The central bank of Indonesia (Bank Indonesia) decided today to raise its benchmark interest rate by 25 basis points to 6.0 percent. The decision was made amid concerns about the inflationary impact of a hike in subsidized fuel prices (planned this June) as well as increasing uncertainty in global financial markets as central banks' may scale back stimulus programs. The Indonesian rupiah has weakened considerably in 2013 and forms the worst performer in Asia after the Japanese yen among the 11 most-traded currencies tracked by Bloomberg.

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To ease pressures on the IDR rupiah, Indonesia's central bank has used about USD $2.0 billion of its foreign exchange reserves to support the currency as the country's continuing trade deficit as well as concerns about the possible increase in price of subsidized fuel in June has caused much uncertainty about the level of inflation in the near future and puts downward pressure on the rupiah. Indonesia's foreign exchange reserves fell to USD $105.2 billion in late May 2013 from USD $107.3 billion at the end of April.

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Yesterday (07/06), the main index of the Indonesia Stock Exchange (IHSG) fell by a total of 2.7 percent to close at 4,865.32 points. The size of this single day fall of Indonesia's IHSG has not been seen since November 2011 and illustrates waning confidence in Indonesia's economy. For eleven days in a row, foreign investors have been engaged in net selling as they have been concerned about ongoing uncertainty regarding the price hike of subsidized fuel, the continuing trade deficit as well as the steady fall of the IDR rupiah.

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Indonesia's minister of Economy, Ir. M. Hatta Rajasa, stated that the government of Indonesia intends to realize economic growth of at least 6.2 percent in the second quarter of 2013 in order to remain on track for 6.3 percent growth for full year 2013. Although he reminded that it will take hard effort to realize this target, his message contained more optimism than Finance minister Chatib Basri's statement earlier this week who sees 6.0 percent of economic growth as the limit in Q2-2013.

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According to data released by Statistics Indonesia (Badan Pusat Statistik, abbreviated BPS), a non-departmental government institution, Indonesia's inflation figure eased 0.03 percent (month-to-month) in May 2013. The Head of BPS, Suryamin, said that it was the first time since ten years that the country experienced deflation in the month of May. The deflation figure is particularly triggered by the government's policy to allow for more imports of certain food products (such as onions, garlic, tomatoes, and chili).

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The government of Indonesia expects inflation to rise to 7.2 percent in 2013 because of the increase in the price of subsidized fuel in June, and expects it to ease to 4 percent in both 2014 and 2015 provided that good monetary policy is implemented. This good monetary policy should particularly be targeted at maintaining food security. The projections were presented by the Fiscal Policy Agency (Badan Kebijakan Fiskal), the Ministry of Finance, and Indonesia's central bank Bank Indonesia.

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About a week ago, Indonesia's highly optimistic minister of Industry, MS Hidayat, stated that Indonesia's non oil & gas manufacturing sector would grow around 9 percent in 2013. Now, however, the minister has felt the need to revise this figure down to 6.5 percent after meeting several other ministers. Issues that will limit growth of the manufacturing sector are higher minimum wages, the planned rise in subsidized fuel prices, and the lack of support through bank credits.

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The central bank of Indonesia (Bank Indonesia, or BI) kept its benchmark interest rate at 5.75 percent and its overnight deposit facility rate (FASBI) at four percent as the country's core inflation figure is still within the target range of the central bank (3.5-5.5 percent). Core inflation currently stands at 4.12 percent (YoY). However, as the price of subsidized fuel is expected to rise in June, inflation may increase and could trigger a policy response by Bank Indonesia later this year.

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Analysts expect that Indonesia's central bank (Bank Indonesia) will maintain its benchmark interest rate at 5.75 percent in tomorrow's meeting (14/05/13). This rate, a historic low rate for Indonesia, has been in force since February 2012. The central bank's deposit facility (Fasbi) is also expected to be kept at 4 percent. The position of Governor of Bank Indonesia - currently held by Darmin Nasution - will be taken over at the end of this month by Agus Martowardojo.

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In April 2013, Indonesia's inflation rate eased 0.10 percent month-on-month, or 5.57 percent year-on-year. According to Statistics Indonesia (Badan Pusat Statistik, abbreviated BPS) April's deflation was triggered by easing food and clothes prices. Food items that became cheaper last month included garlic, chili, and chicken meat. Particularly rice contributed to the country's deflation as the harvesting season in Indonesia has set in. Core inflation is 4.12 percent (YoY).

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Indonesia's poverty rate is expected to jump to between 11.13 and 11.37 percent of the total Indonesian population in 2013 due to inflationary pressures. Inflation may reach 9.2 percent at the year end. The new poverty forecast is significantly higher than the government's original target of 9.5 to 10.5 percent as set in the country's State Budget. The revised forecast was presented by Indonesia's Ministry of National Development Planning (Bappenas). Poverty basket inflation is expected to rise accordingly.

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It was decided at the Board of Governors’ meeting (RDG) of Bank Indonesia on 12 September 2013 to raise the BI Rate by 25 bps to 7.25%, the rate on the Lending Facility by 25 bps to 7.25% and the rate on the Deposit Facility by 25 bps to 5.50%. This action forms part of the follow-up measures taken to reinforce the policy mix instituted by Bank Indonesia, which focuses on controlling inflation, stabilizing the rupiah exchange rate and ensuring the current account deficit is managed to a sustainable level.

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In recent years, Indonesia's car sales have shown robust growth, culminating in a record high number of 1.12 million sold car units in 2012. This is an important statistic because car sales inform us about the state of the economy. Generally, rising car sales indicate an expanding economy while declining car sales indicate that the economy is slowing down. When we take a look at the table below, there is a link visible between Indonesia's GDP growth and rising car sales, except for 2011 to 2012 when GDP growth declined while car sales rose.

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The government of Indonesia has revised the macroeconomic assumptions that are stated in the State Budgets (APBN) of 2013 and 2014 after a meeting with the budgetary body of the House of Representatives (Badan Anggaran DPR) on Wednesday (28/08). It is the third time that the 2013 State Budget has been revised in order to put it more in line with recent global developments. As the government was also too optimistic when drafting the 2014 Budget, it felt the need for a revision (only 12 days after the announcement of the Budget).

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Indonesia's current account deficit, which caused much alarm among the investor community, is expected to ease to about 2.5 percent of gross domestic product (GDP) in the second half of 2013. This assumption is supported by Indonesia's central bank and various analysts. The country's current account deficit reached USD $9.8 billion or 4.4 percent of GDP in Q2-2013. In combination with the weakening rupiah, higher inflation and the possible end to the Federal Reserve's quantitative easing program, investors have been pulling money out of Indonesia.

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The government of Indonesia proposes to allocate IDR 336.24 trillion (USD $32.6 billion) for subsidy spending in the 2014 state budget draft: IDR 284.7 trillion (USD $27.6 billion) for energy subsidies and IDR 51.6 trillion (USD $5.0 billion) for non-energy subsidies. The proposed amount implies a 3.41 percent fall in total subsidy allocation compared to Indonesia's state budget in 2013. However, despite a reduction, subsidy expenditure is still large at 18.5 percent of total government spending (IDR 1,816.7 trillion).

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Although the holy fasting month of Ramadan and subsequent Idul Fitri celebrations always provide a boost for national economic growth in Indonesia as domestic consumption tends to peak, analysts believe that it will not contribute significantly to the government's 6.3 percent GDP growth target this year. During Ramadan and Idul Fitri (known as Lebaran), Indonesian consumers generally spend more on food products, clothes, shoes, tickets for transport and hotels than in other months, and thus lead to increased economic activity.

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Worldwide, most stock indices fell on Wednesday (07/08), particularly Japan's Nikkei index, after it has been speculated that the Federal Reserve may phase out the third round of its quantitative easing program in September 2013. This program, involving a monthly USD $85 billion bond-buying package, aims to spur US economic growth while keeping interest rates low. However, one important side effect has been rising stock markets around the globe. Now the end of QE3 is in sight, investors shy away from riskier assets.

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Indonesia’s inflation rate in July 2013 was significantly higher than analysts had previously estimated. The country’s July inflation figure accelerated to 3.29 percent. On year-on-year basis, it now stands at 8.61 percent, the highest inflation rate since many years. Particularly food commodity and transportation prices rose steeply. The main reason for Indonesia's high inflation is the reduction in fuel subsidies. In late June, the government increased the prices of subsidized fuels in order to relieve the ballooning budget deficit.

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The Indonesian rupiah (IDR) is experiencing one of its worst losing streaks in a decade. On Friday (19/07), the currency weakened to IDR 10,070 against the US dollar, which implies a devaluation of 4.14% in 2013 so far. The central bank of Indonesia, Bank Indonesia, does all it can to support the currency: the country's lender of last resort supplies dollars to the market triggering the reduction of foreign reserves from USD $105 million at end-May to $98 million at end-June, and raised its benchmark interest rate (BI Rate) by 50 bps to 6.50%.

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