The macroeconomic assumptions that have been formulated in the 2014 State Budget Draft by the government of Indonesia are not considered too realistic by several analysts. Although it is understood that one should set a high standard in order to maximize efforts, analysts feel that - given the current problematic economic context in Asian emerging economies as well as global economic turmoil - the government is far too optimistic, particularly because the government will have to devote part of its attention to the elections in mid-2014.

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According to a Bank Indonesia report that was released on Monday (19/08), consumer confidence in Indonesia has weakened after the government decided to raise prices of subsidized fuels in June 2013. The country's consumer confidence index fell 8.7 points to 108¹ in July from 117 points in June. Higher fuel prices led to higher transportation costs that subsequently made many retailers increase prices of products, thus impacting on Indonesian households' purchasing power. In July, the annual inflation rate accelerated to 8.61 percent.

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Indonesian stocks took a large dive on today's trading day (19/08) at the Indonesia Stock Exchange. The IHSG (the index of all listed stocks) fell 5.58 percent to 4,313.52 points as negative market sentiments caused foreign investors to pull money out of the Indonesian market. Investors are highly concerned about a number of macroeconomic data that have been released recently. These data indicated the slowest economic growth since Q3-2010, inflation at a four-year high and a widening trade deficit.

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President of Indonesia, Susilo Bambang Yudhoyono, mentioned in his speech ahead of the Independence Day that Indonesia's per capita GDP is expected to rise to USD $5,000 by 2014. An increasing per capita GDP triggers domestic consumption among Indonesia's rapidly expanding middle class segment and thus forms a catalyst for economic activity in the country. As can be seen in the table below, Indonesia's per capita GDP grew steadily between 2006 and 2012. In 2010, it hit the important level of USD $3,000.

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Indonesia's central bank, Bank Indonesia, decided today (15/08) to keep its benchmark interest rate (BI rate) at 6.50 percent. In recent days, heavy speculation emerged about whether Bank Indonesia would raise the BI rate for the third consecutive time in three months as the country is plagued by higher inflation (8.61 percent year-on-year in July 2013) and a weakening rupiah. Reluctance to raise the interest rate again seems to indicate that the Bank gives priority to economic growth, which has slid to a three-year low at 5.81 percent in Q2-2013.

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The economy of Indonesia continues to be dominated by the island of Java, Indonesia's most populous island with around 130 million people or 60 percent of Indonesia's total population. In the second quarter of 2013, Java contributed 58.15 percent to the nation's total economic growth. Far behind Java are Sumatra (23.90 percent) and Kalimantan (8.73 percent). Within Java, the Greater Jakarta area accounts for 16.50 percent of the country's total economic growth, followed by East Java (15.21 percent) and West Java (14.05 percent).

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Although it was clear that Indonesia would see a high inflation rate in July 2013 as the impact of higher fuel prices would kick in, Indonesia's central bank (Bank Indonesia) was surprised to see the figure go up to 3.29 percent. Currently, Indonesia's annual inflation rate stands at 8.61 percent. Bank Indonesia's governor Agus Martowardojo said that this rate is far outside the central bank's target range and announced that the institution expects annual inflation to stay above 8%  throughout 2013, higher than its previous assumption of 7.8% at end-2013.

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Today (02/08), Indonesia's bureau for statistics announced that economic growth of Indonesia in the second quarter of 2013 reached 5.81 percent (YoY), which is the lowest growth rate since Q3-2010 and also lower than most analysts as well as the Indonesian government expected. The GDP figure reflects Indonesia's cooling economy. For the fourth consecutive quarter, the rate has weakened as the country has been under pressure: high inflation, a widening trade deficit and a weakening rupiah.

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According to Finance minister Chatib Basri, the Indonesian government expects the country's gross domestic product (GDP) to have grown by 6.1 percent in the first six months of 2013. This forecast falls short of the government's 6.3 percent GDP growth assumption in the state budget (APBN). Basri stated that the lower outcome is due to global factors, such as slowing economic growth in China and India. But the government's assumption is more optimistic than the forecast of the central bank, which expects growth between 5.1 and 5.9 percent.

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The Indonesia Investment Coordinating Board (BKPM) expects that investments in the second quarter of 2013 will grow by 25 percent to IDR 96.13 trillion (USD $9.6 billion) compared to Q2-2012. Although Indonesia's economic growth is under threat of slowing down to below an annual growth rate of six percent, the government agency still believes that total investments in 2013 can meet the target of IDR 390 trillion (USD $39 billion). Investments in Q1-2013 were recorded at IDR 93 trillion.

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Although the Indonesian rupiah exchange rate appreciated 0.86 percent to IDR 11,995 per US dollar on Friday (27/06) as economic data from China, South Korea and Taiwan sparked optimism that regional growth has picked up, the recent depreciating trend of Indonesia’s currency burdens the country’s manufacturing industry. This industry is still dependent on imports of raw materials, capital goods and auxiliary materials, which are paid using US dollars causing the domestic industry to feel the financial impact of a weaker rupiah.

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Senior economist at the Institute for Development of Economics and Finance (INDEF), Didier Damanhuri, believes that Indonesia’s two presidential candidates - Joko Widodo (popularly known as Jokowi) and Prabowo Subianto - are both similar in economic approach as both men are primarily focused on high gross domestic product (GDP) growth as the measurement for economic development, while, in fact, many countries that only focus on GDP growth show a high degree of economic inequality.

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On Monday (23/06), the World Bank released its latest analysis regarding the Indonesian economy. In its report, titled ‘Indonesia: Avoiding the Trap’, the World Bank states that Indonesia needs to implement a six reforms in priority areas in order to avoid the so-called middle income trap (referring to the situation where a country gets stuck at a certain income level). Without these critical reforms, the country’s economic growth will slow and may not be able to escape the middle income trap.

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ICRA Indonesia, an independent credit rating agency and subsidiary of ICRA Ltd. (associate of Moody's Investors Service), publishes a monthly newsletter which provides an update on the financial and economic developments in Indonesia of the last month. In the May 2014 edition, a number of important topics that are monitored include Indonesia's inflation rate, the trade balance, the BI rate, the IDR rupiah exchange rate, and gross domestic product (GDP) growth. Below is an excerpt of the newsletter:

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Although the business community in Indonesia requests that the country’s benchmark interest rate (BI rate) is lowered at Bank Indonesia’s next Board of Governor’s Meeting (scheduled for Thursday 12 June 2014), it is highly unlikely that the central bank will alter its BI rate which currently stands at 7.50 percent. The relatively high BI rate curbs business expansion and therefore limits higher economic expansion in Indonesia. However, several factors justify the continuation of the BI rate at 7.50 percent.

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Car sales in Indonesia declined 8 percent to 98,198 units in May 2014 from 106,811 units in the previous month. The Indonesian Automotive Industry Association (Gaikindo) said that the decline was the direct consequence of several public holidays (International Labour Day and the commemorations of Buddha’s birthday as well as ascensions of Prophet Muhammad and Jesus Christ). These holidays caused a lower car production rate and a reduced number of car deliveries to wholesale dealers.

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The central bank of Indonesia (Bank Indonesia) expects Indonesia’s economy to grow by 5.3 percent in the second quarter of 2014. If realized, it means that gross domestic product (GDP) of Southeast Asia’s largest economy will accelerate from the disappointing GDP growth result recorded in the first quarter of 2014 (5.21 percent). Perry Warjiyo, Deputy Governor at Bank Indonesia, said that growth in Q2-2014 will be primarily supported by household consumption and investments which traditionally peak in the second quarter.

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ICRA Indonesia, an independent credit rating agency and subsidiary of ICRA Ltd. (associate of Moody's Investors Service), publishes a monthly newsletter which provides an update on the financial and economic developments in Indonesia of the last month. In the April 2014 edition, a number of important topics that are monitored include Indonesia's inflation rate, the trade balance, the BI rate, the IDR rupiah exchange rate, and gross domestic product (GDP) growth. Below is an excerpt of the newsletter:

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The central bank of Indonesia (Bank Indonesia) decided at today’s Bank Indonesia Board of Governors’ Meeting, convened on 8 May 2014, to maintain the country's benchmark interest rate (BI rate) at 7.50 percent, with the Lending Facility rate and Deposit Facility rate held at 7.50 percent and 5.75 percent respectively. This policy is consistent with efforts to steer the rate of inflation towards its target corridor of 4.5±1 percent in 2014 and 4.0±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level.

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After Statistics Indonesia (BPS) had announced on Monday (05/05) that Indonesia's gross domestic product (GDP) grew by 5.21 percent year-on-year (yoy) in the first quarter of 2014 (considerably below analysts' projections of around 5.6 percent), concerns have risen about the country's economic expansion for the remainder of the year. The government of Indonesia targets a GDP growth rate of between 5.8 and 6.0 percent (yoy). However, several international institutions do not agree with this optimistic target.

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