Results of assessments conducted by Bank Indonesia indicate that the global economic recovery is enduring despite weaker growth than previously thought. The global recovery is particularly supported by economic improvements in advanced countries, in line with the continuation of monetary stimuli along with overcoming a number of fiscal constraints, while the economy of China is yet to rebound as a result of ongoing rebalancing policy. Such circumstances ultimately trigger limited price hikes among primary international commodities. Notwithstanding, Bank Indonesia will continue to monitor an array of risks in the global economy, particularly associated with normalisation policy to be introduced by the Fed, the possibility of a weaker recovery than initially projected due to the downturn in China as well as external vulnerabilities that may emerge in a number of emerging market countries.

Bank Indonesia expects the ongoing episode of domestic economic moderation to continue, leading to a more balanced economic composition. Household consumption is predicted to slow compared to initial projections due to the limited impact of the upcoming legislative election as well as the transmission of stabilisation policy initiated by Bank Indonesia in conjunction with the government. Meanwhile, investment growth, including non-construction investment, is projected to rebound in the second semester of 2014. Real exports will also accelerate but not as robustly as initial projections due to tepid global economic growth and the temporary impact of the Coal and Minerals Mining (Minerba) Act. Against this backdrop, Bank Indonesia projects the domestic economy to expand at the 5.5-5.9 percent.

Persistent improvements in terms of external sector performance in indonesia, concerning the balance of trade and the financial account, will support a more balanced domestic economy. In January 2014, Indonesia's trade deficit totalled USD $0.43 billion, as a result of seasonal factors that undermined exports of non-oil and gas commodities and the temporary effect of enacting the Minerba Act. Meanwhile, exports of manufactured goods, like machinery and mechanical equipment, pharmaceuticals and metal-based products surged in January 2014. Looking forward, Bank Indonesia predicts the balance of trade to return to a surplus as exports accelerate in line with stronger demand from leading trade partners, as well as sluggish imports as a result of moderating domestic demand. Bank Indonesia believes that the current account deficit will be managed at a level of below 3.0 percent of GDP. Furthermore, in terms of the financial account, inflows of foreign capital are expected to escalate as the domestic economy strengthens. Up to February 2014, inflows of foreign portfolio to the markets of Indonesia amounted to IDR 34.6 trillion. Against such a propitious backdrop, the position of foreign exchange reserves held in Indonesia totalled USD $102.7 billion in February 2014, 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.

The sound economic fundamentals are driving improvements in external sector performance, which in turn is strengthening the rupiah exchange rate. In February 2014, the rupiah closed at a level of IDR 11,609 per US dollar, appreciating 5.18 percent on the value at the end of the previous month. On average, the rupiah was valued at IDR 11,919 per US dollar in February 2014, up 2.02 percent on the average reported in the preceding month at IDR 12,160 per US dollar. Looking ahead, Bank Indonesia will consistently maintain rupiah exchange rate stability according to its fundamental value and bolstered by a plethora of efforts to deepen the foreign exchange market.

The rate of inflation continued to trend downwards in February 2014, reinforcing the prospect of achieving the inflation target in 2014, more specifically 4.5±1 percent. Headline inflation in February 2014 was low at just 0.26 percent (mtm) or 7.75 percent (yoy), representing a dramatic decline compared to the previous month at 1.07 percent (mtm) or 8.22 percent (yoy) and below the average for the past five years. Core inflation also remains under control at 0.37 percent (mtm) or 4.57 percent (yoy). The impressive gains made in terms of core inflation are inextricably linked to policy implemented by the central and local governments to minimise the second-round effects of recent natural disasters, thereby lowering inflation of volatile foods in February 2014. Lower inflation was also attributable to sharp rupiah appreciation that minimised the effect of rising international commodity prices. After solid inflation rate performance during the reporting month, the rate of inflation for 2014 overall is expected to hit its target corridor. Bank Indonesia will remain cautious of a number of inflation-related risk factors, including potential pressures stemming from corrections to administered prices, as well as continue to reinforce the policy mix and coordination with the Government to ensure inflation remains on track with the inflation target.

Resolute financial system stability is buttressed by dogged banking system resilience and solid financial market performance. Banking industry resilience remains solid with credit risk, liquidity risk and market risk well anticipated, underpinned by support from robust capital. Bank credit growth slowed from 21.4 percent (yoy) in December 2013 to 20.09 percent (yoy) in January 2014 as domestic demand waned. In addition, Bank Indonesia will coordinate with the Financial Services Authority (OJK) to steer credit growth according to moderating domestic demand. Meanwhile, the capital market performed better in February 2014. Furthermore, the Jakarta composite index rallied and the yield of tradeable government securities (SBN) slumped due to investor optimism concerning the domestic economy in line with falling inflation and a smaller current account deficit.

Jakarta, 13 March 2014
Communication Departement
Bank Indonesia