Furthermore, Bank Indonesia will also continue to strengthen its monetary and macroprudential policy mix, persist with financial market deepening and coordinate closely with the Indonesian government to control inflation and the current account deficit. Opinion at the Board of Governors’ meeting adjudged the current policy mix, instituted by BI in conjunction with the government, conducive to the desired direction of economic stabilisation, namely controlled inflation and reductions in the current account deficit. Looking forward, Bank Indonesia will continue to monitor the full spectrum of risks, globally and domestically, as well as ensure anticipatory actions to maintain macroeconomic stability.

Bank Indonesia's figures indicate that the global economic recovery is gaining momentum amid dogged uncertainty on global financial markets, attributable to robust economic expansion in advanced countries, specifically the USA and Japan, during the final quarter of 2013, which is expected to endure into 2014. The global economic upturn boosted world trade volume and buoyed commodity prices, including some of the main non-oil/gas export commodities from Indonesia. Additionally, investor perception also improved after the Federal Reserve clarified its position on policy direction, although uncertainty on global financial markets remained comparatively high. Looking ahead, Bank Indonesia will continue to monitor risk emanating from the global economy, especially that triggered by the normalisation policy of the Fed as well as the risk of an economic slowdown in China.

Domestic economic growth in Indonesia exceeded Bank Indonesia projections during the fourth quarter of 2013, underpinned by a more balanced structure. The national economy expanded from 5.63 percent (yoy) in quarter III 2013 to 5.72 percent (yoy) in the fourth quarter as a result of stronger real exports in line with growing demand from leading trade partners, particularly advanced countries. Meanwhile, domestic demand experienced a period of moderation, as reflected by a slowdown in household consumption and investment, especially non-construction investment. Consequently, economic growth in Indonesia as a whole for 2013 achieved 5.78 percent. In 2014, moderate domestic demand is expected to persist but exports are expected to perform more favourably in line with the global economic recovery and improvements are expected in the economic structure of Indonesia, therefore, growth in 2014 is projected to hit the lower end of the 5.8-6.2 percent range.

Stronger exports significantly helped to reduce the current account deficit and bolster efforts to improve the balance of payments (BoP) in quarter IV 2013. The current account deficit decreased sharply during the final quarter of 2013, amounting to just 1.98 percent of GDP and well below the 3.85 percent of GDP reported in the previous period. Exports are gaining traction on the back of increased exports from the manufacturing sector in line with growing demand from the US and Japan, coupled with burgeoning exports of natural resources associated with the anticipation of the implementation of Minerba Act. In addition, reductions in the current account deficit are the result of slower imports in line with domestic moderation. Improvements in the fourth quarter of 2013 balance of payments were achieved due to a growing surplus in the financial account stemming from withdrawals of corporate foreign loans, withdrawals of savings from domestic banks overseas and stable inflows of foreign direct investment (FDI). Bank Indonesia expects the balance of payments to continue improving in 2014, supported by the prospect of a smaller current account deficit and a growing surplus in the capital and financial account. In January 2014, foreign exchange reserves held by Indonesia increased to USD $100.7 billion, equivalent to 5.7 months of imports or 5.6 months of imports and servicing government external debt, which is well in excess of the minimum standards applied internationally totalling approximately three months of imports.

Sounder economic fundamentals in Indonesia helped assuage depreciatory pressures plaguing the rupiah exchange rates. In January 2014, the rupiah closed at a level of IDR 12,210 per US dollar, depreciating 0.33 percent compared to the previous month, less than the depreciation in December 2013 of 1.71 percent. On average, the rupiah in January 2014 was valued at IDR 12,075 per US dollar, down 0.7 percent than the average depreciation for December 2013 of 3.74 percent. Consequently, the Real Effective Exchange Rate (with base year 2006) was 94.2, thereby bolstering the competitiveness of Indonesian export prices. Money market activities, both rupiah and foreign exchange, continued to develop dynamically with an increasing volume of transactions and lower risk premium, reflected by credit default swaps (CDS). Such conditions are closely linked to measures undertaken by Bank Indonesia to deepen financial markets, including hedging swaps and interbank repos using mini MRA. Looking forward, Bank Indonesia will consistently maintain rupiah exchange rate stability in line with its fundamental value and supported by a variety of endeavours to deepen the foreign exchange market. Bank Indonesia will also continue promoting the rupiah for domestic transactions pursuant to the Currency Act and advocate broader hedging instruments for foreign exchange transactions.

The rate of inflation in January 2014 remained in harmony with historical trends, thereby avoiding future failure to achieve the inflation target in 2014 at 4.5±1 percent. Despite surpassing the rate of inflation recorded in December 2013, a rate of 1.07 percent (mtm) in January 2014 is not far removed from the historical average of 2008-2013. Higher inflation stems from volatile foods as a result of natural disasters, including flooding, that subsequently disrupted the production and distribution of food in a number of regions, particularly on the islands of Java and Sumatra. Meanwhile, core inflation rose moderately, among others, due to the impact of rupiah depreciation on goods such as motor vehicles and electronic devices. Bank Indonesia will remain vigilant of inflationary pressures and risks looking ahead, including disruptions to the supply of food, electricity rate hikes and the impact of rupiah depreciation. Furthermore, Bank Indonesia will strengthen its policy mix and bolster coordination with the government, thereby mitigating a variety of risks that could undermine achievement of the inflation target.

Controlled economic corrections in Indonesia are supported by well-maintained financial system stability. The resilience of the banking industry remained solid with credit risk, liquidity risk and market risk successfully mitigated as well as sound capital preserved. Credit growth eased from 21.9 percent in November 2013 to 21.4 percent (or 17.4 percent when allowing for exchange rate depreciation) in December 2013 in line with weaker domestic demand and rising lending rates. Bank Indonesia will coordinate with the Financial Services Authority (OJK) to ease future credit growth in line with the moderating domestic demand. Notwithstanding, the performance of the stock market improved in January 2014, signalled by gains on the IDX Composite. Conversely, an increase in the yield of tradeable government bonds (SBN) indicated a decline in the performance of government bonds.

Jakarta, 13 February 2014
Department of Communication
Bank Indonesia

Tirta Segara
Executive Director