Bank Indonesia considers the ongoing economic re-balancing process to be progressing as expected, despite several risks that require vigilance, and will continue to institute anticipatory measures to ensure the inflation target can be achieved and current account performance can be improved. To that end, Bank Indonesia continuously strives to strengthen its monetary and macro-prudential policy mix as well as implement policy that underpins the structure of the domestic economy and manages external debt, particularly corporate external debt.

The global economy continues to recover but at a moderate pace. Advanced economies are providing global economic momentum as monetary stimuli persist. Sales figures and manufacturing sector performance data from Europe and the United States tend to reflect global economic gains. Robust economies in the United States and Europe will spur additional world trade volume and, consequently, international commodity prices should start to rise. Moving forward, there are a number of risks in the global economy that require continued vigilance, including the economic downswing in China and the normalization policy of the Federal Reserve.

Moderating domestic economic growth persisted. Household consumption slowed during the reporting period despite remaining resilient, supported by increases in income as well as the upcoming presidential election. Meanwhile, non-construction investment turned a corner, as reflected by solid import growth for capital goods as well as strong sales figures for heavy equipment. External sector performance was languid during the reporting period due to the suspension of unrefined coal and mineral exports as a temporary effect of the Mineral and Coal Mining (Minerba Act), implemented in January 2014. Nevertheless, exports from the manufacturing sector should continue to improve as the global economy recovers.

In harmony with external sector performance, the balance of trade continued to run a deficit in line with seasonal trends, while the position of the financial account improved. The Indonesia balance of trade in April 2014 registered a deficit totaling USD $1.96 billion. The deficit is congruent with seasonal trends, including a surge in demand in the run up to the holy fasting month of Ramadan and Idul Fitri. Non-oil & gas imports expanded on the back of imports of machinery and mechanical equipment as well as electrical equipment. On the other hand, non-oil & gas exports of natural resources, like coal and vegetable oil, recorded negative growth as demand from China and India dropped off. Looking ahead, Bank Indonesia expects the trade balance to rebound thanks to manufactured export activity as the global economy recovers and imports subside in line with moderating domestic demand. In terms of the financial account, an influx of foreign capital inflows is predicted as the domestic economic outlook improves. Up to May 2014, foreign portfolio inflows to financial markets in Indonesia reached USD $11.04 billion. Consequently, at the end of May 2014, the position of foreign exchange reserves in Indonesia swelled to USD $107.0 billion, equivalent to 6.2 months of imports or 6.0 months of imports and servicing external debt, which is well above minimum international adequacy standards of around 3 months of imports.

The rupiah depreciated against other currencies during the month of May 2014. On average, the rupiah depreciated 0.81 percent (mtm) on the preceding month to a value of IDR 11,532 per US dollar. Point to point (ptpt), the rupiah depreciated 0.97 percent and closed at a level of IDR 11,675 per US dollar. Pressures on the exchange rate emanated from stronger corporate demand in line with seasonal trends of servicing external debt as well as dividend/coupon repatriation. Moreover, investor behaviour also influenced shifts in the exchange rate, with investors currently adopting a wait-and-see attitude until after the presidential election planned for July 2014. Nonetheless, further pressures on the rupiah were alleviated by capital inflows to rupiah financial assets.

The rate of inflation in May 2014 was controlled due to another round of food price corrections, coupled with a stable rate of core inflation. The Consumer Price Index (CPI) evidenced inflation in May 2014 amounting to 0.16 percent (mtm) or 7.32 percent (yoy), up slightly on that posted in the previous month at -0.02 percent (mtm) or 7.25 percent (yoy). The rate of core inflation was 0.23 percent (mtm) in the reporting month, which is relatively stable compared to the preceding month and credited to tumbling global prices amidst rupiah depreciation. Volatile foods continued to experience an episode of deflation but at a lower intensity than in the previous month as the main harvesting season for a number of key staples got underway, including red chilli peppers and bird’s eye chilli, along with the ongoing rice harvest at a number of production centres. Meanwhile, inflation of administered prices increased moderately in May 2014 as public transport fares were hiked, specifically airfares and railway fares, in line with the abundance of public holidays. Bank Indonesia considers the rate of inflation up to May 2014 as congruous with the achievement of the inflation target in 2014 at 4.5±1 percent and in 2015 at 4.0±1 percent. Looking forward, Bank Indonesia will continue to monitor inflation risks stemming from seasonal trends in the run up to the holy fasting month as well as other risks like potential pressures on administered prices and rising prices due to the forecasted El Nino event. In anticipation of the aforementioned risks, Bank Indonesia will bolster measures to strengthen coordination in order to control inflation, primarily through regional inflation control teams.

Financial system stability was maintained during the reporting period, buttressed by banking system resilience and financial market performance. Tenacious banking industry resilience was achieved, with credit risk, market risk and liquidity risk well mitigated as well as sound capital. Credit growth to the private sector in April 2014 slowed to 18.5 percent (yoy) from 19.1 percent (yoy) in the previous month in line with the domestic economic rebalancing process. Bank Indonesia will continue to coordinate with the Financial Services Authority (OJK) in order to steer future credit growth towards supporting a more balanced and sounder direction of domestic economic growth. On the other hand, stock exchange performance in May 2014 improved, with the IDX Composite Index gaining 1.1 percent on the preceding month to a level of 4,893.91. Conversely, the market performance of tradable government securities deteriorated as investors are showing a propensity to postpone investment activity until after the results of the presidential election are announced in July 2014.

​Communication Department
Bank Indonesia

Tirta Segara
Executive Director