Figure 3: Movements in Indonesia Stock Exchange (IDX) and SUN Yield Index 10 year maturity, August 2011 – August 2014 (%)
IDX has posted modest growth, yield SUN yield shows an upward trend once again

Source: IDX, CEIC, and Bloomberg (2014)

 

During the closing session on 29 August 2014, Indonesian Stock Exchange (IDX) continued to show positive albeit flat trend. Despite posting a slight increase (0.94%) compared to the position in the previous month, IDX reached 5,136 levels in August 2014.  Besides, IDX reached a new benchmark when it broke 5000 points price level. In fact, on 21 July 2014, IDX closed at 5,206, which is the highest level for IDX, which occurred at a time when the outcome of the Presidential elections were announced. Nonetheless, in late June 2014, IDX suffered a correction of -0.31% compared with the previous month. This was attributable to restrictive liquidity, as well as a continuation of the “wait and see” attitude of investors.  The hope is that such a condition will not come to end sooner than later, as a result of flawless conduct of the general elections, which induced high market optimism in the newly elected government. Meanwhile, during quarter II-2014 foreign investors bought IDR 19.5 trillion  in securities, which is lower than the volume of transactions made in quarter I-2014 of IDR 24.62 trillion . Moreover, the Sharia Index contributed 60% of the performance of IDX valued at IDR 5, 200 trillion (y-t-d) on 27 August 2014.
On the other hand, bonds markets registered an increase in the yield on State Bonds (SUN) in late August 2014. Sun yield rose by 11 bps to become 8.28% compared with the previous month. In late July 2014, SUN yield was 8.16% lower than 8.35% posted in June, 2014. The fluctuation was attributable to the fact that investors are still in “wait and see” mood as they explore and project economic conditions in the wake of the presidential elections. In the meantime, net purchases of securities by foreign investors on government securities (SBN) registered IDR 42.68 trillion, which during quarter II-2014 showed an increase of IDR 37.08 trillion.

 

Figure 4: Foreign exchange reserves (billion USD) and developments in exchange rate of (IDR/USD), August 2011 – August 2014
Foreign exchange reserve position reached USD 111.2 billion; Rupiah continues to hover above 11,500 per dollar on August 2014

Source: Bank Indonesia and CEIC (2014)

 

Rupiah exchange rate continues to depreciate. In late August 2014, Rupiah exchange rate was IDR 11,717 per USD, which represents a depreciation of 1.09% compared with the position in July 2014 when Rupiah registered an appreciation of 3.16% to IDR 11,591 per USD compared with the position in the previous month. The depreciation of Rupiah is largely attributable to both domestic and foreign issues. With regards to domestic issues, parties that are long in US dollars persist with their wait and see attitude the political developments, especially in the lead-up to the formation of political party coalitions (June 2014) and announcement of general elections results (July 2014). Besides, rising deficit on the current account which was attributable to a deficit on the balance of trade in services, compounded with impending foreign debt repayment and distribution of dividends in quarter II all contributed to negative sentiments that weighed negatively on financial markets. Meanwhile, with respect to external front, geopolitical developments in Iraq and Ukraine strengthened movement toward speculation in international oil and gas prices, which in turn induced investors to adopt holding positions on their dollar portfolios. Nonetheless, outcome of the presidential elections, which were in line with market expectations helped to strengthen Rupiah toward the end of July 2014.
To stem the depreciation of Rupiah, the government must take measures to regulate imports, which would strengthen its ability to control short term external payments and regulate foreign exchange transactions.  Otherwise, current account position was still in deficit in quarter II-2014 as compared with quarter II-2013. Meanwhile, efforts to control foreign exchange transactions have gained traction as reflected in the issuing of instruction of the Coordinating Ministry for Economic Affairs that obliges all transactions to be conducted in Rupiah that came into effect in September 2014. This measure was taken in order to shore up control over Rupiah exchange rate as mandated by Law No.7/2011 on Currency.
Foreign exchange reserves continues to show an upward trend. In August 2014, foreign exchange reserves position reached USD 111.2 billion, which represented a slight increase of  USD 0.68 billion. That said, the foreign exchange position in August 2014, despite falling short of the record that was recorded in August 2011 (USD 124.6 billion), can be regarded as the highest in over one and half years. Meanwhile, in July 2014, foreign exchange reserve position surpassed the USD 110.5 billion mark by USD 2.8 billion compared with the level in the previous month. The increase in foreign exchange reserves in quarter II-2014 specifically in July 2014 was in part as a consequence of positive developments on the capital and financial account, in the wake of the issuing of the first Eurobonds RI. The issuing of the bonds was considered a success as it was able to generate EUR 1 billion or USD 1.4 billion in raised funds. Moreover, the bond issue was oversubscribed by a factor of seven, which was attributable to the concurrence of the issuing with the lowering of the interest rate in Europe by European Central Bank (ECB) from 0.25% to the lowest level so far of 0.15% in June 2014 Eurobond issuing received relatively good rating, with Fitch giving it “BBB-”, S& P   “BB+”, and Moody’s “Baa3”.

 

Figure 5: Developments in Interest rate on IDIC guaranteed Loans and Deposits, 2011 – 2014* (%)
Interest rate on guaranteed loans remain unchanged, the upward trend shown by interest rate on deposits continues

Note:
* = July 2014 (Time deposits) and August 2014 (interest rate on loans)
Source: Bank Indonesia and CEIC (2014)

 

By the time this piece went to press, Indonesia Deposit Insurance Corporation (IDIC) interest rate on loans remained unchanged. Interest rate on loans remained unchanged at 7.75%. Apparently, IDIC does not seem to see indications of significant rise in interest rate on deposits in general. That said, monetary condition in Indonesia continues to point toward restrictive trajectory as reflected in rising interest rate on deposits.
The movement of the interest rate on deposits continues to rise. In June (quarter II) 2014, interest rate on time deposits for the duration of one month was 8.32%, which represented an increase of 16 bps from the level posted in previous month (8.1%), and represented an increase of 33 bps from the position registered in quarter I (7.99%). Meanwhile, in July 2014, interest rate on time deposits for one month maturity was 8.41%, which represented an increase of 9 bps from the level registered in the previous month. What is worth noting is the level of interest on time deposits on one month maturity was far higher than interest rate acceptable on IDIC guaranteed loans. Consequently, rising interest rate on deposits has induced an increase in interest rate on loans, which in turn has led to tightening liquidity in Indonesian commercial banks. On average weighted interest rate on credit over the last few months has shown an upward trend as follows: 12.75% (May 2014); 12.76% (June 2014); and 12.82% (July 2014). Consequently, growth in disbursement of credit has dropped to 15% (y-o-y) in July 2014 from 16.65% (y-o-y) in June 2014 and 17.4% (y-o-y) in May 2014. In quarter to quarter terms, interest rate on credit in quarter II-2014 registered an increase of 20 bps from quarter I-2014-an increase of 12.56%; while credit growth contracted from 19.06% (y-o-y) in quarter I-2014. By July 2014, total credit disbursement was IDR 3,516.7 trillion.

 

Figure 6: Developments in BI Rate, August 2011 – August 2014 (%)
BI rate remains unchanged, monetary sector remains restrictive

Source: Bank Indonesia and CEIC (2014)

 

There is yet no change in Indonesian monetary policy. In accordance with the decision of Bank Indonesia Governors’ council issued on 11 September 2014, BI Rate remained unchanged at 7.5%. The policy was reached after taking into consideration the fact that inflation remained in check, recovery of the Global economy which is underpinned by performance of the US economy that in turn depends heavily on domestic consumption remains sluggish, and positive condition in financial markets that continues to post positive  developments. On the other hand, a dark shadow continues to hang over Indonesian economy due to risk that among other factors is attributable to: uncertainty in the global economy arising from the continuation of the tapering off policy this year which will be coupled with subsequent increase  in the Fed Fund Rate (FFR) in 2015 as well as weaning economic growth affecting emerging markets; decline in value of exports as a result of  falling demand in commodities and natural resources which in part is attributable to the implementation of Law on Mineral and Coal Mining and weakening economic growth in emerging markets; and domestic inflation which is likely to edge upwards as a result of poor weather conditions (El Nino) and impending plans by the government to raise levels of determined prices (flight fares and efforts to control government expenditure on fuel subsidies). Meanwhile, the deficit on the current account in quarter II is poised to increase due to the impending maturation of foreign debt obligations and distribution of corporate dividends. Nonetheless, the deficit on the current account registered in quarter II is still better than the level posted in the same period in the previous year.
With regards to FFR, Joseph Stiglitz, a Nobel Prize laureate in economics, Joseph Stiglitz, predicts that the increase will not occur in 2014 but in quarter II-2015. Stiglitz continues, to warn emerging markets to be wary of global pressure on their economies in the wake of Fed policy. To that end, Stiglitz advises that developing countries can avert the ramifications of Fed policy on their economies by implementing sound management of foreign exchange reserves, current account, and financial account. The recovery of US economy means that quantitative easing policy will be phased out by the end of this year, which also means that raising of FFR in 2015. Median survey of members of Federal Open Market Operations Committee (FOMC), the Fed, showed that prediction to raise FFR ranged between 1 and 1.25%.

 

Figure 7: Inflation, August 2011 – August 2014 (y-o-y, %)
General level of prices is under control, inflation in August was 3.99 % (y-o-y)

Source: BPS and CEIC (2014)

 

During quarter II-2014, the general level of prices showed a downward trend. Inflation in August 2014 was 3.99% (y-o-y). With regards to composition, in August 2014, Core Inflation continues to be under control at 4.49% (y-o-y), inflation of Volatile Prices was 0.48% (y-o-y), and inflation of government Administered Prices was 6.19% (y-o-y). Based on month-to-month, August inflation was 0.47%. The decline in the general level of prices in August was attributable to falling prices onions, tomatoes, and shallots due to abundant supplies. Inflation in August was lower than the level registered in July (4.5%, y-o-y) which was also lower than the level registered in the month prior to that. Meanwhile, inflation in July 2014 was under control thanks to the success of the instruction of the Ministry of Coordination for Economic affairs that induced improvement in the system of distribution of goods. Viewed from the vantage point of composition, in July 2014, Core Inflation was 5.07% (y-o-y), inflation of Volatile Price was 1.97% (y-o-y), while inflation of government Administered Prices 6.18% (y-o-y).

 

Table 6: Inflation by Category of Expenditure 2011 – 2014 (2012=100, m-t-m, %)
Cooling down in the wake of long holiday season, monthly inflation in August 2014 was 0.47% (m-t-m)

 

 

 

 

 

 

 

 

 

Note: (1) Food stuffs; (2) Processed foodstuffs, Beverages, Cigarette, and Tobacco; (3) Housing, Electricity, Gas, and Fuel; (4) Clothing; (5) Health; (6) Education, Recreation, and Sports; (7) Transportation, Communication, and Financial Services
Source: BPS and CEIC (2014)

 

In August 2014, prices of foodstuffs and transportation registered declining due to the completion of the long holiday season. Based on month by month development, the highest inflation in August was registered in expenditure on Education, Recreation, and Sports of 1.58% (m-t-m). Meanwhile, the lowest inflation was registered in expenditure on Transportation, Communications, and Financial Services of -0.12% (m-t-m). Meanwhile, in July 2014, the highest inflation (1.94%, m-t-m) was registered in expenditure on Food Stuff. On the contrary, in July 2014 the lowest inflation (0.39%, m-t-m) was registered in expenditure on Health.
In general, cities in Indonesia that registered inflation in quarter II-2014. Inflation was registered in 66 out of 82 cities that were surveyed in August 2014, compared with 82 cities in July 2014. In August 2014, Tanjung Pandan registered the highest inflation (1.98%, m-t-m), while Ternate city registered the lowest inflation (-1.02%, m-t-m). Meanwhile in July 2014, Bengkulu city registered the highest inflation (2.92%, m-t-m), while Maumere city posted the lowest inflation (0.03%, m-t-m).