Last year, the rupiah was one of the worst peforming emerging market currencies, depreciating more than 21 percent against the US dollar when - amid the looming end of the Federal Reserve's quantitative easing program - billions of US dollars were pulled out of Indonesia's capital markets. International investors were highly concerned about the country's high inflation rate (accelerating to almost 9 percent year-on-year after the government raised prices of subsidized fuels in late June 2013) and the current account deficit (which hit a record high of USD $9.9 billion, or 4.4 percent of GDP, in the second quarter of 2013).

However, Indonesia's fundamentals have started to improve since the second half of 2013. The current account deficit has eased to 1.98 percent of GDP in the fourth quarter of 2013, supported by a USD $4.4 billion trade surplus in the same quarter as the country's exports improved (particularly non-oil and gas exports). Bank Indonesia targets to maintain the current account deficit below the 3 percent of GDP-mark (which is regarded as a sustainable level). However, it remains unknown how much influence the recently introduced ban on exports of unprocessed minerals will have on the country's current account deficit. Although the new rule has not been implemented in full force yet, it is expected to curb the total value of exports. Ahead of the ban's implementation on 12 January 2014, exports of raw minerals surged as Indonesian miners were eager to export as much raw material as possible. This then caused the USD $1.52 billion December 2013 trade surplus. It is therefore very interesting to see Indonesia's January 2014 trade statistics (which will be released at the start of March 2014) as it will inform us about the influence of the unprocessed minerals export ban.

Inflation is still high at the start of 2014 (8.22 year-on-year in January 2014) but forecasts claim that inflation will ease more markedly in the months ahead. As a result bond yields fell to three-month lows. The yield on 10-year government bonds dropped to 8,4898 percent on Friday (21/02) from 8,4911 percent the previous day (in 2013 this yield had been 9.2 percent). This also provides room for Bank Indonesia to lower its benchmark interest rate (BI rate) - currently at 7.50 percent - this year. The country's January 2014 inflation rate was slightly higher than expected due to weather related factors (severe floods in several cities amid a peak of the rainy season). The central bank's target range of inflation this year is between 3.5 and 5.5 percent (year-on-year).

Due to improved domestic and global conditions, the rupiah's performance has been much better in 2014. With most market participants already having reacted to the Federal Reserve's tapering policy and a continuation of improvement in domestic economic fundamentals, the rupiah is expected to remain stable and continue its gradually appreciating trend. The rupiah (JISDOR) started the year at the level of IDR 12,189 per US dollar but has since strengthened to IDR 11,728 on Monday (24/02) amid capital inflows.

| Source: Bank Indonesia

However, Agung mentioned a number of international risks that should not be ignored. Although the greatest impact of the Federal Resere's tapering on Indonesia's capital markets seems to have been felt last year (when speculation about the tapering began), the normalization of Fed policy can still evoke volatility on global markets. Secondly, China's slowing economic expansion has a direct impact on Indonesia as the world's second-largest economy is one of the most important trade partners of Indonesia. When China's economic growth declines by 1 percent, it leads to a 0.6 percent decline of Indonesia's GDP growth. Lastly, there is still a looming currency crisis in Argentina.

Economist Lana Soelistianingsih stated that the rupiah is most likely to appreciate after this year's elections as more foreign funds will enter the country after gaining more certainty about the next government and its political as well as economic policies. The legislative election is scheduled for April 2014 and the presidential election for July 2014. According to her, since the era of Reformation, election years (1999, 2004 and 2009) always bring increased foreign capital inflows. Soelistianingsih expects that the rupiah's value will range between 10,800 and 11,000 per US dollar this year. 

Based on the Bloomberg Dollar Index, the rupiah appreciated 0.78 percent to IDR 11,652 per US dollar at 13:45 local Jakarta time on Monday (24/02).