up by 10.5 percent yoy. Higher interest rates coupled with the weaker rupiah has squeezed cars’ demand. On the other hand, motorcycle sales in the domestic market booked a sound growth of 13.9 percent yoy to 714,264 vehicles, contributing a stronger year-to-date sales of 6.5 million units (vs 5.9 million in the same period of 2012).

Jakarta Composite Index: The JCI closed at a weaker level of 4,256.44 on the last trading day of November versus 4,510.63 a month before. This decline indicates a capital outflow on the stock market due to global sentiments, such as a downgrade of France’s sovereign rating, OECD’s action to cut the world’s GDP growth forecast as well as market concern over the tapering off issue in the US. Domestically, the Central Bank’s decision to raise the BI rate by another 25bps to 7.50 percent coupled with the weaker rupiah also contributed to the weak performance.

BI rate: Amidst increasing inflationary pressures, the Central Bank decided to raise the BI rate by 25bps to 7.50 percent in November. This decision reflected BI’s tight monetary policy in order to manage inflation as well as to help resolve the current account deficit problem. The current trade surplus in October was in line with BI’s expectation with the implementation of its tight monetary policy. Thus, in the upcoming governors’ meeting, the BI rate is expected to be left unchanged at 7.50 percent.

Rupiah: At the end of November, the rupiah depreciated significantly to around IDR 11,977 per US dollar (vs IDR 11,234 at the end of October). The market had concerns over the tapering off policy in the US following the better economic indicators, such as pending home sales, unemployment claims, retail sales as well as the PMI manufacturing index. Additionally, a current account deficit standing at USD $8.4 billion further pressured the rupiah. Another factor of the weaker rupiah was the high demand of US dollar to pay forex loans heading to the year-end. As of 3Q13, total outstanding private external debt was USD $136.6 billion or higher than USD $123.0 billion in 3Q12.

Written by Kreshna D. Armand, Pradnya Desai and Setyo Wijayanto