Indonesia's October inflation rate was well-received by investors. On Friday (01/11), Statistics Indonesia (BPS) announced that the country's inflation in October 2013 grew 0.09 percent. Easing inflation was mainly due to falling prices of raw foods and clothes. Year-on-year (yoy), however, Indonesia's inflation is still high at 8.32 percent, although showing a moderating trend from 8.40 percent (yoy) in September 2013 and 8.79 percent (yoy) in August 2013. Inflation had skyrocketed after subsidized fuel prices were raised by an average 33 percent in June.
Indonesia's Finance minister, Chatib Basri, stated that the government aims to keep inflation below the nine percent mark by the end of 2013. Year to date, inflation has now reached 7.66 percent after the first ten months of 2013. With only November and December ahead, Basri thinks there is a good chance to keep it below 9 percent. In November, Indonesia traditionally records low inflation. However, December is usually plagued by inflationary pressures brought on by the Christmas and New Year celebrations.
(annual percent change)
¹ Year to date (January-October 2013)
Source: Statistics Indonesia
The central bank of Indonesia (Bank Indonesia) maintains its revised inflation target range of between 9.0 and 9.8 percent. Initially, Bank Indonesia expected inflation to reach between 3.5 and 5.5 percent in 2013, but as prices of subsidized fuels were increased in late-June, it quickly revised its forecast by a couple of percentage points. Now inflation is easing from its peak of 8.79 percent (yoy) in August 2013 to 8.32 percent (yoy) in October 2013, the central bank has room to maintain its benchmark interest rate (BI rate) at 7.25 percent for the remainder of the year. In recent months, Bank Indonesia gradually raised its BI rate from 5.75 percent to 7.25 percent in order to curb high inflation as well as to support the depreciating rupiah exchange rate. The rupiah has fallen 17.4 percent against the US dollar in 2013.| Source: Bank Indonesia
With inflation slowly recovering from its shock after the subsidized fuel issue, concerns about Indonesia's trade deficit remain. Although the trade deficit narrowed in the third quarter of 2013 to USD $2.9 billion from USD $3.1 billion in the second quarter, the country recorded another trade deficit of 657.2 million in September 2013, brought on by a deficit in Indonesia's oil and gas sector of USD $1.15 billion.
In order to foster financial and macroeconomic stability, the current account deficit should be kept at a sustainable level. When the Federal Reserve started speculating about an end to its quantitative easing program in May 2013, investors quickly pulled money out from Indonesia as the country shows a number of financial weaknesses. Most importantly, a current account deficit that was at a record high of USD $9.8 billion in the second quarter of 2013 (equivalent to 4.4 percent of the country's gross domestic product), exacerbating the depreciating trend of the rupiah. The current account deficit is expected to decline in the third quarter but will remain high at around USD 8 billion.
The trade deficit emerged as commodity prices plunged in recent years, while domestic demand for imports - supported by the country's robust economic growth - rose. But with a depreciating rupiah exchange rate, imports have become more expensive and thus caused the slowing growth of imports. The value of imports rose one percent to USD $46 billion in the third quarter of 2013 (yoy) but was down 5.9 percent from the second quarter. Exports fell 6.7 percent to USD $43 billion in the third quarter of 2013 (yoy), and were down 5.8 percent from the second quarter.