Several analysts expect that the central bank of Indonesia (Bank Indonesia) will raise its key interest rate (BI rate) again in the first Semester of 2014 in order to anticipate the winding down of the Federal Reserve's monthly USD $85 billion stimulus program (quantitative easing). Currently, the BI rate is set at 7.50 percent but analysts say that the market should be prepared for a hike to 8.0 percent in the first half of 2014. Between June and November 2013, Bank Indonesia has already raised its benchmark interest rate from 5.75 to 7.50 percent.

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In anticipation of tighter US dollar supplies, the government of Indonesia is considering the issuance of euro-denominated bonds in 2014. This would be the first time for the government to issue bonds in the currency. Robert Pakpahan, head of the debt office within Indonesia's Finance Ministry, said that they are discussing both euro- and yen-denominated sovereign bonds, equivalent to USD $6 billion. The bonds will be used to cover the country's budget deficit, which is set at 1.69 percent of GDP or IDR 175.4 trillion (USD $15.5 billion) in 2014.

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Indonesia’s foreign debt was recorded at USD $257.30 billion in August 2013, a 0.9 decrease compared to foreign debt in July 2013 (USD $259.61 billion). On an annual basis (yoy), foreign debt growth in August was 6.6 percent, thus slowing compared to July’s growth of 7.4 percent (yoy). The central bank of Indonesia (Bank Indonesia) considers that the slowing growth in the country's foreign debt is in line with the slowing growth of the domestic economy. Indonesia's GDP growth forecast has been revised down to below the six percent mark.

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The central bank of Indonesia (Bank Indonesia) announced that Indonesia's foreign exchange reserves have increased slightly in September 2013. On 30 September, the reserves stood at USD $95.67 billion, a 2.88 percent increase from USD $92.99 billion one month earlier. The reserves in September are equivalent to 5.4 months of imports, or 5.2 months when servicing of government external debt is included. Recent US dollar demand for the import of oil is what put pressure on the reserves.

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Indonesia's construction industry, which accounts for about ten percent of the country's gross domestic product (GDP), is experiencing turbulent times as the sector is impacted upon by three issues, namely higher minimum wages, higher subsidized fuel prices as well as the depreciating rupiah (against the US dollar). Concerns have arisen that a number of projects cannot be finished due to these issues. Moreover, companies may feel forced to dimiss workers in order to keep a healthy financial balance sheet.

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Growth of Indonesia's foreign debt has slowed down in July 2013 according to data from Indonesia's central bank (Bank Indonesia). Total foreign debt in July 2013 stood at USD $259.54 billion, a 7.3 percent increase compared to the same month in 2012. In June 2013, the year on year growth had been 8 percent. Bank Indonesia stated that it considers Indonesia's current foreign debt situation - both in the private and public sector - as healthy. Growth has slowed down as a consequence of the slowing national economy.

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Despite widespread speculation that the Federal Reserve would tone down its quantitative easing program (QE3) by approximately USD $10 to $20 billion after the FOMC meeting on Wednesday (18/09), the central bank of the USA decided to continue its monthly USD $85 billion bond-buying program as it downgraded its outlook for US economic growth to between 2.0 and 2.3 percent. Chairman Bernanke said that the economic context of the USA is still far from conducive to alter its strategy.

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Although Indonesia's currency, the IDR rupiah, has continued its weakening trend, Indonesian authorities are reassuring the people that this development is not as much caused by domestic factors but rather due to the rising US dollar against other currencies. According to data from Bank Indonesia, the Indonesian rupiah has weakened 5.99 percent to the US dollar in 2013. It is also clear that the central bank of Indonesia has decided to let the rupiah depreciate gradually instead of using its foreign exchange reserves to support the currency.

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According to various analysts and the central bank of Indonesia, the weakening of the IDR rupiah should not be too alarming as there currently is a global trend in which currencies, worldwide, weaken against the US Dollar. This situation is triggered by the economic recovery that has been experienced by the world's largest economy recently. Compared to other ASEAN members, the rupiah's decline is normal. The central bank adds that foreign capital inflows will return and will strengthen the country's currency.

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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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In recent years, the Japanese economy has experienced significant hardships, generated largely by the aftermath of the hurricane and tsunami that hit the country in 2011. But newly adapted stimulus programs (the much-discussed programs of Abenomics) have boosted economic growth rates since that period. As a result, annual GDP is expected to rise to 1.8% for 2014, and these improvements are expected to have a supportive on the performances seen in surrounding economies in the Asia-Pacific region.

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From the start of today's trading day (06/01), the Indonesian rupiah exchange rate depreciated against the US dollar. Based on the Bloomberg Dollar Index, Indonesia's currency fell 0.48 percent to IDR 12,238 per US dollar at 13:00 local Jakarta time. This declining trend is in line with the majority of other Asian Pacific currencies. With the exception of the Australian dollar and the Japanese yen, the US dollar appreciated against all Asia Pacific currencies in the morning of Monday (06/01).

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On Friday (03/01), the benchmark stock index of Indonesia (known as the Jakarta Composite Index or IHSG) ended 1.61 percent down to 4,257.66 points amid a majority of global indices declining after having experienced a short (window dressing-inspired) rally at the end of the year. The IHSG, which was not affected by the window dressing phenomenon, was dragged down after experiencing a four-day rally in the last week of 2013. Positive US employment data were unable to support global indices.

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Garuda Indonesia, the country's top-class airline, is planning to conduct a rights issue in the first quarter of 2014. Through this corporate action, which has already been approved by the shareholders, the state-controlled company aims to raise IDR 2 trillion (USD $162.6 million). For 2014, the airline plans to allocate IDR 4 trillion in capital expenditure (capex) for business expansion. About half of this amount should originate from funds generated through the rights issue.

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On Wednesday (18/12), the Federal Reserve announced to slightly scale back its quantitative easing program starting from January 2014. The reduction of the bond-buying program involves USD $5 billion of mortgage-backed securities and USD $5 billion of US treasury securities. Thus, the Federal Reserve will purchase a total of USD $75 billion worth of bonds per month instead of the current pace of USD $85 billion. For the moment, this policy change has an euphoric effect on global stock markets.

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The announcement that the Federal Reserve (FED) will start its quantitative easing tapering in January 2014, while keeping interest rates low, made stock indices in Asia rise, including Indonesia's benchmark stock index (IHSG), although mining and property stocks were able to limit today's gain. The IHSG rose 0.85 percent to 4,231.98 points on Thursday (19/12). The Indonesia rupiah exchange rate (IDR), however, was down as future tighter US dollar supplies causes market participants to buy US dollar now.

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Ahead of the Federal Open Market Committee (FOMC) meeting on 17-18 December 2013, the Indonesia rupiah exchange rate is continuing its depreciating trend as the economies of the USA and Japan, particularly the capital markets, are improving and causes the US dollar and Yen to appreciate against other currencies. Both currencies are considered safe havens amid the current volatile world economy. One of the victims is the rupiah, which fell to IDR 12,126 per US dollar at 12.30 local Jakarta time (Bloomberg Dollar Index).

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Both the Jakarta Composite Index (Indonesia's benchmark stock index) and the Indonesia rupiah exchange rate are under pressure this morning as market participants are waiting for results of the central bank's Board of Governor's meeting that is held today (12/12) in Jakarta. Speculation has emerged that Indonesia's central bank (Bank Indonesia) will raise its benchmark interest rate (BI rate) one more time in 2013 in order to combat the country's current account deficit as well as mitigate the impact of a possible winding down of QE3.

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Although Indonesia's benchmark interest rate (BI rate) was kept at the level of 7.5 percent (in line with market expectation) today (12/12), it was not able to support the country's stock index. Indonesia's IHSG index fell 1.39 percent to 4,212.22 points. The index was negatively impacted by Asian stock indices that were down due to concerns about the looming end of the Federal Reserve's quantitative easing program. This made investors' positive reaction to the BI rate of temporary nature. Weak openings in Europe increased downward pressure.

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One of the main problems of Indonesia's benchmark stock index (IHSG) is the profit taking that immediately happens after a day of strong growth. On Wednesday (11/12), the IHSG index was plagued by profit taking since the start of the first trading session. Moreover, the index was impacted by mostly falling Asian stock indices as well as the Indonesia rupiah exchange rate which went above the IDR 12,000 per US dollar level again. The only support the IHSG received was just before its closing when European indices opened up.

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