A. Money Supply
In April 2013, the central bank registered an increase in the level of money supply, M1 and M2 of IDR 836.51 trillion and IDR 3,364.12 trillion. If compared to the same period in the previous year, the level of M1 and M2, showed an increase of 16% and 15% respectively.
The increase in money supply has a tendency of contributing to depreciation of Rupiah and an increase in general level of prices. The high growth in money supply contributes to high inflation as it induces a rise in demand which if not accompanied by growth in the real sector generates an increase in prices.
Figure 4: Money Supply, 2009 – 2013* (in IDR Trillion)
In April 2013 M1 increased by 16% while M2 rose by 15% compared to April 2012
Source: Bank Indonesia and CEIC (2013)
B. Inflation
The level of inflation in Indonesia showed a decrease in May 2013, weighed down by a decrease in commodity prices. Based on BPS data, the level of general inflation year on year in May 2013 was 5.47%, which was lower than 5.57% recorded in March 2013. The decrease in inflation in May 2013 was in part an impact of the Policy implemented by the Ministry of Trade, which was embodied in the Minister of Trade regulation No. 16/M-DAG/PER/4/2013 on the importation of Horticultural products. The thrust of the regulation laid in its provisions that loosened restrictions on the importation of some agricultural products which included garlic. Besides, the Minister of Trade implemented the regulation in the wake of a note of complaint to Word Trade Organization (WTO), issued by the United States which complained about increasing complications and uncertainty of Indonesian import regime, which had adverse impact on exports of US agricultural products to Indonesia. As the US trade representative noted (2013), “import regulations in Indonesia violate the obligations of WTO members, including 1994 agreements on Tariffs and Trade”.
Figure 5: Inflation Rates by Component Group, 2009 – 2013* (YoY, in %)
Indonesia recorded lower annual inflation rates in the aftermath of loosening import restrictions on agricultural products.
Source: BPS and CEIC (2013)
In the meantime, core inflation and volatile show a decrease from 4.12% and 12.06% recorded in April 2013 respectively to 3.99% and 12.06% respectively in April 2013.
Comparing to April 2013, the economy in May 2013 experinced deflation of 0.03% which also means a decrease in the consumer price index from 138.64 in April 2013 to 138.60 in May 2013. The deflation is attributable to the decrease in prices of processed food category and clothing category, these categories recorded -0.83% and -1.22% of growth respectively in May 2013.
Figure 6: Inflation Rate by Expenditure Group, 2009 – 2013* (MoM, in %)
Deflation which occurred in May 2013 was attributable to a decrease in prices of processed food and clothing
Source: BPS and CEIC (2013)
Despite a decrease in inflation rate, there is needed to anticipate the potential impact of an increase in prices of subsidized energy fuels on general level of prices. Based on Bank Indonesia predictions, the raise in prices of fuel is projected to induce an increase inflation level to 7.76%. Based on government projections, the price of premium fuel will be raised to IDR 6,500/liter, while solar will be raised to IDR 5,500/liter. However, there was still no information on the measures Bank Indonesia will take to stymie the increase in inflation.
C. Interest Rate
Bank Indonesia Board of Governors meeting on 13 June 2013 decided to increase BI rate at level 6.0%. Nonetheless in the event the government goes a head to raise prices of subsidized fuels, there is little doubt that Bank Indonesia will have to adjust its monetary policy. In line with BI’s decision to increase BI rate by 25 basis point (bps), Indonesia Deposit Insurance Corporation (LPS) has also increase the maximum guarantee rate by 25 bps for period between June 15, 2013 and September 14, 2013. Consequently, maximum guarantee rate on rupiah-denominated increase at level 5.75%. LPS’ decision in increasing the maximum guarantee rate is based on the increase of BI rate as response on high inflation expectation as well as to maintain sound macroeconomic and stable financial system.
Figure 7: Developments in the BI Rate, SBI, Bank Deposits, and Guarantee Rate, 2009 – 2013* (in %)
Along with the increase of BI rate, the maximum guarantee rate has also risen by LPS as response on high inflation expectation as well as to maintain sound macroeconomic and stable financial system
Source : Bank Indonesia and CEIC (2013)
In the meantime, in April 2013, the level of foreign exchange reserves increased from USD 104.80 billion to USD 107.27 billion. The increase in the level of foreign exchange reserves is attributable to Indonesian government policy that involved the issuing global bonds in April 2013. The government issued international bonds to the value of USD 3 billion, of which USD 1.5 Billion has 10 year maturity bearing 3.34% coupon, and USD 1.5 billion, with 30 year maturity, bearing 4.63% coupon.
Nonetheless, the increase in the level of foreign exchange reserves in April 2013 still falls short of USD 124.6 billion, the record since Indonesia gained independence, which was registered in August 2011. However, in May 2013 foreign exchange reserve decrease again to USD 105.149 billion.
Figure 8: Indonesian Foreign Exchange Reserves, 2009 – 2013* (in USD Billion)
The increase in Foreign exchange reserves until April 2013 is propped up by the issuing of foreign currency denominated global bonds by the government.
Source: Bank Indonesia and CEIC (2013)
By May 2013, both domestic and external factors continued to weigh in on the movement of the exchange rate of Rupiah. With respect to external factors, uncertainty of economic conditions of developed nations, and compounded by down ward revision of economic growth projection by IMF in April 2013, continued to exert downward pressure on Rupiah. IMF predicts that the global economy will grow by 3.3 % in 2013, which is lower than initial projection of 3.5%. The revision of global economic projection is an indication that economic recovery continues be bedevilled by uncertainty.
With respect to domestic factors, Rupiah exchange rate has been weighed down by negative sentiments that emanated from an increase in inflation in March 2013, attributable to obstacles that hampered the distribution of food and uncertainties that continue to character government policy on subsidized fuels. Foreign investors perceive government as very uncertain in raising fuel prices, which has contributed to undermining confidence in Rupiah. In late May 2013, the value of Rupiah depreciated by 0.82% (mtm) to IDR 9802 per USD.
In the meantime, the movement of the composite share price index in May 2013 shows an upward trend. The Indonesia Composite Index (IDX) hovered around 5068, which is higher than 4453, registered at the start of 2013 (represents an increase of 13.8%). However, the IDX is likely to experience down ward correction once ramifications associated with uncertainty of government policy on subsidized fuels are factored in.
Figure 9: The Exchange Rate of Rupiah and Share Prices, 2009 – 2013*
Uncertainty that shrouds the increase in prices of subsidized fuel, is one of the factors that has contributed to the depreciation of Rupiah
Source: Indonesia Stock Exchange, Bank Indonesia and CEIC (2013)