After recording three months of consecutive trade surpluses at the end of 2013, Indonesia's trade balance slipped back into deficit in January 2014. Indonesia - Southeast Asia's largest economy - posted a USD $430.6 million deficit in the first month of 2014. Exports fell 5.79 percent (year-on-year) to USD $14.48 billion, while imports fell 3.46 percent to USD $14.92 billion. The decline in exports were caused by the implementation of the ban on raw minerals (per 12 January 2014). Mineral ore exports fell over 70 percent (month-to-month).

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Amid an improving trade balance, Indonesia’s foreign exchange reserves rose to USD $100.7 billion at the end of January 2014, according to a press release of Indonesia's central bank (Bank Indonesia). Compared to December 2013, the reserves increased USD $1.3 billion. These reserves are sufficient to finance 5.7 months of imports or 5.6 months of imports and servicing of government external debt, which is well above the international standard of reserve adequacy at 3 months of imports.

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The central bank of Indonesia (Bank Indonesia) stated that economic growth during the fourth quarter of 2013 was recorded at 5.72 percent (yoy), thus having increased compared to the previous quarter (5.63 percent, yoy), and which is also higher than Bank Indonesia's estimate (5.7 percent). With this development, the overall economic expansion in 2013 reached 5.78 percent. Bank Indonesia considers that the fundamental condition of Indonesia’s economy is still relatively robust.

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Market participants were pleased to see the trade balance of Indonesia posting an unexpected USD $1.52 billion surplus in December 2013, almost twice as high than previous forecasts. This December surplus is the highest monthly surplus since December 2011. Exports rose 6.56 percent from November 2013 and 10.33 percent from December 2012, while imports rose 2.04 percent from November 2013 but declined 0.79 percent from December 2012. Although showing an easing trend, Indonesia posted a trade deficit of USD $4.06 billion in full 2013.

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Today (03/02), Statistics Indonesia (BPS) will release a number of macroeconomic data which are eagerly awaited for by market participants. Most importantly, Indonesia's January 2014 inflation rate and the December 2013 trade balance. These data will have an impact on the performance of Indonesia's rupiah exchange rate and the country's benchmark stock index (IHSG). Monthly inflation in January is expected to range between 0.8 and 1.0 percent, while a trade surplus of about USD $800 million in December is forecast.

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The central bank of Indonesia (Bank Indonesia) expects that the country will record another monthly trade surplus in December 2013. Perry Warjiyo, Deputy Governor of Bank Indonesia, said that the December trade balance is estimated to record a USD $785 million surplus, thus slightly improving from the USD $776.8 million surplus in November 2013. If Bank Indonesia's forecast is realized then it would be the third consecutive month in which Indonesia posts a trade surplus. This is important  to improve the country's financial stability.

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Deputy Trade Minister Bayu Krisnamurthi said that the Indonesian government is preparing two strategic steps to anticipate the negative impact of the winding down of the Federal Reserve's quantitative easing program. In January 2014, the Fed's bond-buying program will be reduced from USD $85 billion to USD $75 billion per month. The two strategic steps, which will enhance financial stability in Southeast Asia's largest economy, involve the curtailing of Indonesia's current account deficit and high inflation.

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On Monday (09/12), the government of Indonesia outlined the long-awaited extension of its economic policy package that was released in August 2013. This extension involves new fiscal policies, aimed at reducing imports and supporting exports, that will be implemented at the start of 2014. An improving global economy in combination with the government's August package and yesterday's extension package is expected to reduce Indonesia's wide current account deficit to a sustainable level of below 3 percent of gross domestic product (GDP).

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Inflation in November 2013 continued to show a decelerating trend at 0.12 percent (month-to-month) or 8.37 percent (year-on-year). Although higher compared to October 2013 inflation (0.09 percent), November inflation was lower than its historical pattern in the last five years. The low inflation rate was influenced by deflation in the volatile food group with deflation of 0.57 percent (mtm), a result of the correction in chilli prices, especially in Java and eastern region of Indonesia as well as the decline in the chicken meat price in almost all areas of Indonesia.

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Today (02/12), Statistics Indonesia (BPS) announced that Indonesian inflation was recorded at 0.12 percent in November 2013. Suryamin, Head of BPS, said that the price movements of basic needs, including rice and chili, were under control in November, while other components, such as groceries and clothing, in fact recorded deflation. Compared to the month November in previous years, the 0.12 inflation rate is limited. In November 2012, inflation was recorded at 0.34 percent. Indonesia's year-on-year inflation rate now stands at 8.37 percent.

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Although widespread concerns about Indonesia's prolonged trade deficit (and current account deficit) are far from unfounded, the country's October 2013 trade data show a positive result. On Monday (02/12), Statistics Indonesia announced that Southeast Asia's largest economy posted a small trade surplus of USD $42.4 million in October after having recorded a trade deficit of USD $810 million in the previous month. This calender year (January to October 2013), the trade deficit has accumulated to USD $6.36 billion.

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Currently, one of Indonesia's main financial issues (and one which puts serious pressures on the Indonesian rupiah exchange rate) is the country's wide current account deficit. According to data from Statistics Indonesia, Indonesia's current account deficit totaled USD $8.4 billion in the third quarter of 2013. This figure is equivalent to a whopping 3.8 percent of Indonesia's gross domestic product (GDP). Generally, a current account deficit that exceeds 2.5 percent of GDP is considered unsustainable.

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This week, a group of Dutch politicians and businessmen, led by prime minister Mark Rutte, will pay a four day visit to Indonesia. The aim of the visit is to smoothen bilateral relations and search for business opportunities between both countries. This Dutch group, which includes more than one hundred Dutch company delegates, forms the largest Dutch trade delegation that has visited Southeast Asia's biggest economy in the modern history. However, relations between the Netherlands and Indonesia are still complex today.

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Bank Indonesia decided to raise the BI rate by 25 bps to the level of 7.50 percent, with the Lending Facility rate and Deposit Facility rate raised to 7.50 percent and 5.75 percent respectively. This policy was taken in light of the persistently large current account deficit amid widespread global uncertainty. Therefore, the decision was taken in order to ensure that the current account deficit is reduced to a more sound level and inflation in 2014 returns to around 4.5±1 percent, thereby supporting sustainable economic growth.

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ICRA Indonesia, an independent credit rating agency and subsidiary of ICRA Ltd. (associate of Moody's Investors Service), publishes a monthly newsletter which provides an update on the financial and economic developments in Indonesia of the last month. In the October 2013 edition, a number of important issues that are monitored include Indonesia's inflation rate, the trade balance, the current account deficit, the IDR rupiah exchange rate, and gross domestic product (GDP) growth. Below is an excerpt:

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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.

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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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The price of cacao has risen by almost 20 percent since the start of June 2013 and is now around its highest level of 2013. Moreover, the cacao price is expected to keep increasing as analysts foresee a shortage of the commodity on the global market for the next two years. Indonesia, the world's third-largest cacao producer, is considering to lower the import duty for cacao to meet rising demand of its domestic cacao processing industry (amid limited growth in cacao production). Currently, the country levies a 5 percent import duty on cacao.

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