Although Indonesia continues with its plan to ban the export of raw minerals from 2014 onward as stipulated by the 2009 Mining Law, the government is studying the possibility to exempt companies temporarily from this rule if they show serious intentions to build processing factories or smelters in Indonesia in order to produce value-added products. Indonesia is still mainly a raw commodity-exporting country and thus misses out on value-added revenue while being more susceptible to volatility in commodity prices on the global market.

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Indonesia's inflation rate in August 2013 was 1.12 percent (month to month) according to Statistics Indonesia (BPS). This result is rather positive as many analysts projected a higher outcome for August inflation. Last month (July), inflation accelerated by 3.29 percent as the impact of higher subsidized fuel prices was felt in combination with weak government policies regarding food quotas, Muslim celebrations (Ramadan and Idul Fitri) as well as the beginning of the news school year.

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Finance minister Chatib Basri said that the Indonesian government should revise its outlook for GDP growth in 2014 from 6.4% (mentioned in the 2014 State Budget) to about 6.0%. A more realistic outlook, which is in line with the current global and domestic financial context, is needed. Global uncertainty due to the possible ending of the Federal Reserve's quantitative easing program has resulted in capital outflows from emerging markets, including Indonesia. Various countries, developed and emerging ones, have lowered outlooks for 2014 GDP growth.

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The government of Indonesia is concerned that the trade deficit in the oil and gas sector that was posted in the first six months of 2013, will continue in the second half of the year and will also disturb the trade balance in 2014. Indonesia's oil and gas sector posted a deficit in Semester I-2013 of USD $5.82 billion, while the non-oil and gas sector posted an USD $2.51 billion surplus. Minister of Trade Gita Wirjawan believes that Indonesia's trade deficit may reach beyond USD $5 to $6 billion this year.

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Indonesia's central bank, Bank Indonesia, decided today (15/08) to keep its benchmark interest rate (BI rate) at 6.50 percent. In recent days, heavy speculation emerged about whether Bank Indonesia would raise the BI rate for the third consecutive time in three months as the country is plagued by higher inflation (8.61 percent year-on-year in July 2013) and a weakening rupiah. Reluctance to raise the interest rate again seems to indicate that the Bank gives priority to economic growth, which has slid to a three-year low at 5.81 percent in Q2-2013.

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That global demand for Indonesian commodities in both the mining and agriculture sectors is still far from recovered is reflected by several financial reports, covering financial results over the first half of 2013, that were published today (15/08). Three Indonesian companies engaged in Indonesia's mining and agriculture sectors posted significantly reduced net profits compared to the same period in 2012. These companies are Indo Tambangraya Megah, Salim Ivomas Pratama, and Perusahaan Perkebunan London Sumatra Indonesia.

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Although it was clear that Indonesia would see a high inflation rate in July 2013 as the impact of higher fuel prices would kick in, Indonesia's central bank (Bank Indonesia) was surprised to see the figure go up to 3.29 percent. Currently, Indonesia's annual inflation rate stands at 8.61 percent. Bank Indonesia's governor Agus Martowardojo said that this rate is far outside the central bank's target range and announced that the institution expects annual inflation to stay above 8%  throughout 2013, higher than its previous assumption of 7.8% at end-2013.

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According to Finance minister Chatib Basri, the Indonesian government expects the country's gross domestic product (GDP) to have grown by 6.1 percent in the first six months of 2013. This forecast falls short of the government's 6.3 percent GDP growth assumption in the state budget (APBN). Basri stated that the lower outcome is due to global factors, such as slowing economic growth in China and India. But the government's assumption is more optimistic than the forecast of the central bank, which expects growth between 5.1 and 5.9 percent.

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Indonesia's mining sector is still the biggest beneficiary of both domestic and foreign direct investments. Investments in Indonesia's mining sector rose 23.8 percent in the first six months of 2013 compared to the same period in 2012. This may be somewhat surprising as global economic turmoil in recent years has resulted in falling commodity prices and weak mining exports. Investments are the most important pillar of economic growth in Indonesia after the country's vibrant consumer industry.

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After the World Bank signaled slowing economic growth in Indonesia, American multinational financial services corporation Morgan Stanley also detects problems in Southeast Asia's largest economy. According to Jonathan Garner, chief Asia and emerging-market strategist for Morgan Stanley, Indonesia’s stock market is the most vulnerable stock market in Southeast Asia in terms of sudden capital outflows. Morgan Stanley downgraded Indonesia's equities to underweight from equal weight and labeled the country as "a relatively over-owned country".

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The Jakarta Composite Index (IHSG), the benchmark stock index of Indonesia, gained 0.61 percent and ended on 4,546.57 on Friday (18/10). Stock trade showed a consolidating trend with the value of transactions in the regular market amounting to IDR 4.39 trillion (USD $388.5 million). Considering the full trading week, the IHSG gained 0.60 percent with an average daily transaction value of IDR 4.18 trillion. This value is below the previous week's average of IDR 4,36 trillion.

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Bank Indonesia’s Board of Governors decided to hold the BI Rate at a level of 7.25 percent, with rates on the Lending Facility and Deposit Facility held respectively at 7.25 percent and 5.50 percent. Bank Indonesia will continue to monitor global and domestic developments and further synergise the monetary and macroprudential policy mix in order to ensure that inflationary pressures remain under control, that rupiah exchange rate stability is maintained according to its fundamentals and the current account deficit is reduced to a sustainable level.

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Inflationary pressures eased in September 2013 to a 0.35% rate of deflation (mtm), or 8.40% (yoy). The rate of deflation exceeded the projections contained within the Price Monitoring Survey conducted by Bank Indonesia and much lower than inflation expectations by some analysts. Abundant supply in the wake of horticultural harvests (shallots and chilli peppers), triggered a deep correction in food prices. In addition, sliding beef prices also exacerbated further deflationary pressures, with volatile foods recording deflation of 3.38% (mtm).

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Investors are eagerly waiting for the release of Indonesia's September inflation rate. Indonesia has been hit by high inflation since the government decided to increase prices of subsidized fuels at the end of June. High inflation limits its people's purchasing power and as domestic consumption accounts for about 55 percent of Indonesia's economic growth, it thus impacts negatively on GDP growth, particularly after Bank Indonesia raised its benchmark interest rate (BI rate) from 5.75 to 7.25 percent between June and September.

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The slowdown of Indonesia's economic growth is expected to continue into the third quarter of 2013. The Indonesian government predicts that economic growth will fall below the GDP growth figure realized in the second quarter (5.8 percent). Acting Head of the Fiscal Policy Agency Bambang Brodjonegoro stated that the main factor that causes the country's slowing economic growth in Q3-2013 is reduced household consumption. Domestic consumption in Indonesia accounts for about 55 percent of the country's GDP growth.

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In its most recent report regarding Indonesia's economy, the World Bank states that high logistic costs form a serious impediment to the country's economic growth. The report, titled Annual Logistics Report, is compiled by Bandung Institute of Technology’s Research Center for Logistics and Supply Chains, the Indonesian Logistics Association (ALI), the STC Group, Panteia Research Institute, and the World Bank Indonesia Office. The report provides an analysis and overview of the progress made in tackling the problem of logistics in Indonesia.

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According to global credit rating and research agency Fitch Ratings, Indonesia's major banks are robust against the rupiah currency slide due to their low unhedged foreign currency exposure, strong loss-absorption cushions and - in some cases - foreign ownership. The slowdown in the economy will weigh on these (rated) banks' operating environment, but is unlikely to damage their credit profiles to any great extent. Below we provide Fitch Ratings' report. This report can also be accessed on their website.

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Indonesia's benchmark stock index (IHSG) went down 2.23 percent on Monday (02/09) after Statistics Indonesia (BPS) released a number of macroeconomic data. The country's inflation pace increased to 8.79 percent year-on-year, while it posted a record monthly trade deficit in July 2013 (USD $2.31 billion). Investors have been highly concerned about the development of Indonesia's current account deficit and after it became known that the figure was high in July, the IHSG quickly lost value.

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The government of Indonesia has revised the macroeconomic assumptions that are stated in the State Budgets (APBN) of 2013 and 2014 after a meeting with the budgetary body of the House of Representatives (Badan Anggaran DPR) on Wednesday (28/08). It is the third time that the 2013 State Budget has been revised in order to put it more in line with recent global developments. As the government was also too optimistic when drafting the 2014 Budget, it felt the need for a revision (only 12 days after the announcement of the Budget).

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Indonesia's current account deficit, which caused much alarm among the investor community, is expected to ease to about 2.5 percent of gross domestic product (GDP) in the second half of 2013. This assumption is supported by Indonesia's central bank and various analysts. The country's current account deficit reached USD $9.8 billion or 4.4 percent of GDP in Q2-2013. In combination with the weakening rupiah, higher inflation and the possible end to the Federal Reserve's quantitative easing program, investors have been pulling money out of Indonesia.

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