Thursday, September 11, 2014

Indonesia maintains rate, wary of risks to stability

    Indonesia's central bank maintained its benchmark BI rate at 7.50 percent, as expected, and said it would continue to strengthen its monetary and macro prudential policy mix to contain risks that may cause disruptions to the stability of the macroeconomy and financial system.
    Bank Indonesia (BI), which has maintained rates since November 2013, issued the following statement:
 "The Board of Governors of Bank Indonesia convened on  September 11th, 2014,  decided to hold the BI rate at 7.50%, with Lending Facility and Deposit Facility rates to remain at 7.50% and 5.75%, respectively. Such policy is consistent with efforts to control inflation towards its target corridor of 4.5±1% in 2014 and 4.0±1% in 2015, as well as to reduce the current account deficit to a more sustainable level. Bank Indonesia perceives that the economic rebalancing process towards a more balanced economy is still continued, underpinned by preserved macroeconomic stability.
Looking ahead, there remains several risks that demands vigilance, that may cause disruptions of macroeconomic and financial system stability. To that end, Bank Indonesia will continue to strengthen its monetary and macroprudential policy mix, along with other policies to reinforce the structure of the domestic economy. Bank Indonesia will also enhance policy coordination with the government to control inflation and reduce the current account deficit in order to ensure that the economic rebalancing process will continue unimpeded, by maintaining a sustainable economic growth.
From a global aspect, Bank Indonesia assessments indicate that the global economic recovery will persist. The US economy has been growing as supported by the expansion in manufacturing production and consumption activities, despite its structural weaknesses confirmed by lower labor force participation and declining productivity. Against that backdrop, the normalization of the Federal Reserve monetary policy is expected to be implemented gradually, despite a possible hike in the Fed Fund Rate during the second or third quarter of 2015.  Meanwhile, European economy was decelerated, as indicated by relatively weak domestic demands along with fewer exports due to geopolitical tensions in Ukraine-Russia. Lower interest rates along with monetary stimuli introduced by the ECB is expected to bolster recoveries in Europe and generate liquidity excess on global financial markets. In emerging countries, economic growth is expected to be relatively limited, thus pushing further down commodity prices. Amidst relatively stable economic growth in China, India’s economy is improving, while a number of central banks in Southeast Asia raised their respective policy rates to control domestic inflation. Looking forward, Bank Indonesia will remain vigilant on a number of global and regional risks to prevent disruptions of national economic stability and growth.  
On the domestic front, economic growth continues to remain moderate. Despite a strong growth, household consumption followed a downward trend. This is indicated by lower retail sales index and weaker motor vehicle sales figures. On the other hand, government consumption is expected to improve during the third and fourth quarters in line with budget absorption capacity which tends to be low due to budget savings. Investment is expected to pick up but remain limited. Such condition is affected by limited export growth in line with sluggish emerging economies. Meanwhile, import growth continues to decelerate as a result of moderating domestic demand. Overall, growth in 2014 is expected to remain in line with the previous projection of 5.1%-5.5%, with a tendency towards the lower range.
The trade balance recorded a surplus, primarily buoyed by a large non-oil/gas trade surplus. The Indonesia trade balance registered a surplus of US$ 0.13 billion in July 2014, subsequent to a US$ 0.29 billion deficit in the preceding month. This was bolstered by a growing non-oil/gas trade surplus that increased to US$ 1.73 billion, thereby surpassing the oil and gas trade deficit at US$ 1.60 billion. Looking ahead, non-oil/gas trade balance performance is expected to be bolsterd by an increase in export as mineral exports recommence and the global economic recovery persists, despite oil/gas trade deficit is expected to remain. In terms of the financial account, the large influx of foreign capital has been maintained, stemmed by the positive perception of investors concerning an increasingly sound domestic economic outlook. As of August 2014, foreign portfolio capital inflows to financial markets in Indonesia have reached US$ 14.4 billion. Consequently, foreign exchange reserves of Indonesia have swelled to US$ 111.2 billion at the end of August, equivalent to 6.5 months of imports or 6.3 months of imports and servicing foreign debt, which is well above international adequacy standards of around 3 months of import. 
The Rupiah depreciated slightly but volatility was mitigated. On average, the Rupiah weakened 0.24% (mtm) from the previous month to a level of Rp11,710 per US dollar. From point-to-point (ptp), the Rupiah was depreciated 1.03% and closed at a level of Rp11,698 per US dollar. The weakening of Rupiah was affected by external and domestic sentiment. The external factors were stemmed from geopolitical dynamics, development of China economy, as well as the possibility of acceleration in the Federal Reserve normalization policy.  Meanwhile, domestic sentiment factors were closely related to the wait-and-see attitude of investors concerning government future policies, including policies related to energy subsidies. Looking ahead, Bank Indonesia will continue to maintain Rupiah stability in accordance with its fundamental value.
Inflation eased in August 2014 as post-Eid al-Fitr price pressures subsided. Consumer Price Index (CPI) recorded that the inflation was 0.47% (mtm) in August 2014 or 3.99% (yoy), below 0.93% (mtm) or 4.53% (yoy) reported in the preceding month. The lower inflation was buoyed by lower inflation in volatile foods and administered prices, as well as controlled core inflation. Core inflation was successfully controlled and decelerated slightly to 4.47% (yoy) in line with inflation expectations. Bank Indonesia perceives that inflation until August 2014, remains in line with the inflation target corridor of 4.5±1% in 2014 and 4.0±1% in 2015. Bank Indonesia will continue to monitor various risks that could undermine the achievement of the inflation target, in particular the possibility of administered price increase, as well as to strengthen measures to control inflation, including coordination.
Solid financial system stability was bolstered by banking system resilience and relatively sound financial market performance. The banking sector remained resilient with credit risk, liquidity risk and market risk well mitigated, supported by a strong capital base.  The Capital Adequacy Ratio (CAR) remained high in July 2014 at 19.18%, well above the minimum threshold of 8%, while non-performing loans (NPL) were low and stable at around 2.00%. Furthermore, credit growth to the private sector decelerated to 15.0% (yoy) from 16.6% (yoy) during the previous month, in line with economic rebalancing process. Liquidity in the economy and banking sector was well maintained. This was evidenced by growth of M2 and third-party deposits at 11.0% (yoy) and 10.4% (yoy) respectively in July 2014, as well as a decline in the money market rate due to an inflow of currency into the banking system. Moving forward, liquidity in the banking system is expected to remain adequate, in line with government financial expansion during the second half of the year. Furthermore, capital market showed stronger performance in August 2014, indicated by the upward IDX Composite trend. Bank Indonesia will remain vigilant to the risks that may emerge from an increase in foreign debt by corporations."


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