Despite solid economic growth of 6.2 percent last year (supported by domestic consumption and foreign investment), Indonesia has not been completely safeguarded from international turmoil. Global demand for Indonesia's commodities (such as coal, tin, palm oil, and rubber) weakened significantly and so did the prices. As commodities account for about 60 percent of total Indonesian exports, it has seriously hurt the country's export sector. Most 2012-annual company reports of Indonesian companies engaged in agriculture or mining showed dramatic declines in net profit.

It is difficult to predict in what direction commodity prices will go this year. PricewaterhouseCoopers (PwC) stated earlier this year that 'unstable and erratic commodity prices are set to continue for 2013 and beyond', implying there is no light at the end of the tunnel yet, despite a recent rise in global commodity prices.

Declining commodity exports is one side of the trade balance coin. The other side is Indonesia's imports, particularly its subsidized fuel policy. This subsidy aims to support the basic needs of the poor. However, by keeping the fuel price artificially low it results in a distorted economy. Moreover, we witness Indonesia's increased vulnerability of public finances to international oil-price volatility. Lastly, it is assumed that 70 percent of the people that benefit from this cheap fuel are actually the country's middle-class and elite.

Demand for this subsidized fuel (called premium which is sold at US $0.46 per liter) is increasing every year and exceeds the government's fuel allocation in the state budget. Last year, it cost the government IDR 211.9 trillion (US $21.8 billion), a number which includes the extra allocation that was needed to meet domestic demand. It impacts heavily on the trade balance as the country imported about US $28 billion of oil products in 2012 (while domestic oil production is in decline). However, slashing the fuel subsidy is a politically-sensitive issue and will trigger demonstrations as seen in the past. It will also put great pressure on the achievement of the country's inflation targets. Knowing that in 2014 new elections are held, the government will not be too supportive of reducing the subsidy as it will come at the price of popular support. It remains unknown if the government will tackle this issue soon and, if yes, how it will deal with it: increasing the subsidized fuel price or limiting the quantity of fuel sold by prohibiting private vehicles from purchasing it. 

The widening trade deficit has also put pressure on the IDR rupiah. Last year, the Indonesian rupiah was one of the worst performing currencies compared to the US dollar when it lost about six percent. This year, the rupiah's decline has been limited so far (0.04 percent), but it has been reported that foreign investors have pulled money out of Indonesia’s bonds market due to concerns about high inflation and the wider trade deficit.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Indonesia's headline inflation reached 5.90 percent in March (year-on-year), the highest level since June 2011. This has also sparked discussion about raising the central bank's historically low benchmark interest rate of 5.75 percent, which it has set since February 2012. If not, capital outflows might follow. The inflation rate of March was particularly influenced by high food prices. Last month, prices of garlic and onion skyrocketed as domestic production was down and Indonesia's Ministry of Trade was too slow to approve imports. Recently the government introduced a new policy that sets limits to import quotas of horticultural products. Although the philosophy behind this policy is good in theory (supporting domestic farmers), in practice it triggered high inflation as the government did not manage to support increased domestic production (yet).