The level of international reserves in May 2014 reached USD 107.048 billion, which was an increase of USD 1.485 billion compared with the position in April 2014. The international reserve position can finance 6.2 months of imports, which criteria makes it fulfill international adequacy standard (three months of imports). Subsequently, in April 2014, international reserves reached USD 105.56 billion, which represented an increase of USD 2.97 billion compared with the position in March 2014. The increase in the level of international reserves came as a consequence of an increase in oil and gas exports during April–May 2014 period and improvement in capital flow to Indonesia in May 2014. Bank Indonesia, through PBI No. 14/25/PBI/2012 on foreign exchange revenue derived from exports and external debt related withdrawals seemed to have registered success in forcing exporters to deposit their revenues in foreign exchange banks. Consequently, the policy has contributed to improving Indonesian international reserve position. Meanwhile, in March 2014, international reserve position decreased by USD 149 million which represents a decline of 0.145% compared with the level registered in the previous month. The decline in the international reserve position is attributable to efforts by the government to repay USD 2 billion of its bond obligations that reached maturity. To that end, Bank Indonesia, expects the international reserve position to decline in quarter II-2014. On a seasonal basis, quarter II is often characterized by maturity of securities that require payment of interest, dividends, and royalties.
Figure 1: Indonesian International Reserves (in USD billion) and Developments in the Exchange Rate (IDR/USD), May 2011 – May 2014
Level of international reserves shows an upward trend and reached USD 107.048 billion; the depreciation of rupiah continues
Source: Bank Indonesia and CEIC (2014)
On the other hand, since January 2014, the issuing of government securities (SBN) also contributed to the increase in the level of international reserves. During quarter I–2014, SBN denominated in foreign currency increased by USD 3.05 billion. The addition meant that the government bond (SUN) denominated in various currencies such as USD, Japanese yen, and Euros to become USD 30.19 billion, JPY 155 billion, and Global Sukuk to become USD 4.15 billion. During quarter IV–2013, the level of SUN denominated in USD reached USD 27.14 billon, whereas SUN denominated in Japanese Yen reached JPY 155 billion, and SBSN reached USD 4.15 billion. Overall, foreign portfolio investment, in the form of equity and SUN, posted a drastic increase of USD 8.51 billion in quarter I–2014, compared with an increase of USD 1.63 billion in quarter IV–2013.
Table 1: Governments Bonds Denominated in Foreign Currencies and Bilateral Loans, 2012 – 2014 (in USD billion unless stated otherwise)
The government securities denominated in USD increased by USD 3.05 billion in quarter I–2014; meanwhile, bilateral loans posted an increase of USD 4.45 billion in April 2014
Note: * = JPY billion
Source: DJPU and CEIC (analyzed, 2014)
The rise in international reserves has not led to the appreciation of rupiah. Rupiah exchange rate by late May 2014 was IDR 11,611 per USD, which represented a depreciation of 0.69% compared with the value in April 2014 (IDR 11,532 per USD). Meanwhile, rupiah exchange rate in April 2014 depreciated further compared with the previous month. The depreciation of Rupiah came on the heels of negative market sentiments that arose from the news relating to the relapse of the balance of payments into a deficit (balance of payments position in April 2014 recorded a deficit of USD 1.96 billion) which is coupled with the periodical pattern of external debt repayment in quarter II. Besides, The Fed policy of gradually reducing quantitative easing this year also has had significant impact on market practitioners. The downward trend in the rupiah is expected to continue as The Fed is expected to raise Fed Fund rate in 2015. Specifically, however, dynamics in Indonesian politics this year, in which the country will conduct presidential elections have also had adverse impact on the rupiah exchange rate in May 2014. The year 2014 being a year of ‘politics’ is expected to be characterized by high uncertainty, which for investors means that they have to seek security first as adopt a wait and see strategy.
As the country entered harvesting season for food crops, inflation trended downwards in March 2014. In March 2014, inflation was 7.32% (y-o-y), which is lower than the level registered in the previous month. Based on the composition of inflation in March 2014 (y-o-y), core inflation was 5.35%, inflation due to volatile prices was 5.55% and inflation of government administered prices was 16.84%. On month-to-month basis, inflation in March 2014 was 0.08%, declined in April 2014, a trend that continues as reflected by a decrease of 7.25% (y-o-y) largely due to the effect of harvesting season on commodity prices. On a year-on-year, core inflation was 5.46%, inflation of volatile price 5.24%, and inflation of government administered was 17%. Meanwhile, on a month-to-month trajectory, April 2014 registered a deflation of 0.02%.
Figure 2: Inflation, May 2011 – May 2014 (y-o-y, in %)
Inflation in May 2014 was 7.32% (y-o-y)
Source: BPS and CEIC (2014)
Despite the fact that harvesting season is still underway, inflation in May 2014 trended upwards. May 2014 registered Inflation of 7.32% (y-o-y), which is higher than 5.47% (y-o-y) registered in May 2013. In the meantime, on a month-to-month basis, inflation in May 2014 was 0.16%. Based on the composition of May 2014 inflation on a year-on-year basis, core inflation was 5.63%, volatile price inflation was 6.17%, and administered price was 16.23%.
Table 2: Inflation of Indonesia by Group of Commodities, 2011 – 2014 (2012=100, m-t-m, in %)
Foods induced deflation, inflation in May 2014 was 0.16% (m-t-m)
Note: (1) Food Stuff; (2) Prepared Food, Beverage, Cigarette, and Tobacco; (3) Housing, Water, Electricity, Gas and Fuel; (4) Clothing; (5) Health; (6) Education, Recreation, and Sports; (7) Transport, Communication and Financial Services
Source: BPS and CEIC (2014)
On a month-to-month basis, April 2014 registered a deflation of 0.02% (m-t-m), largely due to the decline in expenditure on Food Stuff. Food Stuff experienced a deflation of 1.09% (m-t-m). Some of the Food Stuff that registered price decline were in 6 sub categories which included condiments and spices (7.4%). The contribution Food Stuff’s inflation accounted for -0.22% of headline inflation in April 2014. Prices that declined in April 2014, among others included chili pepper, rice, onions, spinach, and andwater spinach. Furthermore, inflation in April 2014 was dominated by the group of Health commodity, accounted for 0.6% (m-t-m). Meanwhile, based on group of commodities, the inflation in May 2014 (month-to-month) was dominated by Health commodity which increased by 0.41%, followed by inflation on Prepared Food, Beverage, Cigarette, and Tobacco (0.35%), and Housing, Water, Electricity, Gas and Fuel (0.23%). Meanwhile, prices of Food Stuff continued to register deflation as was the case in the previous month, largely attributable to the decline of prices of red pepper, chili, and rice due to the harvesting season that is still underway.
In general, cities in Indonesia experienced inflation in May 2014. Out of 82 cities, 67 of them, registered inflation, with Pematang Siantar being the city that registered the highest inflation of 1.09% (m-t-m). The number of cities that registered inflation in May 2014 is higher than 43 cities and 45 cities that registered inflation in April 2014 and March 2014, respectively. On the contrary, 15 cities registered deflation in May 2014, with Pangkal Pinang being the city that experienced the largest deflation of (1.27% m-t-m). In April 2014, Pangkal Pinang city registered the highest inflation (1.57% m-t-m), while Jayapura recorded the lowest inflation in the same period (-1.79% m-t-m). Meanwhile, in March 2014, Merauke registered the highest inflation (1.15% m-t-m), while Tual recorded the lowest inflation (2.43% m-t-m).
The performance of Indonesia Composite Index (IDX) continues to its upward trend in May 2014. At the close of trading session in May 2014, IDX was 4,894, which represents an improvement of 1.11% compared with the level registered in the previous month. In fact, in May 2014, IDX reached 5,031. The value of 5,000 on the IDX constitutes the psychological level for investors as it is regarded as a benchmark for new share prices which will impact market practitioners. At the closure of the trading session in April 2014, IDX registered a value of 4,840, which an increase of 1.51% is compared with the level recorded in the previous month. Intensive activity of IDX within the green level is indicative of rising investor confidence in the current economic condition and economic prospects of Indonesian economy amidst the year of politics. At a more fundamental level, the resurgence of investor confidence in Indonesian economy reflects investor perception that Indonesian economic fundamentals have improved. In quarter I–2014 foreign investors carried out net buy of IDR 24.62 trillion, which is higher than the level made in quarter IV–2013 of IDR 11.11 trillion.
Figure 3: The Movement of Indonesia Composite Index (IDX) and 10 Years Government Bond Yield , April 2011 – April 2014 (%)
IDX continues the upward trend; meanwhile, SUN yield was 8.21% in late May 2014
Source: IDX, CEIC, and Bloomberg (2014)
In the bonds market, the movement of government bond yield by the end of May 2014 showed a downward trend shedding 12 bps to 8.21%. Nonetheless, as has been the case in previous months, the movement of the SUN yield follows movement and fluctuation of inflation. Thus, the SUN yield has shown a downward trend since January 2014, changed course in May 2014, largely as a consequence of higher inflation that was registered in May 2014 compared with the level in April 2014. During the previous months, inflation slowed slightly, which in turn induced a downward trend in SUN yield. The yield on SUN in late April 2014 was 8.09%, which is lower than the level registered in March 2014 (8.21%).
The Indonesia Deposit Insurance Corporation (IDIC) has decided to raise its guaranteed intreset rate by 25 basis points (bps) to 7.75% in May 2014. The increase in interest rate constitutes an attempt to ensure than deposits of bank customers are guaranteed. Meanwhile, the upward trend in bank interest rate continues. Liquidity in Indonesian banking in domestic assets is tending towards becoming restrictive. This is a consequence of BI restrictive monetary policy which is reflected in keeping BI rate at 7.5%. IDIC policy will be in effect until September 2014. Meanwhile the IDIC’s guaranteed interest rate for March-April 2014 remained unchanged at 7.5%.
Figure 4: Developments in IDIC’s Guaranteed Interest Rate and Time Deposits, 2011 – 2014* (%)
The IDIC’s guaranteed interest rate increased by 25 bps, meanwhile the time deposits’ interest rate for 1 month is above BI rate and IDIC’s guaranteed interest rate
*= March 2014 (time deposit) and May 2014 (guaranteed interest rate)
Source: Indonesia Deposit Insurance Corporation, Bank Indonesia and CEIC (2014)
Interest rate on time deposits continues to be high, higher than the rate that is applicable on guaranteed deposits. Interest rate on time deposits for one month maturity was 8.1% in April 2014. This is an indication that Indonesian Banking sector is experiencing restrictive liquidity condition, which is attributable to slower growth in broad money (M2). The slackening of M2 is as a result of low realization of government expenditure and decline in credit growth. As has become the practice, the realization/absorption of government expenditure is initially slow at the outset but picks up pace toward the end of the fiscal year. By quarter I–2014, government consumption grew by a mere 3.6% (y-o-y), which is lower than the level registered in quarter IV–2013 which grew by 6.4% (y-o-y). Interest rate on credit has risen since January 2014. This is showed by the trend in interest rate on credit which in February 2014 rose to 12.51%, and in March was 12.53%, while in April 2014 it reached 12.56%.
Figure 5: Developments in BI Rate May 2011 – May 2014 (%)
Bank Indonesia left BI rate unchanged at 7.5% in May 2014
Source: Bank Indonesia and CEIC (2014)
Restrictive monetary policy in May 2014 continues in line with the inflation targeting policy and efforts to improve balance of payments position. This is reflected in outcomes of Bank Indonesia governors council meeting convened on May 12, 2014, which decided to leave BI rate unchanged at 7.5%. The decision was taken after factoring in inflation that is under control, the downward trend shown by the deficit on the current account, optimism that is exuding from financial markets condition, domestic demand which continues to offset contraction, and economic prospects of Indonesian and global economy that are gradually improving. Nonetheless, Indonesian economy continues to face a number of risks, which among other factors , include: uncertainty that continues to cast a large shadow on the economy emanating from the impact of tapering off policy and expected plan to raise FED Fund Rate in 2015; decline in the value exports attributable to the weakening of the economy of China which one of Indonesia’s key trading partners; and domestic inflation which is expected to rise due to possibility of bad weather in the event of El Nino occurrence and government plan to raise prices of some services that fall under the category of administered prices (basic electricity rates and LPG 12 kg price).