The US dollar continues to depreciate against emerging currencies after the minutes of the Federal Reserve’s latest FOMC meeting, released Wednesday (09/07), suggest that the US central bank will maintain historic low interest rates (0.0 - 0.25 percent) into 2015. The Fed informed that US interest rates hikes will only occur ”a considerable time” after the US asset-buying program (quantitative easing) has ended. Based on the latest minutes, this program is expected to end in October 2014.

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Head of the International Monetary Fund (IMF) Christine Lagarde stated on Sunday (06/07) that the institution expects improved global economic growth in the second half of 2014 as well as in 2015 supported by the assumption that China, the world’s second-largest economy, will expand between 7.0 and 7.5 percent in 2014, thus not showing a sharp slowdown. Later this month, the IMF will release its new global economic outlook. Lagarde said that forecasts will be slightly different from forecasts made in the April edition.

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The Indonesian rupiah exchange rate came close to the IDR 12,000 per US dollar mark on Wednesday (18/06). Based on the Bloomberg Dollar Index, Indonesia’s currency depreciated 0.87 percent to IDR 11,997 per US dollar. Bank Indonesia stated that the weakening is due to violence in northern Iraq (giving rise to a higher oil price which subsequently pressures the financial balance sheets of countries that import oil, such as Indonesia), and concern about results of the Federal Reserve meeting (17-18 June 2014).

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The World Bank cut its global economic growth forecast because of the weaker outlooks for the economies of the USA, Russia and China, as well as the geopolitical tensions between Russia and Ukraine which triggered worldwide concerns. The Washington-based institution expects to see 2.8 percent of global economic growth in 2014, far below its January 2014 estimate of 3.2 percent. However, it kept its global growth forecasts for the next two years at 3.4 percent and 3.5 percent, respectively.

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An improving US economy can lead to capital outflows worth IDR 130 trillion (US $11.2 billion) from Indonesia as funds are expected to flow back to the USA when interest rates are raised. Since 2009, emerging markets, including Indonesia, benefited from capital inflows amid large monetary stimulus provided by the Federal Reserve (quantitative easing as well as low interest rates). Although the stimulus was aimed at boosting the US economy, emerging markets felt the side effects (such as capital inflows and appreciating emerging market currencies).

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Indonesia's central bank (Bank Indonesia) said that the country's private debt has increased steadily in recent years. On the one hand this is a good sign as it indicates that the private sector is growing, but on the other hand the lender of last resort warned Indonesian companies to watch over their foreign loans as it can jeopardize the country’s financial stability. Private sector foreign debt doubled between 2009 and 2013, reaching USD $141.4 billion in January 2014. Meanwhile, public debt stood at the level of USD $127.9 billion in the same month.

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Indonesia's Finance Minister Chatib Basri is optimistic that Indonesia's economic growth can reach 5.8 to 6.0 percent in 2014. According to Basri, three factors support this expectation: strong household consumption, an improving global economy, and the impact of Indonesia's legislative and presidential elections (scheduled for April and July 2014). However, one of the biggest challenges for the Indonesian government will be to offset the impact of further US Federal Reserve tapering and US interest rate hikes in 2015 and 2016.

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The Indonesian rupiah exchange rate and benchmark stock index (IHSG or Jakarta Composite Index) both plunged severely after the US Federal Reserve announced on Wednesday (19/03) to cut another USD $10 billion from its bond-buying program (quantitative easing). Moreover, speculation arose that US interest rates may increase in 2015 (the US central bank had kept interest rates close to zero for over five years to stimulate economic growth). It led to tumbling stocks, bonds and currencies across Asia on Thursday (20/03).

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Global credit rating agency Fitch Ratings reminded the investor community about the ongoing risk of a sudden reversal of capital inflows in Indonesia. In the first two months of 2014, capital inflows have been strong, reaching a total of USD $2.3 billion, a 16 percent increase from the same period last year, backed by renewed confidence in Indonesia's economic fundamentals as the current account deficit and inflation have moderated since the end of last year. However, several risks are looming causing potential volatility of capital flows.

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Credit growth in Indonesia's banking sector slowed in January 2014 to a growth pace of 20.9 percent (year-on-year), down from 21.4 percent (yoy) in the previous month. Total disbursed credit in January 2014 stood at IDR 3,287 trillion (USD 285 billion). The slowing pace of credit disbursement in Southeast Asia's largest economy is in accordance with the central bank's target to reduce credit growth in the banking sector to between 15 and 17 percent (yoy), said Agus Martowardojo, Governor of Bank Indonesia.

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The Indonesian rupiah exchange rate depreciated 0.31 percent to IDR 11,447 per US dollar on Thursday (27/03) based on the Bloomberg Dollar Index. The currency's strong performance in February and the first half of March, supported by Indonesia's easing current account deficit and inflation, has met resistance due to global concern about the aggressive US Federal Reserve monetary tightening (winding down its quantitative easing program by another chunk of USD $10 billion as well as possible US interest rate hikes in 2015 and 2016).

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Fitch Ratings, one of the three major global credit rating agencies, said that its latest annual survey on economic prospects and the business climate in Indonesia indicates an optimistic view. Respondents in the survey, mostly CEOs and Division Heads at financial institutions, companies, government and media, were asked 11 questions about the Indonesian economy, reformation and prospects for the next five years. Andrew Steel, Managing Director Head of Asia Pacific Corporate Ratings Group, presented results of the survey.

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At the start of the new week, Indonesia's benchmark stock index (Jakarta Composite Index or IHSG) was able to continue to climb, supported by positive Asian indices. Today, investors took advantage of discounted stocks in Asia as markets had fallen after the Federal Reserve's announcement last week that the quantitative easing program would be wound down further as well as a possible US interest rate hike in 2015 and 2016. However, the IHSG was also vulnerable to profit taking. Therefore, today's gain was limited.

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The US Federal Reserve's plan to increase interest rates is a serious threat to the stock and bonds markets of emerging markets, including Indonesia, in 2014. The higher Fed Fund rate will result in a high cost bonds-climate in Indonesia. The Federal Reserve announced on Wednesday (19/03) that it continues to cut its quantitative easing program (QE3) by USD $10 billion in March 2014 as well as aims for an interest rate hike six months after the 'tapering' has ended. With the current pace, QE3 is expected to end in December 2014.

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Fitch Ratings, one of the three major global credit rating agencies, estimates that Indonesia's current account deficit will reach USD $27.4 billion, equivalent to 3.1 percent of the country's gross domestic product (GDP) in 2014. As such, Fitch Ratings' forecast is more pessimistic than forecasts presented by both Indonesia's central bank (Bank Indonesia) and government. Both these institutions expect to curb the current account deficit below the three percent of GDP mark (a sustainable level). Global investors continue to carefully monitor the deficit.

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The Indonesian rupiah exchange rate had depreciated (0.15 percent) to IDR 11,665 per US dollar on Thursday (27/02), 15:00 local Jakarta time, based on the Bloomberg Dollar Index. Governor of Bank Indonesia Agus Martowardojo stated yesterday to expect the currency to stabilize near current levels in line with its economic fundamentals ahead of looming further Federal Reserve tapering. Analysts estimate that Indonesia's trade balance might deteriorate in January 2014 as the impact of the mineral-ore export ban kicks in.

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Foreign confidence in Indonesia's capital markets seems to be growing further after foreign investors continued to expand their stock portfolios last week. In February 2014 (up to Friday 21/02), foreigners purchased IDR 36.0 trillion (USD $3.1 billion) worth of stocks and sold IDR 29.3 trillion (USD $2.5 billion), resulting in net foreign buying of 6.7 trillion (USD $570.2 million) in the first three weeks of February 2014. When foreign net buying of January 2014 is added, total net foreign buying reached IDR 9.0 trillion (USD $766.0 million).

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At Bank Indonesia's Board of Governors’ Meeting today (13/02), it was decided to maintain the country's benchmark interest rate (BI rate) at 7.50 percent as well as the interest rates on the Lending Facility and Deposit Facility at 7.50 percent and 5.75 percent respectively. The policy is consistent with the tight monetary policy stance currently adopted in order to steer inflation back towards its target corridor of 4.5±1 percent in 2014 and 4±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level.

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As companies' financial results of 2013 slowly start to be released, two reports - so far - have raised eyebrows due to significant declines in net profit. These are publicly listed, but majority state-owned, airline Garuda Indonesia and fully state-owned electricity firm Perusahaan Listrik Negara (PLN). Both companies felt the impact of the sharply depreciating Indonesia rupiah exchange rate. The currency fell over 21 percent against the US dollar in 2013 due to capital outflows amid looming US tapering and current account deficit concerns.

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In 2013, Indonesia experienced a rough year in terms of stock trading. The world was shocked by Ben Bernanke’s speech in late May 2013 in which he hinted at an end to the Federal Reserve’s large monthly USD $85 billion bond-buying program known as quantitative easing. Through this program, cheap US dollars found their way to lucrative yet riskier assets in emerging economies, including Indonesia. But when the end of the program was in sight, the market reacted by pulling billions of US dollars from emerging market bonds and equities.

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