Tuesday, March 17, 2015

Indonesia holds rate, beefs up moves to keep FX stable

    Indonesia's central bank maintained its benchmark BI rate at 7.50 percent, as widely expected, and underlined its firm commitment to maintain a stable rupiah currency along with reducing the current account deficit towards what it described as a healthier level of 2.5 to 3.0 percent of GDP.
    Bank Indonesia (BI), which last month reversed a 25 basis point rate hike at an unscheduled board meeting in November to quell any inflationary pressures from the government's increase in fuel prices, added that it "continues to beef up measures to keep the rupiah stable, including market interventions as well as purchasing government bonds in the secondary market."
    "Going forward, Bank Indonesia will continue to consistently keep the stability of the rupiah at the exchange rate that is in line with its fundamental," BI said.
    The rupiah has been depreciating steadily since May 2014 and has now surpassed lows seen in 2009, moves that have been welcomed by BI as being helpful for the country's exporters. Today the rupiah was trading at 13,180 to the U.S. dollar, down 5.6 percent this year.
    Intervention in the foreign exchange market by the BI has been viewed by traders as smoothing out any volatility rather than an attempt to halt its decline.
    BI said today the depreciation was "mainly due to continued strengthening of the US dollar against the all world's currencies, with a weakening of the euro due to the European Central Bank's quantitative easing program adding pressure to emerging market currencies, including the rupiah.
    Indonesia was among the countries hit by the 2013 "taper tantrum" due to its current account deficit but BI said a surplus in the February trade balance was in line with its projections for an improvement in the current account in the first quarter of this year from the fourth quarter of 2014 when the deficit was US$6.2 billion, down from $6.8 billion in the third quarter.
    For 2014 the current account deficit amounted to 2.95 percent of Gross Domestic Product.

    BI noted that foreign reserves rose to US$115.5 billion at the end of February from $114.2 billion at the end of January, the equivalent of 7 months of imports, well above international standards.
    BI was optimistic about 2015 growth prospects, saying it was expected to be better than last year, with growth between 5.4 and 5.8 percent, up from 2014's estimated 5.01 percent, mainly due to higher investments, strong consumption and gradually improving exports.
    Inflationary pressures were also "easing further," BI said, moving to a point where they are in line with its 2015 target of 4.0 percent, plus/minus one percentage point. In February consumer price inflation eased to 6.29 percent, continuing to drop from December's 8.36 percent and January's 6.96 percent.

    Bank Indonesia issued the following statement:
 "Bank Indonesia board meeting on March 17, 2015 has decided to hold the BI Rate at 7.50%, setting the Deposit Facility rate at 5.50% and Lending Facility rate at 8.00%. This decision is in line with the ongoing efforts to keep inflation within the target of 4±1% for 2015 and 2016, and to control current account deficit towards a healthier level at 2.5-3% of GDP in the medium term. As consequence, Bank Indonesia also strengthens measures to keep the rupiah stable. Bank Indonesia's policy mix will be focused on efforts to maintain macroeconomic stability, amidst rising uncertainty in the global financial markets. In this context, Bank Indonesia remains strongly committed to strengthening its monetary and macroprudential policy mix, as well as stepping-up coordination with the government to curb inflation and current account deficit, while encouraging speedy structural reforms. With this regard, Bank Indonesia supports the government's continued measures in carrying out structural reforms that would in turn serve to strengthen the balance of payment.

The global economic recovery has continued to progress, supported by the increasingly solid U.S. economy. Increasing consumer spending, declining crude oil prices, and a lower unemployment rate have fuelled the U.S. economic recovery. Stronger consumer spending in the U.S. has been matched by the increase in manufacturing indicators. The solid U.S. economy further confirmed a monetary policy direction towards normalization, although the timing of the implementation is still shrouded by uncertainty. This would push the U.S. Dollar value higher against almost all of world's currencies and would spur uncertainty in the global financial markets. The European Central Bank's quantitative easing program would further weaken the Euro currency, as well as offset part of the impact brought about by the Fed's move that would affect flows of global funds in and out of the Emerging Markets. On the other hand, China's economy may continue to slow on the back of declining investment. In this light, Prices of the global commodities, including crude oil, may continue to be weak, although some recovery has been seen after their prices bottomed-out in January 2015.

Indonesia's economic growth in 2015 starts to improve and expected to be generally better than that in 2014. Economic growth in the First Quarter 2015 is projected to be higher than that of the previous period, mainly driven by rising private consumption, as inflation is kept in check. Government consumption has also picked-up, reflecting an increase in government spending. Meanwhile, exports may continue to decline, despite some signs of pick-ups, on the back of declining commodity prices and lingering weak global demand. On the other front, investment may still grow slightly in the first quarter 2015, and will continue to pick up in the following quarters as government spending rises. Looking ahead, the full-year 2015 economic growth should be between 5.4-5.8%, mainly driven by higher investment as a result of the realized infrastructure projects and improved invesment climate, in addition to the continued strong consumption and the gradually improving exports.

The Indonesia trade balance in February 2015 recorded a surplus, mainly attributable to a surplus in non-oil and gas. The trade balance in February 2015 recorded a surplus of US$0.74 billion, relatively flat compared to the previous month, due mainly to US$0.57 billion surplus in non-oil and gas trade. The oil and gas account in February 2015 also recorded a surplus, after a deficit in the previous month. Bank Indonesia is convinced that the January-February 2015 trade balance was in line with the projected current account for the first quarter of 2015 which is lower than that in the fourth quarter of 2014. In the financial account, foreign capital inflows is expected to remain strong on the back of continued improving prospect of the domestic economy. Up to February 2015, foreign portfolio investment inflows to the financial market reached US$4.3 billion. With this positive development, Indonesia's foreign exchange reserve rose to US$115.5 billion at end-February 2015, equivalent to 7 months of imports, or 6.8 months of imports plus the government's foreign debt payment. This is well above the international adequacy standard of 3 months.

The rupiah depreciated against the U.S. dollar, manly due to continued strengthening of US dollar against all world's currencies. The weakening of the Euro currency as a result of the European Central Bank's quantitative easing program has added pressure to the Emerging Markets' currency, including rupiah. In February 2015, rupiah on average weakened by 1.38% (mtm) to a level of Rp12,757 per dollar. The rupiah depreciated by 1.99% (point to point), to a level of Rp12,925 per US dollar. Bank Indonesia continues to beef up measures to keep the rupiah stable, including market interventions as well as purchasing government bonds in the secondary market. Going forward, Bank Indonesia will continue to consistently keep the stability of the rupiah at the exchange rate that is in line with its fundamental.

Inflationary pressure is easing further, moving to a point where it supports the 2015 inflation target, which is 4.0±1%. The consumer price index (CPI) again recorded a deflation, at 0.36% (mtm), mainly caused by a deflation in the volatile foods group and in the administered prices. Meanwhile, the core inflation fell from 0.61% (mtm) in January to 0.34% (mtm) in February, or 4.96% (yoy). The decline in inflation was driven by lower global commodity prices, a moderate domestic demand, and expected inflation that has been kept in check. Going forward, Bank Indonesia will continue to monitor various risk factors that affect inflation, among others are the global oil prices and the possibility of future adjustments in other administered prices.

The financial system stability remains solid, supported by the resilient banking system and the relatively stabil financial markets performance. The resilient banking industry stays sound with the credit, liquidity and market risks being kept in check, along with the support of strong capital. At end-January 2015, the Capital Adequacy Ratio (CAR) rose to 20.84%, far above the required minimum ratio of 8%, while the Non-Performing Loan (NPL) rate remained low at around 2.0%. Gauging the banking intermediary role, bank lending growth rose to 11.5% (yoy) at end-January, remain stable compared to 11.6% (yoy) at end of the previous month. Loan growth is forecast to improve in the coming months. Growth in third-party funds at end-January was recorded at 14.2% (yoy), increased from 12.3% at end of the previous month. The other front, the stock market performance also improved, shown by the benchmark Jakarta Composite Index that has stayed on an uptrend. Going forward, along with the improving economic growth, bank loan and third-party fund is expected to grow, respectively by 15-17% and 14-16% in 2015."


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