On Wednesday (04/09), the International Monetary Fund (IMF) released a report that describes a change in the current global economic dynamic as developed economies are showing signs of recovery, while growth in emerging markets is slowing down. These two developments are interrelated because stagnating developed economies from the late 2000s meant that investors started to look for lucrative assets in rapidly-growing emerging markets, including Indonesia.

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The macroeconomic assumptions that have been formulated in the 2014 State Budget Draft by the government of Indonesia are not considered too realistic by several analysts. Although it is understood that one should set a high standard in order to maximize efforts, analysts feel that - given the current problematic economic context in Asian emerging economies as well as global economic turmoil - the government is far too optimistic, particularly because the government will have to devote part of its attention to the elections in mid-2014.

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Today (02/08), Indonesia's bureau for statistics announced that economic growth of Indonesia in the second quarter of 2013 reached 5.81 percent (YoY), which is the lowest growth rate since Q3-2010 and also lower than most analysts as well as the Indonesian government expected. The GDP figure reflects Indonesia's cooling economy. For the fourth consecutive quarter, the rate has weakened as the country has been under pressure: high inflation, a widening trade deficit and a weakening rupiah.

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In the latest edition of its flagship publication, the World Economic Outlook (WEO), the International Monetary Fund (IMF) says it is concerned that sluggish global economic growth will persist in the foreseeable future particularly on the back of slowing growth in emerging markets (which account for the lion's share of global growth). The IMF's forecast for global growth in 2015 and 2016 was both cut by 0.2 percentage point to 3.1 percent (y/y) and 3.6 percent (y/y), respectively, from the July WEO Update. In 2014, the world economy grew 3.4 percent (y/y).

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The central bank of Indonesia (Bank Indonesia) expects that the country’s current account deficit will only ease slightly in 2014. Last year, the deficit reached 3.3 percent of Indonesia’s gross domestic product (GDP), a level which is generally considered unsustainable and leads to reduced investor confidence. Countries that have to cope with a wide current account deficit, such as Indonesia and India, are highly vulnerable in times of global shocks as investors will quickly withdraw their investments from assets in these countries.

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The Bank for International Settlements (BIS) wrote in its most recent report that emerging economies, which includes Indonesia, are highly vulnerable to severe capital outflows as investments from the West have been highly speculative and can be quickly pulled out from emerging markets. Even when only a light shock occurs, capital outflows will be significant as international investors have been showing ‘herd behaviour’. This behavior can rock the financial fundamentals of emerging markets and leave these countries shattered.

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Two Indonesian companies - Indofood Sukses Makmur and Golden Agri Resources - joined the ranks of the Boston Consulting Group’s Global Challengers 2014. This index contains a group of 100 companies (all from emerging markets) that are vying for leadership of key industries and have emerged as drivers of global economic growth. The Boston Consulting Group (BCG) also included Indonesian agribusiness firm Wilmar International in the graduates list. This list mentions firms that have grown into global market leaders in their industries.

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After a disastrous year in 2013, characterized by capital outflows from emerging economies, global investors’ confidence in emerging markets seems restored in 2014. More and more money has been flowing to Latin America and Asia, causing rising regional stock indices and lower bonds yields. For example, the stock index of India has reached a near-record level. This is in sharp contrast with developments last year when emerging stock indices, exchange rates and (most) interest rates increased.

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On Monday (14/04), the Indonesian rupiah exchange rate depreciated 0.23 percent to IDR 11,440 per US dollar according to the Bloomberg Dollar Index. This performance was in line with most other emerging Asian currencies, which weakened against the US dollar due to broad strength in the greenback as well as risk aversion. The rupiah - still the best performing emerging Asian currency so far this year - depreciated on dollar demand from local importers (while state-run banks were reported to engage in rupiah buying).

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The Indonesian rupiah exchange rate extends its depreciation on Friday (11/04) after market participants showed their concern about Indonesia's legislative election result on Wednesday (09/04). As the election did not result in a clear victory for the PDI-P (the main opposition party which intends to nominate popular Jakarta Governor Joko 'Jokowi' Widodo as presidential candidate), the fragmented outcome is expected to lead to continued political uncertainty ahead of Indonesia's presidential election on 9 July 2014.

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As expected, the Jakarta Composite Index (abbreviated IHSG) continued its downward trend amid falling global indices. From the start of Tuesday's trading day (07/01), the IHSG had to face pressures resulting in foreign net selling. Apart from the weakening rupiah exchange rate, negative market sentiments were caused by the Goldman Sachs Group and JP Morgan Chase & Co that both downgraded emerging market economies. This led to a correction on Asian stock markets.

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The Federal Reserve, central banking system of the United States, expects that the current economic recovery of the USA is set to continue. In the minutes of the latest Federal Open Market Committee (FOMC) meeting, held at end-October 2013, it is mentioned that within the next few months the Federal Reserve can start winding down its monthly USD $85 billion stimulus program (known as quantitative easing). The next FOMC meeting, which will shed more light on the future of the bond-buying program, is scheduled for December 2013.

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Amid falling Asian stock indices, Indonesia's benchmark stock index (IHSG) went down 1.08 percent to 4,350.79 points on Wednesday's trading day (20/11). As has become an usual pattern, after one or two days of gain, market participants immediately engage in profit taking the following day. Investors reacted to the OECD's downgrade of its outlook for global economic growth (triggered by slowing growth in emerging markets) and to Indonesia's central bank's higher interest rate (which impacts negatively on the country's economic growth).

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