The Indonesian rupiah exchange rate and benchmark stock index (IHSG or Jakarta Composite Index) both plunged severely after the US Federal Reserve announced on Wednesday (19/03) to cut another USD $10 billion from its bond-buying program (quantitative easing). Moreover, speculation arose that US interest rates may increase in 2015 (the US central bank had kept interest rates close to zero for over five years to stimulate economic growth). It led to tumbling stocks, bonds and currencies across Asia on Thursday (20/03).

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Global credit rating agency Fitch Ratings reminded the investor community about the ongoing risk of a sudden reversal of capital inflows in Indonesia. In the first two months of 2014, capital inflows have been strong, reaching a total of USD $2.3 billion, a 16 percent increase from the same period last year, backed by renewed confidence in Indonesia's economic fundamentals as the current account deficit and inflation have moderated since the end of last year. However, several risks are looming causing potential volatility of capital flows.

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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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Based on the Bloomberg Dollar Index, the Indonesian rupiah exchange rate appreciated 0.15 percent to IDR 11,647 per US dollar on Wednesday (26/02). All through the day, the currency traded within a fairly narrow trading range, possibly due to market participants' wait and see attitude ahead of the release of important US economic indicators. As the US economy is improving and the US unemployment rate is declining, the Federal Reserve may wind down its quantitative easing program in a more aggressive manner soon.

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Indonesian stocks and the country's currency feel the negative impact of the further winding down of the Federal Reserve's bond-buying program (quantitative easing). Yesterday (29/01), it was announced that the Fed will cut the bond-buying program by USD $10 billion to USD $65 billion per month. Among market participants concern emerged about the stability of emerging economies amid the tapering as capital outflows are expected. After opening, the benchmark stock index of Indonesia (IHSG) immediately fell more than 1 percent.

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On Wednesday (29/01), the Federal Reserve (Fed) announced to cut its massive bond-buying program (quantitative easing, QE) by another USD $10 billion after the FOMC meeting, while maintaining interest rates close to zero. Originally, the Fed's QE program, implemented in September 2012, totalled USD $85 billion per month but after the cuts in December 2013 and January 2014, it is now wound down to USD $65 billion per month and if the pace of tapering continues, the program might be over by the end of 2014.

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Asian stocks and currencies strengthened on Wednesday (29/01) after the central banks of Turkey and India tightened their monetary policies in order to attract capital inflows and restore investors' confidence. The central bank of Turkey raised its overnight lending rate aggresively from 7.75 percent to 12 percent on Tuesday (28/01); a measure which managed to calm down Asian markets. According to the Bloomberg Dollar Index, the Indonesia rupiah exchange rate appreciated 0.20 percent to IDR 12,166 per US dollar on Wednesday.

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On Tuesday (28/01), the Indonesia rupiah exchange rate shows a volatile performance. Around 15:30 local Jakarta time, Indonesia's currency appreciated 0.08 percent against the US dollar. Market participants are waiting for the outcome of the Federal Reserve's FOMC meeting held on 27-28 January 2014. Most analysts expect the Federal Reserve to quicken the winding down (tapering) of its quantitative easing program. This program caused a large capital inflow in emerging economies, including Indonesia, in recent years.

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Indonesia's central bank (Bank Indonesia) kept its benchmark interest rate (known as the BI rate) at 7.50 percent in today's Board of Governor's meeting (09/01). The institution decided not to change its interest rate because it estimates that the inflation target for 2014 is not in jeopardy (4.5 percent) while Indonesia's economic growth prospects for 2014 and 2015 remain unchanged. Also the overnight lending facility as well as deposit facility rate (Fasbi) were kept at 7.50 percent and 5.75 percent respectively.

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Ahead of the new year, the Indonesia rupiah exchange rate continues its downward trend on Monday (30/12). Bank Indonesia's Jakarta Interbank Spot Dollar Rate (JISDOR) fell to IDR 12,270 per US dollar from IDR 12,260 on the previous trading day. Due to the improving US economy, the US dollar keeps appreciating against the majority of emerging currencies. At most local Indonesian banks, the rupiah is traded significantly above the psychological level of IDR 12,000 per US dollar.

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In line with the performance of other Asian emerging currencies, Indonesia's rupiah exchange rate appreciated on Monday (12/01) as the fall in US wages (released late last week) caused speculation that the Federal Reserve will - for now - delay its plan to start raising US borrowing costs. Despite solid growing US non-farm payrolls in December 2014, US wages (average hourly earnings) fell the most in eight years. Indonesia’s rupiah appreciated 0.38 percent to IDR 12,599 per US dollar according to the Bloomberg Dollar Index.

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The Indonesian rupiah exchange rate and Indonesian stocks gained on the last trading day of the week in line with the performance of other emerging markets. Indonesia’s benchmark stock index (Jakarta Composite Index, abbreviated IHGS) rose 0.09 percent to 5,216.67 points, while the rupiah appreciated 0.22 percent to IDR 12,647 according to the Bloomberg Dollar Index. The positive performance was mainly caused by speculation that the unexpected fall in US wages will keep the US central bank from raising its key interest rate soon.

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Indonesia’s inflation pace accelerated in December 2014, exceeding estimations of analysts and Indonesia’s central bank. December inflation, 2.46 percent (m/m) or 8.36 percent (y/y), accelerated due to the impact of higher subsidized fuel prices (introduced in November) and volatile food prices (fluctuating rice and chili prices at the year-end). Other factors that contributed to high inflation in 2014 were higher electricity tariffs for households and industries, the higher price of 12 kg LPG, and an airfare adjustment.

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Indonesia’s rupiah exchange rate and stocks opened stable on Wednesday (17/12) after two days marked by severe pressures on emerging market assets. By 11:30 am local Jakarta time, Indonesia’s rupiah was down 0.09 percent to IDR 12,736 per US dollar (according to the Bloomberg Dollar Index), while Indonesian stocks were up 0.41 percent by the same time. Yesterday, the rupiah nearly touched IDR 13,000 per US dollar (its lowest level since the Asian Financial Crisis in 1997-1998), before the central bank decided to support the currency.

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Amid weakening emerging Asian currencies, Indonesia’s rupiah exchange rate touched a six-year low on Friday (12/12) after US consumer spending rose in November while US jobless claims fell (signalling a strong recovery in the world’s largest economy). Based on the Bloomberg Dollar Index, the rupiah depreciated 0.95 percent to IDR 12,467 per US dollar on Friday. Besides the impact of the US dollar’s bullish momentum, the rupiah also weakened on year-end US dollar demand from local companies for debt payments.

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Total foreign outstanding debt of Indonesia continues to grow at a robust pace. Based on data from the country’s central bank, total external debt rose 11.2 percent year-on-year to USD $292 billion at the end of September 2014 as private Indonesian companies have been eager to seek lower interest rates abroad. Privately-held foreign debt was up 14 percent y/y to USD $159.3 billion at end-September. Central Bank official Tirta Segara said that private sector debt is concentrated in the financial, manufacturing and mining sectors.

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Although we initially expected that the benchmark stock index of Indonesia (Jakarta Composite Index, abbreviated IHSG) would be supported by the various macroeconomic data (inflation, trade balance, and manufacturing activity) that were released by Statistics Indonesia today, the opposite is what happened. The index went into red territory amid profit taking, although the bond market in fact strengthened and foreign investors recorded net buying at IDR 224 billion (USD $18.7 million).

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The market showed today (27/10) that the composition of Indonesian President Joko Widodo’s cabinet did not live up to expectations. On Sunday afternoon, Widodo had announced the names of the ministers inside his Working Cabinet (Kabinet Kerja) after having delayed the announcement for almost a week as several of his ministerial candidates needed to be replaced having been red flagged by the country’s Corruption Eradication Commission (KPK). This then heightened expectations that Widodo’s cabinet would constitute a ‘dream team’.

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It was a good start of the week for the benchmark stock index of Indonesia (known as the Jakarta Composite Index, abbreviated IHSG). Various factors, both internal and external, managed to push the index higher on Monday (20/10). Externally, the IHSG was supported by positive Asian indices which responded to last week’s good US economic data (building permits, housing starts, and consumer sentiment). Moreover, the sharply appreciating Indonesian rupiah exchange rate made Indonesian assets more attractive.

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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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