In line with most Southeast Asian stock markets and currencies, Indonesian stocks and the rupiah were rather flat with a tendency to weaken slightly on Tuesday (17/02). Most investors seem to avoid trading in this short trading week (On Thursday 19 February markets will be closed due to Chinese New Year celebrations). Moreover, market participants in Indonesia are waiting for the central bank’s interest rate decision later today. Lastly, failed talks between Greece and its creditors on Monday dented sentiment across Asia.

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Benedict Bingham, Senior Resident Representative for Indonesia at the International Monetary Fund (IMF), expects that the central bank of Indonesia (Bank Indonesia) will remain committed to the tighter monetary policy in a bid to safeguard the country’s fiscal fundamentals amid external pressures. Apart from sluggish global economic growth, the looming interest rate hike in the USA (later this year) is expected to rock Indonesia as it will trigger capital outflows from emerging markets.

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The Indonesian government wants to limit investment opportunities in the country’s cement industry in an attempt to maintain a healthy business climate. Indonesian Industry Ministry official Harjanto said that Indonesia’s current cement production capacity is more than enough to meet domestic demand. Given that most established cement producers have expansion plans the influx of new cement producers leads to an oversupply thus reducing companies’ profit margins. The nation’s cement production capacity stands at 77 million tons per year.

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Despite further slowing economic growth in 2014 and possible rupiah depreciation ahead of higher US interest rates later this year, global ratings agency Moody’s Investor Service said that the outlook for Indonesian companies is stable in terms of foreign exchange risks. Brian Grieser, Vice President and Senior Analyst of Corporate Finance at Moody’s, believes that weak rupiah performance is manageable for most of these companies. Starting from mid-2013, Indonesia’s rupiah has depreciated significantly amid US monetary tightening.

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The economy of Indonesia expanded 5.02 percent year-on-year (y/y) to IDR 8,354 trillion (USD $664 billion) in 2014, the nation’s slowest annual growth pace since 2009, according to the latest data from Statistics Indonesia (BPS). As such, GDP growth failed to achieve the central government’s 5.5 percentage point growth target that was set in the 2014 State Budget. Indonesia’s economic growth has been slowing since 2011 when it still posted a 6.5 percentage point growth rate (y/y). However, growth is expected to rebound from here.

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The latest Consumer Confidence Survey released by Indonesia’s central bank indicated that Indonesian consumers were more optimistic in January 2015 (compared to the previous month) on the back of recent fuel price cuts. The index, based on a total of 4,600 households across 18 major Indonesian cities, climbed to 120.2 points in January, up from 116.5 in the preceding month (a score above 100 signals consumer optimism). In December the index had declined due to higher administered fuel prices.

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Domestic car sales in Indonesia were slightly down in 2014 compared to the previous year. Amid the slowing economy (Indonesia’s GDP growth may have fallen from 5.8 percent in 2013 to 5.1 percent in 2014) and political uncertainty (triggered by the fragmented results of the country’s legislative and presidential elections) car sales totaled 1.21 million units in 2014, down 1.8 percent from 1.23 million sold vehicles in 2013, according to the latest data from the Indonesian Automotive Industry Association (Gaikindo).

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On 18 January 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 presentations at the Indonesia Investment Summit 2015, reports from the World Bank, Deutsche Bank, Moody’s and the ADB on the Indonesian economy, Bank Indonesia’s interest rate, and more.

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The central bank of Indonesia (Bank Indonesia) decided to keep its benchmark interest rate (BI rate) at 7.75 percent at its Board of Governors’ Meeting on Thursday (15/01). The country’s Lending Facility and Deposit Facility were maintained at 8.00 percent and 5.75 percent, respectively. According to the bank this interest rate environment is sufficient to push inflation, which has accelerated to 8.36 percent year-on-year (y/y) in December due to fuel subsidy reforms, back towards its target of 3 to 5 percent (y/y) in 2015.

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In terms of market capitalization, the largest listed company on the Indonesia Stock Exchange (IDX) is now Bank Central Asia (BCA). BCA, Indonesia’s second largest bank by assets, managed to surpass HM Sampoerna and Astra International at the end of 2014 with a value of IDR 320 trillion (USD $26.6 billion), or 6.1 percent of total market capitalization of the IDX (IDR 5,228 trillion). Despite tougher conditions in Indonesia’s financial sector (amid a higher interest rate environment) shares of BCA rose 36.7 percent in 2014.

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It seems clear now how market conditions will be until the end of the year. Two important foreign issues - the US Federal Reserve's tapering of quantitative easing (QE3) as well as the US debt ceiling issue which resulted in a shutdown as the Democrats and Republicans failed to come to an agreement on the country's federal budget - and various economic data from Indonesia (inflation and the trade balance) have provided some more insight into the matter. I will discuss each topic one by one below.

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After three months of high monthly inflation rates, Indonesia's inflation eased in September due to falling prices of food, transportation, communications and financial services after the Muslim celebrations of Idul Fitri, which always cause a spike in inflation, have passed. In September 2013, Indonesia posted deflation of 0.35 percent. It was the first time in 12 years that the country posted deflation in this month. The annual inflation rate eased to 8.40 percent from 8.79 percent in August 2013.

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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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In order to avert a potential bubble in Indonesia's property sector, Bank Indonesia (the central bank of Indonesia) is planning to further tighten its monetary policy in the sector. After having raised the minimum down payment requirement on housing loans to 30 percent for first home ownership (thus a loan-to-value ratio of 70 percent) in June 2012, Bank Indonesia now intends to prohibit credits for the purchase of a second, third (or more) house that has not been built yet (still in the preconstruction phase). This new rule is expected to be introduced this month.

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On Thursday (19/09), most currencies and stock indices outside the USA were bullish after the Federal Reserve decided to continue its massive monthly USD $85 billion bond buying program. Today (20/09), Asian currencies and stock indices took the foot off the gas as many investors sought to cash in on yesterday's gains. The MSCI Asia Pacific was still able to rise slightly (0.1 percent) after jumping 2.2 percent yesterday, but Indonesia's benchmark stock index (IHSG) plunged 1.86 percent (after gaining 4.65 percent yesterday).

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Market participants are waiting for the outcome of the Federal Reserve's FOMC meeting, which will deal with the future of the quantitative easing program. The wait and see attitude of investors made the benchmark index of Indonesia (IHSG) fall 1.20 percent to 4,463.25 points. Few big cap stocks were able to rise and although some second liners were up, it was not enough to push the IHSG into the green zone. The rupiah continued to weaken and foreign investors were again mostly selling their Indonesian assets.

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Last week, Indonesia's benchmark stock index (IHSG) climbed 7.3 percent to end at 4,375.53 on Friday (13/09). This growth is remarkable as it remains unknown what the Federal Reserve will do with its quantitative easing program (QE3). The next Fed meeting - scheduled for 17-18 September - is expected to provide more clarity regarding this matter. Positive sentiments that lifted the IHSG were Indonesia's slightly increased foreign exchange reserves, its stable rupiah after another BI rate hike, and the Bilateral Swap Deals (BSA) with Japan and China.

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Despite concerns that Indonesia's benchmark stock index (IHSG) would weaken on Thursday's trading day (12/09), the index ended 0.17 percent up to 4,356.61 points. Indices on Wall Street and in Asia impacted positively on the IHSG and kept foreign investors increasing their stock portfolios in Indonesia. Moreover, the Bank Indonesia's decision to raise the country's benchmark interest rate (BI rate) by 25 basis points to 7.25 percent was generally well-received by investors. Banking stocks helped to support the IHSG.

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It was decided at the Board of Governors’ meeting (RDG) of Bank Indonesia on 12 September 2013 to raise the BI Rate by 25 bps to 7.25%, the rate on the Lending Facility by 25 bps to 7.25% and the rate on the Deposit Facility by 25 bps to 5.50%. This action forms part of the follow-up measures taken to reinforce the policy mix instituted by Bank Indonesia, which focuses on controlling inflation, stabilizing the rupiah exchange rate and ensuring the current account deficit is managed to a sustainable level.

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In recent years, Indonesia's car sales have shown robust growth, culminating in a record high number of 1.12 million sold car units in 2012. This is an important statistic because car sales inform us about the state of the economy. Generally, rising car sales indicate an expanding economy while declining car sales indicate that the economy is slowing down. When we take a look at the table below, there is a link visible between Indonesia's GDP growth and rising car sales, except for 2011 to 2012 when GDP growth declined while car sales rose.

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