Bank Indonesia (BI), which raised its BI rate by 175 basis points in 2013 to curb inflation and defend its embattled rupiah currency, added that the country's current account deficit should also narrow and this should reduce the pressure on the exchange rate.
"Monetary policy will remain consistently directed towards controlling inflation within its target corridor and bringing the current account deficit to a healthier level through interest rate policy and exchange rate stabilisation according to economic fundamentals," the BI said.
Indonesia faced what the BI described as "a number of arduous challenges" in 2013 as a global slowdown pushed down the prices of its export of commodities, inflation jumped due to higher fuel prices and is currency dropped as investors withdrew funds following expectations that the U.S. Federal Reserve would start to wind down its asset purchases.
Economic growth is forecast by the central bank to have dropped to 5.7 percent in 2013, down from 2012's 6.2 percent, inflation soared to 8.38 percent from 4.30 percent and the current account deficit swelled to 3.5 percent of Gross Domestic Product from 2012's 2.8 percent.
But the central bank sees better times ahead, expecting an improvement in the global economy in 2014 "hence propping up the Indonesian economy looking ahead, both in terms of the trade channel and the financial channel."
Indonesia's inflation rate jumped in July and has remained in a range of between 8 percent and 9 percent since then. But the BI expects inflation to drop into its target corridor of 4.5 percent, plus/minus one percentage point, in 2014, and then ease further toward its 2015 corridor of 4.0 percent, plus/minus one percentage point.
The decline in economic growth last year was partly due to lower exports due to the tepid global economy but domestic demand and investments also slowed while household consumption remained the primary driver of growth, the BI said.
"Bank Indonesia considers the ongoing downward economic growth trend as conguous with the current direction of Bank of Indoenesia and Government stabilization policy instituted to bring the domestic economy back towards a healthier and more balanced growth trajectory," the BI said.
Growth this year is forecast to strengthen to the lower end of a forecast 5.8-6.2 percent.
Indonesia's Gross Domestic Product rose by 2.96 percent in the third quarter from the second quarter for annual growth of 5.62 percent, the fifth quarter with a declining growth rate.
Lower exports and lower commodity prices, combined with high domestic demand for fuel, raised Indonesia's current account deficit and pressure on the balance of payments was accentuated by a shrinking surplus on the financial and capital accounts "triggered by bearish sentiment following the Fed's plan to taper monetary stimuli as well as domestic expectations regarding the current account," the BI said.
Indonesia's current account deficit eased to $8.449 billion in the third quarter from $9.954 billion in the second quarter, but the BI said the balance of payment should improve in the fourth quarter and the current account deficit should subside as the trade surplus grows because non-oil/gas imports ease in line with the slowing economy and the global economy improves.
"Bank Indonesia considers the improving balance of payments in the final quarter of 2013 adequate to support domestic economic stability and steer the current account towards a healthier position,"BI said.
Foreign exchange reserves amounted to $99.4 billion in December, the equivalent of 5.4 months of imports.
The rupiah exchange rate was under pressure in 2013, especially from the end of May until August as capital flowed out of the country due to expectations of Fed policy tightening amid soaring inflation following fuel price rises. The rupiah fell 20.8 percent from end-2012 to end-2013, closing at 12,170 to the U.S. dollar for an average depreciation of 10.4 percent.
"Better BoP performance, along with a shrinking current account deficit, will help stabilize the rupiah exchange rate and encourage potential rupiah appreciation looking ahead," the BI said.
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