Thursday, December 11, 2014

Indonesia holds rate, sees inflation peak in December

    Indonesia's central bank maintained its benchmark BI rate at 7.75 percent, as expected, and said it expects the impact on inflation from the latest rise in subsidized fuel prices to be "temporary and controlled," lingering for around three months and peaking in December.
    Bank Indonesia (BI), which raised its BI rate by 25 basis points at an extraordinary meeting on Nov. 18 in response to President Joko Widodo's sharp reduction in government fuel subsidies, confirmed that it expects inflation to return to its target of 4.0 percent, plus/minus one percentage point, by end-2015.
    BI has welcomed the more than 30 percent rise in subsidized gasoline and diesel prices as it will help reduce Indonesia's budget and current account deficits.
    Indonesia's headline inflation rate jumped to 6.23 percent in November from 4.83 percent as administered prices escalated in line with the subsidized fuel price, land freight and electricity rates. Food inflation also rose due to higher chili prices.
    "In contrast, core inflation was relatively well managed," BI said, noting core inflation rose to 4.21 percent in November from 4.02 percent.
    BI said Indonesia's economic growth is forecast to continue decelerating in the fourth quarter due to weak government spending and lower household consumption due to higher inflation. But growth is expected to rebound in the first quarter of 2015 when consumption bounces back as government spending is expected to rise.

    Growth in 2014 is projected in the lower end of the 5.1-5.5 percent forecast range and then rise to 5.4-5.8 percent in 2015, the BI said, confirming its previous forecast. Earlier this week, BI forecast 2014 growth of 5.1 percent.
    Indonesia's rupiah currency has been depreciating against the U.S. dollar since July, as many other currencies, in light of the U.S. Federal Reserve's unwinding of its asset purchases.
    BI said the rupiah had depreciated by an average of 0.21 percent in November - in line with nearly all global currencies - but aded that pressure was negated by optimism over the government's reform policy and "compared to the currencies of other countries, the level of rupiah depreciation has been relatively low."
    BI added that it would "tirelessly maintain exchange rate stability in line with its fundamental value."
    On Monday the central bank told Reuters that it had carried out "measured intervention" in foreign exchange markets after the rupiah fell to its lowest level against the dollar since 1998.
    Today the rupiah fell further, hitting 12,412 to the U.S dollar from 12,348 on Monday, down 2 percent since the beginning of the year.

    Bank Indonesia issued the following statement:

"The Bank Indonesia Board of Governors, convening on 11th December 2014, decided to hold the BI rate at 7.75%, with the Lending Facility and Deposit Facility rates to remain at 8.00% and 5.75% respectively. 
The benchmark rate is consistent with efforts to ensure short-term inflationary pressures in the wake of government policy to reallocate fuel subsidies are controlled and temporary, with inflation returning to the target corridor of 4±1% in 2015. The policy is also in line with existing stabilisation measures taken to manage the current account deficit to a more sustainable level. Bank Indonesia continues to strengthen its policy mix in order to safeguard macroeconomic and financial system stability. A relatively tight monetary policy stance is maintained to control inflation and manage the current account deficit, while accommodative macroprudential policy is instituted in order to avoid the tight monetary policy stance triggering financial system instability. Payment system policy is directed towards promoting government social programs and expanding the National Non-Cash Movement (GNNT). Furthermore, policy coordination between Bank Indonesia and the Government will be intensified in order to maintain macroeconomic stability, especially in terms of controlling inflationary pressures after the recent fuel price hike and ongoing current account deficit, as well as to expedite structural reform policy that will catalyse stronger and sustainable economic growth. 

From a global standpoint, the economic recovery persisted, albeit at a slower and uneven pace. The US economy, as a global driver, continued to improve and remains on an expansionary cycle. Consequently, normalisation of the Fed’s monetary policy continues with a possible increase in the Federal Funds Rate (FFR) expected in the second quarter of 2015, which prompted strong US dollar appreciation against nearly all global currencies and exacerbated the risk of capital reversal from emerging markets, including Indonesia. In contrast, the economies of Europe and Japan continued to confront pressures despite constant monetary stimuli. The economic downswing in China persisted due to economic rebalancing in the country. Such circumstances perpetuated the slump in international commodity prices, with the prices of minerals and agricultural produce lower than previously forecasted. The trend of global economic growth and sliding global commodity prices has affected the export structure of Indonesia, with manufacturing exports increasing and pressures on exports of primary goods intensifying. Meanwhile, the international oil price dropped dramatically and the trend is expected to endure into 2015 as supply picks up in the United States amidst moderating global demand. In general, as a net importer of oil, lower oil prices will favour the Indonesian economy in terms of economic growth, the balance of payments and the fiscal sector. 

Domestic economic growth is projected to continue decelerating in the fourth quarter of 2014 despite rebounding in the first quarter of 2015. Consumption is expected to slow moderately in the fourth quarter, primarily due to weak government consumption in line with budget cuts and declining household consumption as a result of climbing inflation. Consumption will rebound in the first quarter of 2015 as a result of increasing government consumption in line with greater fiscal space. The increase in consumption will stimulate investment activity, both construction and non-construction investment. Externally, despite the surge in manufacturing exports, export growth overall remains limited as demand moderates in emerging market countries. For 2014 in general, economic growth is projected towards the lower end of the 5.1-5.5% range but is subsequently predicted to rebound in the first quarter of 2015, achieving 5.4-5.8%  in 2015.

A smaller current account deficit, coupled with a growing capital account surplus, led to a sound balance of payments. The Indonesia trade balance recorded a US$0.02 billion surplus in October 2014 after experiencing a US$0.26 billion deficit in the preceding month. Sound trade performance was supported by a growing non-oil/gas trade surplus as manufacturing exports increased, predominantly automotive exports.  In terms of the financial account, the positive perception of investors concerning a promising domestic economic outlook maintained the influx of foreign capital. Accumulatively, as of November 2014 foreign portfolio inflow to financial markets in Indonesia totalled US$17.75 billion. Consequently, foreign exchange reserves in Indonesia at the end of November 2014 amounted to US$111.1 billion, equivalent to 6.6 months of imports or 6.4 months of imports and servicing external debt.

Strong US dollar appreciation as the Federal Reserve normalises its monetary policy placed depreciatory pressures on nearly all global currencies, including the rupiah. In November 2014, the rupiah depreciated by an average of 0.21% (mtm) to a level of Rp12,167 per US dollar, which is in line with the depreciation felt by nearly all global currencies. Improvements in the balance of trade along with controlled inflation in October 2014 were insufficient to offset intense depreciatory pressures on the rupiah against the US dollar. Pressures on the rupiah were negated, however, by optimism towards economic prospects as the new government implements subsidy reform policy. Compared to the currencies of other countries, the level of rupiah depreciation has been relatively low. In addition, Bank Indonesia will tirelessly maintain exchange rate stability in line with its fundamental value.

Low and controlled inflation up to October 2014 began to climb in November, primarily due to the subsidised fuel price hike. CPI inflation was 6.23% (yoy) in November, rising from 4.83% (yoy) in the preceding month.  Inflation of administered prices escalated in line with subsidised fuel prices, land freight charges and electricity rates. Meanwhile, volatile food inflation also increased on the back of soaring chilli prices. In contrast, core inflation was relatively well managed at 4.21% (yoy). Bank Indonesia perceives the impact of the latest fuel price hike to be temporary and controlled, lingering for around three months and peaking in December 2014. Confronting this issue, coordination measures with the Government need to be strengthened, particularly in terms of minimising the second-round effects of the subsidised fuel price hike on transportation tariffs, amongst others. Furthermore, coordination efforts should focus on strengthening food security in order to avoid additional pressures on prices. With these strategies, inflation at the end of 2015 is estimated to be managed within a range of 4 ± 1%. 

Financial system stability was still preserved with the support of banking system resilience and relatively well-maintained financial market performance. Banking industry resilience remained strong with credit risk, liquidity risk and market risk well mitigated and the support of a sound capital base. In October 2014, the Capital Adequacy Ratio (CAR) remained high at 19.6%, which is far above the minimum threshold of 8%. At the same time, non-performing loans (NPL) were low and stable at around 2.0%. Meanwhile, credit growth eased to 12.62% (yoy) in October 2014 from 13.16% (yoy) in the previous month. Deposit growth in October 2014 was recorded at 13,93%, increased from the previous month, which was recorded at 13,32%. The banking sector remained selective when extending new credit but rejections of new credit applications were down. The ratio of undisbursed loans (UL) was stable, indicating the ongoing wait-and-see attitude prevalent in the corporate sector towards economic growth.  On the other hand, bank liquidity was maintained and improved in line with more expansive government financial operations. In the future, deposit and credit growth are estimated to increase, reaching 14-16% and 15-17% each. Furthermore, the capital market strengthened as the IDX Composite index rallied."


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