In line with other stock indices in Southeast Asia, Indonesia’s benchmark stock index (Jakarta Composite Index) has been weakening since the start of trading on Wednesday (03/06). Yesterday’s weakening indices on Wall Street, concern about rising bond yields, worries about the possibility of a default by debt-ridden Greece, and weak macroeconomic data from Indonesia have all contributed to the negative performance of Indonesian stocks so far today. By 11:15 am local time, the Jakarta Composite Index had fallen 1.42 percent.

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Inflation in Indonesia accelerated higher than expected in May 2015. Based on the latest data from Statistics Indonesia (BPS), announced today, Indonesia’s consumer price index rose to 7.15 percent (y/y) in May, from 6.79 percent (y/y) in the preceding month. The primary reason for higher inflation is rebounding oil prices thus causing higher prices at fuel pumps. As fuel subsidies have been largely cut at the start of 2015, the recent rising global oil prices now cause serious inflationary pressures in Indonesia.

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One month ahead of the holy fasting month of Ramadan, food prices in Indonesia have already began to rise. It is a traditional phenomenon that ahead of the Ramadan (and during this month as well as the subsequent Idul Fitri celebrations) inflation peaks as Indonesians spend more money on food products (for dinner parties in the evening after the daily fasting has ended) and other consumer products such as clothes and shoes. However, some concerns have arisen as a presidential regulation on price controls is yet to come out.

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In order to avert a spike in inflation and social unrest, Indonesian President Joko Widodo may feel forced to allow around 1.5 million metric tons of rice imports in 2015 as domestic prices of rice have been rising on sluggish local harvests. Moreover, an intensifying El Nino is expected to cause dry weather in the months ahead hence further jeopardizing rice productivity. These already tough conditions will be exacerbated by seasonal Islamic celebrations (Ramadan and Idul Fitri) that always trigger increased consumption of food products.

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Indonesia's central bank (Bank Indonesia) showed that it is committed to its relatively tight monetary stance as it left interest rates unchanged at its May Board of Governor’s Meeting. Despite pressures from the government and business players to cut interest rates (which would boost economic growth), Bank Indonesia maintained its key BI rate at 7.50 percent, the overnight deposit facility at 5.50 percent and the lending facility rate at 8.00 percent. In the first quarter of 2015 Indonesia’s economic growth had slowed to a disappointing 4.71 percent (y/y).

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The central bank of Indonesia (Bank Indonesia) is currently dealing with a dilemma. On the one hand, its relatively high interest rate environment (with the benchmark BI rate at 7.50 percent) is partly responsible for the country’s slowing economic growth as credit expansion is curtailed and economic activity declines. On the other hand, Bank Indonesia’s high BI rate is needed to safeguard Indonesia’s financial stability as inflation is still above the central bank’s target, the current account deficit nearly unsustainable, and capital outflows loom.

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On 10 May 2015, Indonesia Investments released the latest edition of its newsletter. This free newsletter, which is sent to our subscribers once per week, contains the most important news stories from Indonesia that have been reported on our website in the last seven days. Most of the topics involve economic matters such as updates on Indonesia’s Q1-2015 economic growth, April inflation, domestic manufacturing activity, the new palm oil export levy, car sales, unemployment, the mobile phone industry, and more.

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After seeing the disappointing GDP growth figure of 4.71 percent (y/y) in the first quarter of 2015, investors have become concerned about Indonesia’s economic growth in the remainder of the year. The poor Q1-2015 GDP growth was caused by the country’s weak export performance (due to the sluggish global economy and low commodity prices), Indonesia’s high interest rate environment (curbing people’s purchasing power and business expansion of local companies), and sluggish government spending.

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The Indonesian Automotive Manufacturers Association (Gaikindo) lowered its car sales target for 2015 to 1.1 million vehicles, down from its original sales target of 1.2 million vehicles, due to persistent slowing economic growth in Indonesia (curbing consumer demand). On Tuesday (05/05), Statistics Indonesia announced that the country’s economic growth slowed to 4.71 percent (y/y) in the first quarter of 2015, a five-year low. Other important factors that negatively influence car sales are inflation, the interest rate, the rupiah, and fuel prices.

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The central bank of Indonesia (Bank Indonesia) decided to maintain its key interest rate (BI rate) at 7.50 percent at Tuesday’s Board of Governors’ Meeting (14 April 2015). The institution also left its deposit facility and lending facility at 5.50 percent and 8.00 percent, respectively. Bank Indonesia considers this level to be effective in order to push the country’s inflation rate back into its target range of 3-5 percent (y/y) in both 2015 and 2016. It is also convinced that this interest rate environment will improve the current account balance.

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Cement sales in Indonesia grew by seven percent to 32.9 million tons in the period January to July 2013. This pace of growth is significantly lower compared to the double-digit cement growth rate last year and thus forms another sign of cooling economic growth in Southeast Asia's largest economy (cement sales are a good indicator to measure the state of economic growth of a country). A slowdown in domestic cement sales is likely to continue in the second half of 2013, partly due to a decline in infrastructure projects.

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Although the holy fasting month of Ramadan and subsequent Idul Fitri celebrations always provide a boost for national economic growth in Indonesia as domestic consumption tends to peak, analysts believe that it will not contribute significantly to the government's 6.3 percent GDP growth target this year. During Ramadan and Idul Fitri (known as Lebaran), Indonesian consumers generally spend more on food products, clothes, shoes, tickets for transport and hotels than in other months, and thus lead to increased economic activity.

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Worldwide, most stock indices fell on Wednesday (07/08), particularly Japan's Nikkei index, after it has been speculated that the Federal Reserve may phase out the third round of its quantitative easing program in September 2013. This program, involving a monthly USD $85 billion bond-buying package, aims to spur US economic growth while keeping interest rates low. However, one important side effect has been rising stock markets around the globe. Now the end of QE3 is in sight, investors shy away from riskier assets.

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Indonesia’s inflation rate in July 2013 was significantly higher than analysts had previously estimated. The country’s July inflation figure accelerated to 3.29 percent. On year-on-year basis, it now stands at 8.61 percent, the highest inflation rate since many years. Particularly food commodity and transportation prices rose steeply. The main reason for Indonesia's high inflation is the reduction in fuel subsidies. In late June, the government increased the prices of subsidized fuels in order to relieve the ballooning budget deficit.

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As I stated before, mixed sentiments continue to influence the performance of Indonesia's main stock index (IHSG). During Thursday's trading day (01/08), the index moved sideways. News that the Federal Reserve intends to continue its bond-buying program made a good impact. However, this positive sentiment was offset by the release of Indonesia's high July inflation rate as well as the country's continued trade deficit. At the end of the day, the IHSG managed to post a gain as it received support from rising stock indices in Asia.

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Last week (22-26 July 2013), Indonesia's main stock index (IHSG) ended 1.39 percent down at 4,658.87. The daily value of transactions on the regular market narrowed to an average of IDR 3 trillion (USD $300 million) from IDR 3.84 trillion in the previous week. Foreigners still recorded net sales amounting to IDR 92.9 billion (USD $9.3 million). Lack of positive sentiments, financial results of companies that were below expectation and the continued weakening of the rupiah against the US dollar resulted in the decline of the index.

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Investment realization in Indonesia grew 30.2 percent to IDR 192.8 trillion (USD $19.8 billion) in the first six months of 2013 (compared to the same period last year). This result implies that 49.4 percent of the investment target for full 2013 has been achieved. The Indonesia Investment Coordinating Board (BKPM) aims to collect IDR 390.3 trillion in investments this year. This target is divided in domestic direct investment (DDI) of IDR 117.7 trillion and foreign direct investment (FDI) of IDR 272.6 trillion.

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Indonesia's main stock index (IHSG) increased 3.98 points to close at 4,724.41 on the last trading day (19/07). During last week, the index rose a limited 1.97 percent amid the context of a weakening IDR rupiah (Indonesia's currency even fell below the psychological boundary of IDR 10,000 against the US dollar). The IHSG's performance last week was mainly supported by rising shares in the country's finance, property, construction and metal mining sectors, while the cement and plantation sectors were corrected.

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The Indonesian rupiah (IDR) is experiencing one of its worst losing streaks in a decade. On Friday (19/07), the currency weakened to IDR 10,070 against the US dollar, which implies a devaluation of 4.14% in 2013 so far. The central bank of Indonesia, Bank Indonesia, does all it can to support the currency: the country's lender of last resort supplies dollars to the market triggering the reduction of foreign reserves from USD $105 million at end-May to $98 million at end-June, and raised its benchmark interest rate (BI Rate) by 50 bps to 6.50%.

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Indonesia's main stock index (IHSG) went up 0.89 percent to 4,720.44 on Thursday (18/07). The index was supported by developments in the United States. On Wednesday (17/07), Ben Bernanke spoke to the US Congress and said that the Federal Reserve is likely to continue its bond-buying program in 2013 and may gradually withdraw the quantitative easing program in 2014. But only if economic recovery of the US provides the good context. This message supported the IHSG although foreign investors continued to record a net sale.

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