Thursday, November 13, 2014

Indonesia holds rate, notes rising inflation expectations

    Indonesia's central bank maintained its benchmark BI rate at 7.50 percent, as expected, but said it remained vigilant of rising inflation expectations from the government's planned increase in fuel prices and would adopt a number of policies, including strengthening coordination with central and local governments, to ensure the impact on inflation remained "controlled and temporary."
    Bank Indonesia (BI), which has maintained rates since November 2013, also said inflation remains under control and is continuing to follow a downward trend, bolstering the prospect of meeting the 2014 inflation target of 4.5 percent, plus/minus one percentage pony.
    Indonesia's headline inflation rate rose to 4.83 percent in October from 4.53 percent in September while core inflation eased to 4.02 percent from 4.04 percent.
    Indonesia's government plans to raise prices of subsidized gasoline and diesel this month to help reduce the current account deficit.
    Last year the BI raised rates in response to the government's planned reduction in fuel subsidies at the same time that the country, along with other emerging markets, experienced a sudden surge in capital outflows, and thus downward currency pressures, due to expectations that the U.S. Federal Reserve would start to trim its asset purchases.

    The central bank said domestic economic growth has been decelerating in line with weak global demand, with investment activity remains weak and exports have contracted. But growth in Eastern Indonesia has accelerated as mineral exports resumed and growth in Java remains high as manufacturing exports have continued to expand.
   For 2014, economic growth in Indonesia is still projected in the lower end of a 5.1-5.5 percent range before rising to 5.4-5.8 percent in 2015.
    Indonesia's current account deficit narrowed to US$ 6.836 billion in the third quarter from $8.689 billion in the second quarter, mainly due to a significant surplus in non-oil and gas balance and positive manufacturing exports and recommenced exports of unrefined mineral exports.
    BI said it expects the current account deficit to continue to improve in line with robust manufacturing and mineral exports as well as controlled oil and gas imports.
    In the third quarter, Indonesia's foreign exchange reserves rose to $112.0 billion, equivalent to 6.6 months of imports.

    Bank Indonesia issued the following statement:
"The Board of Governors of Bank Indonesia, convening on 13th November 2014, decided to hold the BI rate at 7.50%, with the 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 confirms that the economic stabilization policy that has been adopted is able to safeguard macroeconomic and financial system stability as well as to support a more balanced economic adjustment process. Such conditions are confirmed by a declining current account deficit and managed domestic demand. Nonetheless, Bank Indonesia remains vigilant of indications on rising inflation expectations linked to fuel subsidy policy planned by the government. To that end, Bank Indonesia will continuously strengthen its monetary and macroprudential policy mix to safeguard macroeconomic and financial system stability as well as strengthening the domestic economic structure. Furthermore, policy coordination between Bank Indonesia and the Government will be intensified in terms of controlling inflation and reducing the current account deficit to ensure measured economic rebalancing and to bolster sustainable economic growth.
From a global perspective, the global economic recovery continues albeit at an uneven pace. Economic gains in the United States continue to bolster the global recovery, as reflected by improving production indicators and declining unemployment. Conditions in the US confirmed the prognosis for normalization of the Federal Reserve policy to be instituted in the middle of 2015. Meanwhile, the economic condition of Europe and Japan experienced a downturn. China’s economy also showed signs of a downswing. Consequently, international commodity prices continued to slump, including the global price of oil as supply surged amidst moderating demand. On the trade sector, such global economic development will strengthen Indonesia’s export performance, as manufacturing export continued to improve amidst a slowdown in primary commodity export. Meanwhile, on the financial sector, capital inflows to Indonesia is expected to persist despite in a high volatility in line with normalization of The Fed’s policy. Bank Indonesia will remain vigilant of various external risks to maintain conducive environment for the Indonesia’s economy.
In line with persistently weak global demand, domestic economic growth tends to decelerate. Economic growth in the third quarter of 2014 achieved 5.01% (yoy), which is lower than 5.12% (yoy) posted in the preceding quarter. Consumption increased due to resilient private consumption and greater government procurement expenditure. Meanwhile, investment activity, specifically non-construction investment activity, remains weak. Concerning the external sector, exports continued to experience a contraction, primarily stemming from weaker exports of primary goods, while manufacturing exports consistently improved. Such conditions are illustrated by regional economic growth, where sources of decline originated from Sumatera as a primary commodity exporting region. Meanwhile, economic growth in Eastern Indonesia accelerated as mineral exports recommenced, and economic growth of Java remained relatively high as manufacturing exports continued to expand. In general for 2014, growth is projected at the lower end of the 5.1-5.5% range, increasing thereafter to 5.4-5.8% in 2015.
The position of the Indonesia Balance of payments (BOP) strengthened in the third quarter of 2014, buoyed primarily by a declining current account deficit. The current account deficit amounted to US$6.836 billion in the reporting quarter (3.07% of GDP), down from US$8.689 billion in the second quarter (4.07% of GDP) as well as from US$ 8.635 billion in the third quarter of 2013 (3.89% of GDP). Gains in the current account were primarily supported by a significant surplus in non-oil and gas trade balance, in line with the adoption of economic stabilization policy amidst the increased deficit in oil and gas balance. The improvements were further nurtured by positive manufacturing export performance stemming from the US recovery licenses were granted to recommence unrefined mineral exports. Meanwhile, the capital and and a rebound in mining exports after financial account recorded a significant surplus as the inflow of foreign direct investment escalated in line with the positive perception of foreign investors concerning the domestic economic outlook. Foreign capital inflows were maintained in October 2014. Consequently, the position of foreign exchange reserves in Indonesia increased and reached totalled US$112.0 billion in the reporting period, equivalent to 6.6 months of imports or 6.4 months of imports and servicing the government’s external debt, which is well in excess of international adequacy standards amounting to approximately three months of imports. Looking ahead, the current account deficit is projected to continue improving in line with robust manufacturing and mineral exports as well as controlled oil and gas imports.
The rupiah depreciated slightly due to global sentiment. During the third quarter of 2014, the rupiah depreciated by an average of 1.2% (qtq) to a level of Rp11,770 per US dollar. Pressures on the rupiah were influenced by external factors, namely concerns over the normalization of the Federal Reserve policy, global geopolitical dynamics and the global economic downturn. Internally, however, rupiah depreciation was triggered by the wait-and-see attitude of investors towards the formation of the new government cabinet and work programs. Pressures on the rupiah persisted into October. Accordingly, the rupiah depreciated by an average of 2.01% (mtm) to a level of Rp12.142 per US dollar. Moving forward, Bank Indonesia will continue to maintain rupiah stability commensurate with its fundamental value.
Inflation was controlled and continued to follow a downward trend, thereby bolstering the prospect of achieving the 2014 inflation target of 4.5±1%. Inflation dropped to 4.53% (yoy) in the third quarter of 2014 from 6.70% (yoy) in the previous period. Controlled inflation was bolstered by managed core inflation and lower inflation of volatile foods. Controlled core inflation was a result of decreasing international commodity prices, moderating demand and anchored inflation expectations. Meanwhile, inflation of volatile foods was relatively low in line with abundant food supply. In contrast, inflation of administered prices increased as residential electricity rates and prices of 12 kg canisters of LPG were raised. Controlled inflation endured into October 2014 despite increasing to 4.83% (yoy). Bank Indonesia continues to closely monitor an array of inflation risks, including the planned adjustment to subsidized fuel prices, as indicated by the rising inflation expectations. To mitigate those risks, Bank Indonesia will adopt a number of policies to ensure that the impact of the fuel price hike towards inflation remains controlled and temporary, including by strengthening coordination with the central and local governments in controlling inflation.
Financial system stability remains solid, underpinned by banking resilience and relatively sound financial market performance. The banking industry has been resilient, with credit risk, liquidity risk as well as market risk well mitigated and supported by a strong capital base. At the end of the third quarter of 2014, the Capital Adequacy Ratio (CAR) remained high at 19.40%, well above the minimum threshold of 8%, while the ratio of non-performing loans (NPL) remained low and stable at around 2.0%. In terms of the intermediation function, credit growth continued to decelerate to 13.16% (yoy) from 17.2% (yoy) at the end of the second quarter in line with the economic rebalancing process. Despite decelerating in comparison to the preceding quarter, deposit growth in September 2014 accelerated compared to the previous month and recorded at 13.32% (yoy) as the Government adopted expansive financial operations. Consequently, bank liquidity was relatively well maintained in the reporting quarter. Meanwhile, capital market performance continued to improve as indicated by the upward IDX Composite trend."


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