Rupiah Continues to Depreciate
High inflationary pressure in Indonesia is often attributable to non-monetary factors such as poor infrastructure, floods, and natural disasters. Such events have often ended up sending prices of food prices higher, which in turn fuels inflation. Inflation in January 2014 rose sharply compared to the position in December 2013 (8.08%, y-o-y). Besides, the increase in prices of commodities that are under government direction and control—such as the increase in liquefied petroleum gas which occurred at the beginning of the year—also contributed to the drastic rise in inflation.
In February 2014, the government succeeded in depressing inflation to 7.75% (y-o-y), which is lower than the previous month, 8.22% (y-o-y). Control over inflation in February 2014 is in part attributable to adoption of government policy that imposed import quotas based on closed system which is still underway. Imposition of import quotas is still underway, until prices are deemed relatively stable. In the event food supplies are deemed sufficient, the imposition of import quotas will be put into effect once again.
Figure 15: Inflation, February 2011 – February 2014 (y-o-y, in %)
Inflation in February 2014 was 7.75% (y-o-y)
Source: BPS and CEIC (2014)
In order for the government to succeed in putting inflation under control, there is need for ensuring that distribution of food supplies runs smoothly which requires carrying out repairs on national infrastructure. In February 2014, year-on-year, core inflation was 5.26%, while administered price component stood at 16.76%, and volatile component was 8.73%. Meanwhile, based on month-to-month trend, inflation in February 2014 was 0.26%, which was lower than 1.07% registered in the previous month.
Table 3: Inflation by Type of Expenditure, 2011 – 2014 (2012=100, m-t-m, in %)
Food prices continue to be very high; inflation for February 2014 was 0.26%
Notes: (1) Food stuffs; (2) Processed foods, Beverages, Tobacco; (3) Housing, Electricity, Gas, and Fuels; (4) Clothing; (5) Health; (6) Education, Recreation, and Sports; (7) Transportation, Communications, and finance
Source: BPS and CEIC (2014)
The composition of inflation in February 2014 was relatively even for all item categories, compared with the previous month, which was dominated by food stuffs. Processed food, beverages, and tobacco, contributed most to inflation in February 2014. The expenditure category contributed 0.08% of total inflation in February 2014 which stood at 0.26%. Meanwhile, inflation of that category is 0.36% (m-t-m) or 9.62 % (y-o-y). Food items contributed the largest proportion to inflation in January 2014, 0.56% of inflation in February 2014 of 11.43% (y-o-y) or 2.77% (m-t-m). Besides, expenditure on housing, water, electricity, Gas, and fuels also contributed 0.25%, to inflation of 7.63% (y-o-y) or 1.01% (m-t-m), in January 2014.
Meanwhile, based on inflation in 82 largest cities Indonesia, most cities in Indonesia registered inflation in January and February 2014. Based on data released by BPS in February 2014, 55 cities experienced inflation. Pontianak recorded the highest inflation of 2.73% (m-t-m). However, 27 cities in Indonesia experienced deflation in February 2014. Sibolga recorded the highest deflation of 2.43% (m-t-m). Meanwhile, in January 2014, 78 cities registered inflation, with Pangkal Pinang posting the highest figure of 3.79%, while four cities experienced deflation, with Sorong registering the highest 0.17%.
High inflation, coupled with lower level of international reserves than in previous years, stoked Rupiah depreciation. The level of Indonesia international reserves in January 2014 was USD 100.651 billion or increased by USD 1.265 billion compared with the position in the previous month. Meanwhile, in February 2014, international reserve rose to USD 102.74 billion, or increased by USD 2.09 billion. The positive trend has continued since August 2013. Nonetheless, the level of international reserves put Indonesia in a position that could be regarded as more than sufficient. The increase in international reserves in January and February 2014 was in part due to Bank Indonesia efforts to improve the country’s trade account position by implementing Bank Indonesia regulation (PBI) No.15/17/PBI/2013 on Protecting the Value of Swap Transactions, and government bonds auctions in the end of January and in mid February 2014.
Figure 16: Indonesia International Reserves (billion USD) and Developments in the Rupiah Exchange rate (IDR/USD), February 2011 – February 2014
In February 2014, Indonesian registered the highest level of International reserves over the last 9 months
Source: Bank Indonesia and CEIC (2014)
Besides, Bank Indonesia regulation on protection of swap transactions, Bank Indonesia also implemented rupiah exchange rate stabilization efforts by deepening foreign exchange market. The effect of such efforts is visible in improvements in exchange rate of Rupiah which appreciated by 4.84% to IDR 11,643/USD in February, which in brought to a stop the depreciation of the currency that begun in November 2013. In January 2014, the exchange rate of Rupiah stood at IDR 12,226/ USD, which represented a depreciation of 0.3% compared with the position in December 2013. The appreciation of Rupiah is in part attributable to the implementation of government policy that involved the issuing of USD 4 billion of government bonds denominated in US dollars, which was aimed at attracting inflow of global investors. The selling of bonds is also aimed at strengthening Rupiah in the wake of US Fed’s decrease in level of quantitative easing that took effect in January 2014. The debt securities issued by the government consisted of bonds with 10 year maturity, coupon rate of 5.95%, and 20 year bonds with coupon of 6.85%, USD 2 billion in each category.
In relation to efforts to control rupiah exchange rate, Bank Indonesia through JISDOR (Jakarta Interbank Spot Dollar Rate) succeeded in achieving international recognition. Singapore Monetary Authority (MAS) with effect from 27 March 2014 started to adopt JISDOR as the official exchange rate for Rupiah denominations in Singapore money market. This was very much in line with the goal of Bank Indonesia of launching JISDOR in 20 May 2013, which had the main goal of ensuring that Rupiah exchange rate Rupiah was a fair one. As a consequence, financial deepening is bound to occur due to improvement in market efficiency.
Despite inflationary pressure and weakening Rupiah, Bank Indonesia decided to leave BI rate unchanged. Based on minutes of Bank Indonesia council meeting that convened on 13 February 2014, BI rate remained unchanged at 7.5%. The policy underscores Bank Indonesia’s intention to continue to control inflation and improve Indonesian balance of payments position. It is worth noting that, the last time BI rate changed was in November 2013 which at the time was raised by 0.25 basis points.
Figure 17: Developments in BI Rate, February 2011 – February 2014 (in %)
BI rate remained unchanged at 7.5% in February 2014
Source: Bank Indonesia and CEIC (2014)
In general, interest rates have not shown significant movements in January and February 2014 compared with the position in December 2013. Interest rate on LPS guaranteed loans, increased by 0.25 basis points to 7.5% (rupiah denominated) and by 1.5% (on foreign currency denominated) in January 2014, which remained unchanged in February 2014. The increase was aimed at ensuring that LPS continued to guarantee people’s savings amidst rising interest rate that occurred in December 2013. On the other hand, interest rate on time deposits 3 months showed an upward trend, and rose above interest rate on loans as well as BI rate. In December 2013, interest rate on time deposits 3 months was 7.61%, but rose to 7.95% in January 2014. This may be potential sign that banks are facing liquidity problems.
Figure 18: Developments in Interest rate on LPS Guaranteed Loans and Deposits, 2011 – 2014* (in %)
LPS raised interest rate on guaranteed loans, 3 month deposit rate is higher than BI rate and LPS interest rate
*= January 2014 (time deposits) dan Februari 2014 (LPS guaranteed loans)
Source: Bank Indonesia and CEIC (2014)
Financial markets exudes optimism as the year ended
Financial markets, Jakarta composite index (IHSG) showed positive movements, while government bonds (SUN) showed some fluctuation in January and February 2014. IHSG increased by 3.38% to 4,418.757 (December 2013 – January 2014), and continued that trend by posting another increase of 4.56% to 4,620.216 (January – February 2014). The strengthening of IHSG in January and February 2014 may signal that foreign investors have started returning to Indonesia. On the other hand, the movement of the yield on government bonds in the market, indicated fluctuation that hovered around 8.6% (December 2013), 9.01% (January 2014), and 8.4% (February 2014). This is because yields follow inflation. Yield increase whenever inflation increases, as was the case in January 2014, and decline when inflation recedes which is also what happened in February 2014. SUN bearing medium term maturity such as 10 years is the favourite for investors as it is considered a safe and secure investment. It serves as a good investment in countering the potential for negative sentiments in the financial markets, and it is sufficiently liquid in the secondary market.
Figure 19: Movement of IHSG and Yield on SUN 10 year Maturity, February 2011- February 2014 (in %)
IHSG continued to strengthen right from December to February; yield on SUN decreased in late February 2014
Source: IDX, CEIC, and Bloomberg (2014)