BI plans issuing dollar term deposits

Bank Indonesia (BI)  Indonesia's central bank, moved to stem its sliding currency on Tuesday, as the rupiah tumbled 2.5 percent to its lowest since 2009.

BI plans to release term deposit facility for US dollar to overcome the scarcity of foreign exchange that has been pressing rupiah exchange rate. This instrument uses an auction system so that the placement of US dollar funds can only be done at certain times.

The central bank promises an attractive interest rate so bank will place the excess liquidity of the foreign exchange. Bank Indonesia also allows early redemption and will not entitled with risk-weighted assets (ATMR).

The funds will be distributed to the banks that need foreign currency liquidity, with a swap or loan mechanism.

Selling of Indonesian stocks, bonds and the rupiah currency has intensified in recent weeks in line with other Asian assets as Europe's deepening debt crisis and cooling global growth prompt investors to head for the exits.

Foreigners have sold a net $650 million of Indonesian shares this month, taking their total investments in 2012 down to just around $300 million. They also sold a net 4.2 trillion rupiah ($452 million) of Indonesian government bonds this month.

But domestic factors may also be creating a downdraft for the rupiah, with some investors discouraged by slow progress on economic reforms, potential restrictions on the mining sector and the inability of the government to tackle its swelling subsidy bills.

BI use recap bond for replace SBI

Bank Indonesia plans to use recap bonds to replace Sertifikat Bank Indonesia (SBI) as instrument moneter. the central bank will do it gradually especially if assets and liability management can be concluded and agreed by finance minister. 

The definition of assets and liability management as the conversion of the recapitalization bonds (recap bonds) from non-tradable to tradable notes. following the 1997/1998 Asian financial crisis, Inonesian entity banks received IDR430 trillions liquidity support from goverments by recap bonds. 

Assets and liability management will boost supply for Bank Indonesia for monetary operations. At the end of December 2011, the outstanding value of the recap bonds which totaled about IDR 240 trilions. The notes would be converted to tradable bonds so that Bank Indonesia could use recap bonds as instrument for monetary operations.

Indonesia offer 16 infrastructure project

Indonesian Goverment offering 16 infrastructure projects worth more than US$30 billion to foreign investors this week at an international forum,

The government is offering 16 projects worth more than $30 billion at the forum, which is hosted by the Indonesian Chamber of Trade and Commerce (Kadin).

Among the projects on offer are a 33-kilometer railway connecting Soekarno-Hatta International Airport and Manggarai, the Purukcahu-Bangkuang railway and the Bali tourism railway.

Crumbling infrastructure has been blamed for hampering Indonesia economic growth and scaring off potential investors. In response, the government has led a push to upgrade the nation’s roads, ports and power stations. The government also plans increase land acquisition funds from IDR1.4 trillion to IDR3.4 trillion last year, with plans to raise it to IDR4.9 trillion by 2013.

Goverment uppgrade railway capacity

PT Kereta Api Indonesia, state railway operator company, may set up a consortium to upgrade the Jakarta-Surabaya railway as it tries to boost efficiency and increase railroad capacity.

The company may retooling the 780-kilometer railway would cost an estimated IDR6.5 trillion, with construction expected to start this year and finish by 2014.

KAI may form a consortium with state construction companies and state toll road operator Jasa Marga to build the railway.

Upgrading the railway is part of the ministry’s pledge to boost state enterprises’ capital expenditure to more than IDR800 trillion, up from IDR387 trillion, as part of the country’s economic corridor project.

Traffic between Jakarta and Surabaya would continue to increase as the economy grows. A double-track railway with a capacity of 15,000 to 20,000 containers per month was necessary because the railway was the most efficient means of transport.

Bank Indonesia try to hold interest rate

Bank Indonesia may refrain from another interest-rate increase after a hike this month as other efforts to tame inflation should be sufficient.

While rising oil prices will have an impact on inflation, the government’s suggestion to delay a planned cut of subsidized fuel sales and a “declining trend” in food costs mean consumer prices may rise as little as 0.5 percent in February from the previous month.

Bank Indonesia raised its reference rate by a quarter-point to 6.75 percent on Feb. 4, after inflation climbed to a 21-month high. It had previously resisted raising rates, seeking to curtail more foreign capital inflows by opting instead to increase lenders’ reserve requirements and tightening rules on banks’ foreign-exchange holdings to curb price advances. The central bank is due to decide on whether to hike rates or let them stand on March 4.

Fitch revised Indonesia's outlook

Fitch Ratings has revised Indonesia's Outlooks to Positive from Stable. Its ratings have been affirmed at Long-term foreign and local currency Issuer Default (IDR) BB+, short-term foreign currency IDR 'B' and Country Ceiling 'BBB-'.
"The positive outlook reflects Fitch's view that Indonesia's favourable macroeconomic prospects are likely to see the credit profile strengthen further over the next twelve to eighteen months, despite near-term risks from inflation and potentially volatile capital flows," said Andrew Colquhoun, Senior Director and Head of Asia-Pacific Sovereign Ratings at Fitch.

"Faster progress in tackling long-standing weaknesses in economic and credit fundamentals including the low tax take, infrastructure deficiencies and corruption, would further support the case for an upgrade."
Indonesia's economy grew 6.1% in 2010 after a mild slowdown to 4.6% in 2009, consolidating the five-year average at 5.7% per aannum, well ahead of the BB and BBB range medians (each 3.6% per annum).

Growth is being driven by domestic demand, supported by a pick-up in the investment rate to 32.5% of GDP in 2010, up from 24.9% in 2007.

Indonesia's growth has not been accompanied by the emergence of potentially risky external imbalances - rising savings rates have largely matched rising investment, and the economy has run a modest current account surplus since 1998.

Moreover, investment is well-diversified across the industrial and service sectors as well as the traditionally-important mining industry. Indonesia needs faster growth to narrow the income differential with rated peers; average income of US$3,000 in 2010 compares poorly with the BB median of US$5,400 and the BBB median of US$7,700.
Inflation poses a near-term risk to economic prospects. CPI inflation of 7% at end-2010 exceeded Bank Indonesia's (BI) target range of 4%-6%. BI hiked its key policy rate in February to 6.75% from 6.5% and signalled its willingness to act more firmly to contain inflation expectations, while citing the role of food prices (36% of the basket and up 17.7% to end-December).

However, Indonesia has a history of higher and more volatile inflation than rated peers, while BI's focus on its inflation target has been tempered by caution over attracting excessive capital inflows. Fitch expects inflation will average 6.5% over 2011, but a more severe inflation shock than the agency expects that is sufficient to damage economic and financial stability would weaken the case for positive rating action.
Indonesia's gross government debt to GDP ratio fell again to 26% of GDP by end-2010, well below the 'BB' median of 41% and the BBB median of 37%. The budget deficit came in at 0.6% in 2010, extending a run of low deficits below 2% since 2002 that has contributed to the debt ratio reduction. The low revenue take (just 16% of GDP in 2010) continues to weigh on the ratings, although even the debt/revenue ratio is projected to drop from 163% at end-2010 to nearer the projected BBB median of 126% by 2012. Nonetheless, low revenues diminish fiscal flexibility and constrain resources available for public investment, all of which weigh on the ratings.
Official foreign reserves rose to a record US$96.2 billion by end-2010, worth some seven months of imports and up 46% on the end-2009 figure. FDI inflows were also strong in 2010 at US$9.8 billion (1.4% of GDP). A long run of current account surpluses has helped take Indonesia's net external debt down to the BB median of 9% of GDP. Strengthening external liquidity supports the ratings, although portfolio capital inflows were a strong US$14 billion in 2010, and any reversal in the event of a shift in investor sentiment could undo some of the improvement.
Long-standing weaknesses in economic and credit fundamentals including deficiencies in physical infrastructure and a high reported prevalence of corruption weigh on the ratings. Faster progress in tackling these would help secure Indonesia's prospects for sustained growth and would support the ratings. Indonesia's steady consolidation as a democracy leaves political stability as a rating strength relative to the 'BB' category.

Goverment plan to offer tax incentive for sharia

Indonesian Goverment plan to offer tax incentives for Islamic finance. The central bank, Bank Indonesia, also plan to submit proposals, including tax cuts for mudarabah investment accounts.

A mudarabah is a partnership in profit, in which each party provides either capital or labor.

Bank Indonesia is proposing reducing income taximposed on returns earned from mudarabah accounts to 10 percent from 20 percent for customers and banks.

The plan will boost sales of Islamic debt from the nation with the world's biggest Muslim population. Indonesia had IDR 86 trillion of Islamic banking assets as of October 2010, or about 3 percent of the total, according to the central bank. That compares with RM337.6 billion ringgit in Malaysia, or 20 percent of banking assets.

Indonesia, which sold its first global Islamic bond in April 2009, will tap the international sukuk market in the first half of 2011. PT Bank Muamalat Indonesia, also aims to sell Islamic debt in 2012 depending on its business plan.