Inflation eases but rate cut deemed unlikely for now 

Indonesia’s consumer price index (CPI) growth has been steadily within acceptable boundaries for almost a year, yet Bank Indonesia (BI) hiked its key interest rate twice during that time, and analysts believe the central bank will remain cautious despite inflation being under control. 

Indonesia’s consumer price index (CPI) growth has been steadily within acceptable boundaries for almost a year, yet Bank Indonesia (BI) hiked its key interest rate twice during that time, and analysts believe the central bank will remain cautious despite safe inflation readings.  

Interim Statistics Indonesia (BPS) head Amalia Adininggar Widyasanti announced at a press briefing on Thursday that headline inflation, which measures the year-on-year (yoy) increase in consumer prices, declined marginally to 3 percent in April from 3.05 percent in the preceding month.  

In monthly terms, however, CPI growth eased significantly, as consumer prices in April were only 0.25 percent higher than in March, marking a slowdown from a month-to-month (mtm) increase of 0.52 logged in March.  

Amalia attributed that slowdown to reduced price pressure in staple food products like “red chili, rice and eggs”.  

Inflation has been well maintained within BI’s target range for almost a year now, but the central bank nonetheless decided to increase its benchmark interest rate twice in that period, most recently with a 25-basis-point (bps) increase on April 24, lifting the BI Rate to 6.25 percent. 

BI’s inflation target range for 2023 was 2 to 4 percent, which was ultimately attained at the year’s close with 2.61 percent. The central bank then set a more ambitious target of 2.5 plus/minus 1 percent for this year, and so far, CPI growth has stayed well clear of the upper limit.  

After a prolonged period of high inflation in Indonesia and much of the world, domestic inflation finally came back down to BI’s target range in May 2023 as CPI growth touched 4 percent yoy. 

It has remained within the central bank’s target range ever since, hence BI’s two most recent interest rate hikes were interpreted as pre-emptive moves aimed at anticipating any risks from external economic uncertainties, such as conflict in the Middle East. 

While the first surprise hike took place in October 2023 amid mutual attacks between Israel and Hamas, the one last month came against the backdrop of escalating tension between Iran and Israel.  

In addition to geopolitical risks, BI’s April hike also came after United States macroeconomic data had prompted the US Federal Reserve (Fed) to signal to financial markets that it would keep its key interest rates “higher for longer”.  

The Fed kept the federal funds rate unchanged on Wednesday, and Fed Chairman Jerome Powell said in Washington, DC, that inflation was too high and progress in bringing it down was uncertain, but he did not entertain growing speculation that the Fed might need to hike the rate.  

"There are paths to not cutting, and there are paths to cutting. It's really going to depend on the data," he said, which traders interpreted as all but ruling out a rate hike, according to Reuters. That was enough to send most Asian stock markets higher on Wednesday.= 

The Fed’s stance, which has turned more hawkish when compared to a few months ago, has buoyed the US dollar and is seen as the strongest factor behind BI’s decision to raise the BI Rate last month.  

The unusually narrow gap between the BI Rate and federal funds rate may drive investors to sell off rupiah assets in favor of the dollar, which would put pressure on the rupiah’s exchange value and thereby stoke imported inflation as the higher cost of imported goods – in rupiah terms – drives up domestic prices.  

Against that backdrop, said BCA chief economist David Sumual, BI had made the right decision with both of its most recent rate hikes, despite domestic inflation being stable.  

David told The Jakarta Post on Thursday that Indonesia had never had the privilege to move independently of the Fed, since “the majority of our trade transactions and investments are still [conducted] in dollars”.  

“So, when [the Fed] raises the interest rate, expectations shift and investment becomes turbulent,” said David. He pointed out that capital outflow had contributed to the rupiah touching a multiyear-low in mid-April.  

David forecast that irrespective of domestic inflation, BI would only begin to cut its rate after the Fed and added that the Indonesian economy could afford the current high rate, given that the benchmark rate hikes were not accompanied by equally large increases in the lending facility rate and hence in commercial bank lending rates. 

On top of that, BI also provided liquidity incentives for banks that provided loans to certain sectors, he noted. Both of these factors, according to David, will spur loan and GDP growth, effectively making the high rates less costly to the economy. 

Bank Danamon economist Irman Faiz wrote in an analysis published on Thursday that he did not expect a rate cut from BI this year as the central bank would seek “to ensure rupiah stability”. BI would “have room to cut after the Fed begins its rate cut cycle, which we expect to happen in December 2024”.  

Source: The Jakarta Post 

Microsoft will invest $1.7 billion in AI and cloud infrastructure in Indonesia

Microsoft will invest $1.7 billion over the next four years in new cloud and artificial intelligence infrastructure in Indonesia — the single largest investment in Microsoft’s 29-year history in the country — Microsoft CEO Satya Nadella said Tuesday. 

Microsoft runs one of the world’s largest cloud computing operations and has taken a significant step into artificial intelligence by incorporating an AI chatbot into its search engine, Bing. Its earnings report Thursday said profit rose 20%for the January-March quarter as it tries to position itself as a leader in applying artificial intelligence technology to make workplaces more productive. 

“This new generation of AI is reshaping how people live and work everywhere, including in Indonesia,” said Nadella, in Jakarta on the first stop of a tour of Southeast Asia. 

“The investments we are announcing today — spanning digital infrastructure, skilling, and support for developers — will help Indonesia thrive in this new era,” he said. 

Microsoft sees Southeast Asia as a growing market and potential location for more AI product development. The rise of AI in the region is expected to significantly impact its economic landscape. A study held by Kearney, a global consulting firm, said that AI could contribute nearly $1 trillion to Southeast Asia’s GDP by 2030, of which Indonesia is expected to capture $366 billion. 

The investment announced Tuesday will include AI training for 840,000 people, as well as support for Indonesia’s growing community of tech developers. 

Indonesia is home to the third-largest developer community in the Asia-Pacific region after India and China. More than 3.1 million developers in Indonesia use GitHub, a microsoft-owned platform for software development, collaboration, and innovation. It is projected to be one of the top five developer communities on GitHub globally by 2026. 

Apple CEO Tim Cook met Widodo on April 17 and said the company would “look at” manufacturing in Indonesia. 

Indonesia, under President Joko Widodo’s administration, has emphasized development of digital technology and information sectors, aiming to achieve the government’s Golden Indonesia 2045 Vision, which projects Indonesia becoming one of the world’s top five economies with GDP of up to $9 trillion, exactly a century after it won independence from Dutch colonizers. 

Nadella met Widodo on Tuesday in the Presidential Palace. During the meeting, Widodo proposed building an AI research center in Indonesia, and a Microsoft data center based in Bali or Nusantara, the country’s new capital city on Borneo island, according to Indonesia’s Minister of Communication and Information Technology, Budi Arie Setiadi. 

The CEO’s regional visit began in Indonesia and will be followed by Thailand and Malaysia over the next two days. 

Source: AP 

Indonesia may offer dual citizenship to attract overseas workers, minister says

Indonesia may offer dual citizenship to people of Indonesian descent to entice more skilled workers into the country, a senior cabinet minister said on Tuesday. 

Indonesia does not recognise dual citizenship for adults, according to Indonesian law, as a child with two passports must choose one and renounce the other when they turn 18. 

Luhut Pandjaitan, the coordinating minister for maritime affairs and investment, said the government plans to give dual citizenship to former Indonesian citizens living overseas, without offering details. 

Luhut was speaking ahead of Microsoft CEO Satya Nadella, who pledged a $1.7 billion investment in Indonesia. 

"We also invite diaspora Indonesia and we give them also, soon, dual citizen," he said. "Which I think will ... bring very skilful Indonesians back to Indonesia." 

Nearly 4,000 Indonesians became Singaporean citizens between 2019 to 2022, according to data from the Directorate General of Immigration. 

The immigration agency did not immediately respond to a request for comment on the plans to allow for dual citizenship. 

The issue of dual citizenship caused some controversy in 2016 when Indonesia's President Joko Widodo removed Arcandra Tahar as energy and mining minister after less than a month on the job following reports he held U.S. and Indonesian passports. 

Source: Reuters