Rebound in Capital Flows

INDONESIA - Report 30 Oct 2015 by Cyrillus Harinowo and Maria Kartika Purisari

In the past few weeks, we have seen a return of capital inflows into the Indonesian financial system, both in the stock and the bond market. Such a return led to a significant strengthening of the Indonesian currency. Aside from the impact of lowering import prices, the strengthening of the currency built business confidence, which in turn helped propel the economy.

In the mindset of the people, the exchange rate, which approached Rp.15,000 per US dollar, weakened confidence significantly. Therefore, when the exchange rate crossed back below Rp.14,000, sentiment reversed immediately. Since many Indonesian manufacturing industries are dependent on imported raw materials, the weakening currency hit them directly. Therefore, when the currency strengthened, sentiment also reversed.

At the same time, further spending by the Indonesian central government as well as spending by the regional governments also pushed the economy forward. While lower than the previous year, loans of the banking system also started to come on in the third quarter of 2015. The impact on the economy will be seen in third quarter growth, to be announced in early November 2015. So far, indications suggest a higher rate of annual growth, from 4.7% in the first half of 2015 to around 4.8% to 4.9% in Q3 2015.

In the midst of this situation, in September 2015 the trade balance registered another surplus. Thus, for the first nine months of this year, the trade balance has continued to post surpluses. The trade surplus in September was driven primarily by a decline in imports, although exports also declined. Exports reached $12,528.9 million in September, slightly lower than in August, for a decline of $197.9 million or 1.55%. This decline was due to the lower number of working days in September (30 working days) compared to August (31 working days). Therefore, average daily exports were stable or even slightly higher than in August. Meanwhile, imports reached $11,511.7 million in September 2015, compared with $12,399.2 million in August 2015, a decline of $887.5 million or 7.16%. Thus the trade surplus in September 2015 was $1,017.2 million. For the first nine months of this year, exports were $115,073.4 million while imports reached $107,942.2 million, leading to a trade surplus of $7,131.2 million.

September 2015 was also marked by relatively mild deflation, at 0.05%. Yearly inflation in September was 6.83%. With three months remaining in the year, accumulated inflation for the year stands at just 2.24%. With that inflation and trade data, Bank Indonesia decided to keep the interest rate constant at 7.5% at its policy meeting in October 2015.

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