With all eyes on the two-day policy meeting of the Federal Reserve, we could almost forget that the central bank of Indonesia (Bank Indonesia) will also hold its monthly policy meeting today. Similar to the topic discussed in the Federal Open Market Committee (FOMC) meeting (16-17 September), Bank Indonesia may consider raising its key interest rate (BI rate) as a Fed Fund Rate hike would trigger capital outflows, while Indonesia’s inflation rate remains high and the rupiah is fragile.

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For the second time, the central bank of Indonesia (Bank Indonesia) cut its 2016 forecast for economic growth in Indonesia, Southeast Asia’s largest economy. Due to persistent low commodity prices and weak export figures, the central bank now estimates that Indonesia’s economy will grow in the range of 5.2 - 5.6 percent (y/y) next year, down from its earlier outlook of 5.3 - 5.7 percent and the initial outlook of 5.4 - 5.8 percent.

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Despite the hosting of the Gaikindo Indonesia International Auto Show 2015 (20-30 August 2015), Indonesian car sales continued to shrank in August due to people’s weaker purchasing power amid the country’s economic slowdown. In August a total of 90,077 cars were sold in Southeast Asia’s largest economy, down 6.9 percent from the same month last year, according to the latest data from the Indonesian Automotive Industry Association (Gaikindo).

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Mirah Sumirat, Chairman of the Indonesian Association of Trade Unions (Asosiasi Serikat Pekerja, abbreviated ASPEK), stated that the tens of thousands of Indonesian workers who participate in the demonstration, organized in Central Jakarta on Tuesday (01/09), are not seeking anarchy or a coup but simply request that the government will make more efforts to protect the interests of the people (as stipulated by the 1945 Constitution; article 27, paragraph 2).

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Tomorrow (Tuesday 01 September 2015) around 50,000 Indonesian workers are expected to demonstrate on the streets of Central Jakarta and demand for higher wages. This mass protest is a response to the many layoffs that occurred in Indonesia’s labor-intensive industries in recent months (while more layoffs are expected in the period ahead) as well as a response to people’s weakening purchasing power (curtailed by prolonged high inflation).

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Most analysts expect that Indonesian inflation will accelerate to around 7.43 percent (year-on-year) in August 2015 primarily due to imported inflation. As the Indonesian rupiah has been depreciating against the US dollar over the past couple of weeks while the central government recently raised import duties for a wide range of consumer products, inflationary pressures are estimated to rise.

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Through capital injections the Indonesian government aims to enhance the role of various state-owned enterprises (SOEs) within the process of economic development. In the recently unveiled 2016 State Budget draft, which still requires approval from Indonesia’s House of Representatives, the government allocated a total of IDR 48.2 trillion (approx. USD $3.6 billion) to 24 SOEs in five priority sectors: food security, infrastructure & maritime development, energy security, strategic industry development, and national economic autonomy.

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For the sixth straight month, the central bank of Indonesia (Bank Indonesia) left its interest rate regime unchanged at Tuesday’s Board of Governor’s meeting (18/08) as it aims to guard the rupiah against severe volatility (which occurred after China’s yuan was allowed to devalue, while markets are still preparing for monetary tightening in the USA) and tries to combat inflation.

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On Friday (14/08) the Indonesian government unveiled its 2016 State Budget draft at a session in the House of Representatives (DPR). The draft is important as it shows government targets regarding the macroeconomy of Indonesia and it shows on what fields the government will focus in terms of public spending. The government - led by Indonesian President Joko Widodo - is optimistic that economic growth will finally rebound after four years of slowing economic growth as its 2016 GDP growth target was set at 5.5 percent (y/y).

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The Indonesian rupiah continues to depreciate on Tuesday (11/08). By 11:16 am local Jakarta time, the rupiah had depreciated 0.14 percent to IDR 13,570 per US dollar according to the Bloomberg Dollar Index. Indonesia’s currency has been touching 17-year lows due to bullish US dollar momentum ahead of looming higher US interest rates. Today, the US dollar received additional strength as China allowed its currency to weaken to a three-year low, dragging down other currencies in the Asian region.

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Today (20/10), Central Jakarta seems to have changed into one big party as Joko Widodo was inaugurated as Indonesia’s seventh president earlier this morning. For the remainder of the day celebrations will be held at Monas (National Monument) and surrounding areas. However, it is of vital importance that Widodo (popularly known as Jokowi) will start to focus on this presidential duties tomorrow as the country is facing a number of economic challenges. What are these challenges?

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Bank Indonesia decided to hold the key interest rate (BI rate) at 7.50 percent in October, with the Lending Facility and Deposit Facility rates kept at 7.50 percent and 5.75 percent, respectively. This level is expected to help control inflation at 4.5±1 percent in 2014 and 4.0±1 percent in 2015, as well as to reduce the current account deficit to a more sustainable level. Despite stable domestic conditions, Bank Indonesia sees risks: contagion risk stemming from US monetary tightening and possible higher subsidized fuel prices.

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The central bank of Indonesia (Bank Indonesia) released a press statement on Wednesday evening (01/10) in which it set out its view on the country’s trade balance and inflation after the latest economic data had been released by Statistics Indonesia (abbreviated BPS) earlier on the day. Based on information of BPS, Indonesia’s September inflation was relatively low at 0.27 percent month-to-month (m/m), while the August trade balance swung back into a deficit at USD $318.1 million.

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The central bank of Indonesia (Bank Indonesia) will not lower its key interest rate (BI rate) until accelerated inflation (brought on by the looming subsidized fuel price hike at the end of the year) has eased and US interest rates are stable (the US Federal Reserve may raise its key interest rate in the second or third quarter of 2015). This implies that the relatively high interest rate environment in Indonesia (the key BI rate has been at 7.50 percent for almost a year) will continue (to safeguard financial stability) at the expense of higher economic growth.

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The central bank of Indonesia (Bank Indonesia) kept its key interest rate (BI rate) at 7.50 percent for the tenth consecutive month as inflation is under control and well within the year-end target of the central bank (3.5-5.5 percent). The lending facility and deposit facility were kept at 7.50 percent and 5.75 percent, respectively, at Thursday’s Board of Governor’s Meeting (11/09). The central bank also expects that the current interest rate environment is capable of curbing the country’s wide current account deficit.

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The government of Indonesia agreed with the House Budget Committee to adjust the economic growth target of Southeast Asia’s largest economy in 2015 to 5.8 percent, 0.2 percentage point up from the initial growth target proposed by the government in the Financial Memorandum as well as the 2015 State Budget Draft (APBN). Still, the 5.8 percent gross domestic product (GDP) growth target constitutes the lowest growth target set in Indonesia’s state budget (excluding revised state budgets) since the year 2010.

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The benchmark stock index of Indonesia (Jakarta Composite Index, abbreviated IHSG) ended at a record high on Wednesday (03/09) as market sentiments were positive after the Indonesian government raised USD $1.5 billion from 10-year dollar-denominated Islamic bonds (known as sukuk) on Tuesday (02/09). Foreign investors submitted USD $10 billion worth of bids, six times the amount offered, showing that they are confident about the country’s current and future economic prospects.

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Speculation has emerged that Indonesian President-elect Joko Widodo (Jokowi) plans to raise prices of subsidized fuels immediately after taking office in late October 2014. On Tuesday (02 /09), Jokowi said that he sees no other option than to raise these prices in an effort to relieve the budget deficit, curb the wide current account deficit and make more funds available for long-term productive public investments (such as on infrastructure, healthcare and education). The government has set aside IDR 291.1 trillion (USD $25 billion) for fuel subsidies in 2015.

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Contrary to the positive performance of the benchmark stock index of Indonesia on Monday’s trading day (01/09) and despite positive domestic economic data released by Statistics Indonesia, the Indonesian rupiah exchange rate depreciated 0.22 percent to IDR 11,716 per US dollar based on the Bloomberg Dollar Index on Monday (01/09). The main reason for the currency’s depreciation is the strengthening US dollar as US economic data are improving and inflation is slowing in the Eurozone.

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In the past days, Indonesia’s fuel subsidy policy has been in the spotlight of Indonesian media continuously. When it was reported that incumbent President Susilo Bambang Yudhoyono (SBY) and newly elected president Joko Widodo would meet on the island of Bali this week to discuss various transitional matters, speculation emerged that the country’s generous fuel subsidies, which seriously burden the government’s budget as well as current account, might be wound down before the new government is inaugurated in October 2014.

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