Reports of worsening economic conditions dominated headlines in newspapers for most of the year as the plunge of the rupiah sparked concerns about the possible recurrence of financial crises that shook the country’s economy in 1998 and 2008.
The year 2013 began on a positive note, when the Central Statistics Agency (BPS) announced gross domestic product (GDP) growth of 6.02 percent year-on-year in the first quarter.
Although the figure was lower than the 6.3 percent recorded in the same quarter last year, it was considered high enough given the slow recovery in the global economy.
However, the plunge in the rupiah in the middle of the year changed the entire economic prognosis. In May, the government was forced to revise down all economic indicators to cope with the impact of the weak rupiah.
The GDP growth target for 2013 was, for example, lowered to 6.2 percent from 6.8 percent and inflation to 7.2 percent from 4.9 percent.
Weak exports and the sharp decline in the value of the Indonesian currency were blamed as the main culprits of the country’s economic slowdown.
After fluctuating at a narrow range of between Rp 9,400 (77 US cents) and 9,600 per US dollar in most of 2012, and in the first half of 2013, the Indonesian currency dropped below 10,000 for the first time in four years in mid July.
The central bank tried to prevent it from breaking the psychological 10,000 barrier to no avail, despite spending billions of dollars from its foreign exchange reserves (forex) on shoring up the currency.
The fall did not stop there as the rupiah further weakened in the following months, with substantial outflows of foreign funds from the country’s equity and debt market continuing. The rupiah even passed the 12,000 level per US dollar in late November.
The fall in the rupiah was caused by foreign fund withdrawals from the country. A growing concern that the US central bank would terminate its bond-buying stimulus package led to massive outflows of foreign funds from emerging markets, including Indonesia, at the start of the second quarter.
The impact was severe, with share prices falling to their lowest levels due to heavy selling pressure from foreign fund managers.
During the peak of the foreign fund withdrawal at the end of August, the Jakarta Composite Index (JCI), the main price indicator at the local stock market, plunged to 3,967, losing more than 25 percent, in less than three months after it passed the 5,000 level for the first time in the first week of May.
The index reached its peak of 5,200 thanks to the inflow of foreign funds, partly due to the US stimulus program before the selling spree hit the market.
The same thing occurred in the debt market as foreign funds also sold their assets, mostly government bonds.
Besides its aggressive market intervention, Bank Indonesia (BI) also immediately raised its key interest rate by 25 basis points to 6 percent in mid June to shore up the rupiah and curb growing inflationary pressure amid growing concern that the plunge in the currency could lead to a financial crisis.
The country’s financial crises in 1998 and 2008 both started with a fall in rupiah.
The rise in the key rate, the first since 2011, marked the end of the low interest rate era as the central bank focused more on monetary stability. The rate hike was followed by other increases in the following months — by 50 basis points in June, 50 basis points in July, 50 basis points in August, 25 basis points in September and another 25 points in November to 7.25 percent.
Although BI raised the key rate by 1.75 percentage points since the first hike in June, inflationary pressure remained strong. Year-on-year inflation, which jumped to 8.6 percent in July from 5.89 percent in June, remained high at 8.8 percent in August, and 8.3 percent in September, October and November.
In addition to the rise in the interest rate, the central bank also renewed swap agreements with its counterparts in other Asian countries in anticipation of the worsening of the country’s economic condition.
BI signed swap agreements with its counterparts in Japan and China in deals worth $12 billion and $15 billion, respectively.
The central bank’s high interest policy and its swap agreements helped improve foreign investors’ confidence. Some of them have put their money back in the local stock and debt markets.
Encouraging signs were reflected in the increase in forex reserves held by BI in the third quarter. The reserves increased from $92.67 billion at the end of July to $93 billion at the end of August, $95 billion at the end of September and $97 billion at the end of October.
The country’s current account deficit also dropped to $8.45 billion or 3.8 percent of GDP in the third quarter, ending in September, from $9.95 billion or 4.4 percent of GDP in the second quarter, ending in June.
BI is trying to lower further the current account deficit to 2.5 percent of GDP so that the widening deficit would not cause a serious impact on the economy as whole.
The surge in the rupiah has affected almost all economic components, including domestic consumption, as the increase in prices resulting from the higher operating costs have begun to slow demand.
Indonesia’s GDP grew below 6 percent for the first time since 2010 in the second quarter ending in June, as the economy began to feel the pinch from weak exports, the decline in domestic consumption and investment.
GDP grew only 5.81 percent year-on-year in the second quarter, ending in June. The trend continued as in the third quarter, the economy grew even lower at 5.6 percent.
Finance Minister Chatib Basri acknowledged it would be difficult to end the year with a GDP growth of 6 percent given the decline in the country’s exports.
Although domestic consumption and investment remain the main contributors to economic growth, they will not be able to prop up growth to above 6 percent like in previous years.
The World Bank estimates this year’s GDP growth will be even lower at 5.6 percent, below the government’s revised target of 6.2 percent.
Source Article from http://www.thejakartapost.com/news/2013/12/30/yearender-a-year-low-growth-and-high-inflation.html
