Reversing the Trend

INDONESIA - Report 31 Aug 2015 by Cyrillus Harinowo and Maria Kartika Purisari

Indonesian authorities have been confronted with two major challenges: the slowdown in the economy and the turmoil in the global financial markets. The turmoil in the global market has put downward pressure both on the currency exchange rate as well as the stock exchange.

The slowdown of the economy was recently confirmed by the Central Board of Statistics, which released its National Account Statistics for Q2 2015. In the report, the headline indicated that the Indonesian economy slowed further, hitting its lowest growth in the past few years by posting an annual growth rate of 4.67%. This is slightly lower than growth in Q1 of 2015, which reached 4.71%. The rate of growth for the first semester was 4.70%. Q2 GDP posted a rate of 3.7% from the previous quarter. This confirmed many reports from the corporate sector that their companies’ Q2 performance improved from the first quarter. However, the rate of growth year over year was lower due to the better performance in the previous year.

While the government has been very responsive on this issue, the more critical challenges are the depreciating currency and the fall of the stock market index in the midst of the global turmoil after the devaluation of Chinese yuan. The rupiah exchange rate has crossed Rp.14,000 for each greenback even though it retreated again to below Rp.14,000 during the writing of this report. Similarly the stock market fell significantly, but rebounded in the past three days. Given this fluctuation, it is difficult to predict where the two indices may be heading.

On the external front, the results were much more positive. The trade balance for the month of July was again reported to be in a large surplus, of over $1 billion, due to the sharper drop in imports than in exports. However the trade data do not reflect the real situation. Both exports and imports were down due to the lower number of working days since many factories, as well as the ports, were closed for long holidays. Because the number of working days for July 2014 was higher (with the holidays only at the end of the month), the year-over year comparison of the trade data performance was not valid. This will also be the case for the trade data of the coming month.

The trade surplus for the first semester 2015 led to a relatively small current account deficit, of $4.477 billion. While larger than the deficit of Q1, the deficit of Q2 was also based on the larger GDP data. The current account deficit remained at 1.8% of GDP. Therefore, the Indonesian economy was on healthier footing, with a smaller current account deficit. However, since the capital account was not as favorable as before, the overall balance of payments was in deficit of $2,925 billion. With that deficit, foreign exchange reserves fell to $108.03 Billion.

In the monetary sector, monthly inflation in July 2015 rose by 0.93% due to the upcoming Muslim holidays. With that figure, year-over-year inflation reached 7.26%. Some portion of this inflation will phase out by the end of this year, so the Central Bank remained confident that yearly inflation in 2015 will be below 5%.

Faced with several challenges, the Indonesian Monetary Authorities finally decided to keep the benchmark rate constant at 7.50%. That is a wise decision, rather than creating unnecessary confusion for the market.

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