A. Money Supply
In July 2013, the central bank recorded money supply of M1 and M2 amounted for IDR 903.23 trillion and IDR 3,529.66 trillion respectively. To that end, M1 registered an increase of 17% (yoy) in July 2013, which is higher than 10.2% recorded in the previous month. Meanwhile, M2 increased by 15.5% in July 2013 which is higher than 11.9% (yoy) in June 2013.
High growth in money supply during Ramadhan and Eid Mubarak contributed to inflation in August 2013. Based on Bank Indonesia data, the population withdrew IDR 97 trillion during July 10- August 2, 2013 , which is 94.1% of IDR 103.1 trillion predicted as money required by the population during the Eid season.
Figure 4: Money Supply, 2011 – 2013* (in IDR Trillion)
An increase in Money in Circulation contributed to fuelling inflation in August 2013
Source: Bank Indonesia and CEIC (2013)
B. Inflation
BPS announced inflation for August 2013 to be 8.79% (yoy), which followed the previous month that posted a relatively high inflation of 8.61% (yoy). In light of that, inflation for the January-August based on calendar year has risen to 7.94%, which is higher than the assumption of inflation in revised state budget 2013, registered of 7.2%.
Rising prices of horticultural commodities, onions and cattle meat, are in part responsible for volatile inflation of 16.52% (yoy) recorded in August 2013. Meanwhile, in August 2013, administered prices inflation reached 15.4% (yoy), which was attributable to the increase in transportation fares during Eid season and the hike in electricity charges. Nonetheless, core inflation during the same period stood at 4.48% (yoy).
Figure 5 : Inflation Rate by Component Group 2011 – 2013* (yoy, in %)
High Inflation recorded in August 2013 was a result of administered prices and volatile prices.
Source : BPS and CEIC (2013)
Based on BPS data, high inflation in August 2013 was attributable to an increase in all categories of expenditure. The highest contribution of inflation in August 2013 (mtm) is clothing recorded for 1.81%, followed by Food 1.75%, also education, recreation, and sports 1.36%. High inflation in August 2013 is in part attributable to Ramadhan and Eid season, which is associated with a drastic increase in demand and expenditure on clothing and food.
Besides, soaring prices of processed food, beverages, tobacco (0.68%); housing, electricity, gas, and fuels (0.66%); clothing (1.81%); health (0.37%); and transportation, communications and finance (0.95%); also contributed to high inflation in August 2013 (mtm).
Figure 6 : Inflation Rate by Expenditure Groups 2011 – 2013* (mtm, in %)
Rising inflation has become a serious threat to the economy
Source : BPS and CEIC (2013)
C. Interest Rate
At the beginning of 2013, Bank Indonesia set the reference interest rate at 5.75%. However, in June 2013, the central bank raised the interest rate by 25 basis points to 6%. Bank Indonesia took that policy in anticipation of inflation and response to depreciation of Rupiah exchange rate as a result of capital outflows that picked up pace during May 2013.
Subsequently, during the Meetings of the Board of Governors of Bank Indonesia (RDG) on July 11, 2013, the central bank raised interest rate once again by 50 basis points to become 6.5%, a measure that was taken as a response to the rising inflation expectations and maintain the stability of the macroeconomy and financial system amidst high global uncertainty in global financial markets.
Figure 7: Developments in BI Rate,Interest rate on Bank Indonesia Cerificates , Deposits, and Loans 2009 – 2013* (in %)
Reference Interest rate was raised to 7.25%
Source: Bank Indonesia and CEIC (2013)
As a response to the deterioration of Rupiah depreciation and changes in the dynamics of the global and national economy, Bank Indonesia convened the RDG on Thursday, 29 August 2013 decided to raise the BI rate by 50 basis rates to 7%.
Furthermore, as Rupiah has still been facing pressure, the central bank decided to raise BI rate during RDG on 12 September 2013 to 7.25%. BI decision to raise the reference interest rate was aimed at making Rupiah more attractive as an investment, hence propping the Rupiah exchange rate against other currencies from even deeper depreciation. Another reason that drove the central bank to take the policy measure was an effort to reduce current account deficit. In addition to raising the BI rate, the central bank also decided to raise the interest rate on Lending Facility (LF) to 7.25% and interest rate on Deposit Facility (DF) to 5.5%.
Besides, BI also issued a policy that reduced the month holding period of Bank Indonesia certificates from 6 months to one month. In addition, BI reached the decision to include BI Deposit Certificates (SDBI) as a component of secondary minimum reserve requirements (GWM).
Another policy Bank Indonesia took was the decision to strengthen collaboration with other central banks through the extension of the Bilateral Swap Arrangement (BSA) between Bank Indonesia and Bank of Japan. Bank Indonesia and Bank of Japan reached an agreement to extend BSA period effective from late August 2013, in which Indonesia can conduct Rupiah Swap per USD with a maximum of USD 12 Billion.
Figure 8: Indonesia Foreign Exchange Reserves, 2011 – 2013* (in USD Billion)
The drain on international reserves continues
Source : Bank Indonesia and CEIC (2013)
The Indonesia foreign exchange reserves constitutes external assets which are directly under the control of Bank Indonesia as the monetary authority to finance deficit in balance of payments, and intervene in money markets to preserve exchange rate stability.
However, as this edition was being written, the position of foreign exchange reserves showed signs of intensifying as a result of rising current account deficit at a time when the surplus on the capital and financial account was not sufficient to finance it, which has contributed to the deterioration of balance of payments deficit. The level of foreign exchange reserves decreased by USD 20.11 billion from USD 112.78 Billion on December 2012 to USD 92.997 Billion on August 2013. The decrease in the level of foreign exchange reserves, undermined the capacity of Bank Indonesia to intervene in foreign exchange markets to stem the depreciation of Rupiah. This was at a time when the demand for USD to repay foreign debt was high. Based on BI data, the level of foreign debt due for repayment during June-December 2013 is USD 28.88 Billion.
Figure 9: The Exchange Rate of Rupiah and Share prices, 2011 – 2013*
Rupiah exchange rate continues to plummet. Right from the start of the year to August 2013, rupiah has depreciated by 12.64%.
Source : Indonesian Capital Market, Bank Indonesia, and CEIC (2013)
Incessant pressure on global financial markets amidst sluggish growth of the world economy have adversely affected the performance of Indonesia’s trade and financial markets. The plan by the Federal Reserve Bank to taper out the monthly monetary stimulus has generated pressure on financial markets in many countries, including Indonesia. Capital outflow and rising investment risk have contributed to plummeting capital market prices and exchange rates of currencies a number of emerging market economies, Indonesia without exception.
Consequently, in August 2013, persisting pressure emanating from global financial markets coupled with several domestic factors, caused an increase in the current account deficit and inflation, which in turn contributed to 12.64 % depreciation of the exchange rate of Rupiah against the USD from IDR 9 698 per USD in January 2013 to IDR 10 924 per USD in August 2013. Moreover, the Exchange rate has continued to depreciate, hitting the IDR 11 200 per USD on September 6, 2013.
The movement of the Rupiah against USD, coupled with a decrease in foreign exchange reserves have induced panic in the capital market, reflected in the weakening of the Indonesia Composite Index (IHSG) lately. The downward trend in the composite share price index, which in May 2013, had soared to 5 068.63, plunged to 4 195.09 in August 2013.
To stem the deterioration of the composite share price index, the Indonesia Financial Service Authority (OJK) issued a regulation that allows listed companies to buy back shares traded on the stock exchange without approval of the general shareholders’ meeting. The buyback policy is embodied in OJK regulation No. 02/POJK 04/2013 on the buying back of shares by listed on the stock exchange by issuers or public companies if the economic condition shows high fluctuations. The implementation of the buyback policy is in part in aimed at preventing the possibility of a plummet in big capitalization share prices in the capital market. Consequently, blue chip shares, which have hitherto been leading movers, might end up being lagging movers on the composite share price index.