Thursday, January 19, 2017

Indonesia holds rate, improvement in outlook to continue

    Indonesia's central bank maintained its benchmark BI 7-day RR rate at 4.75 percent and struck an optimistic tone by saying the "improvement in the national economic outlook is expected to continue, with stronger growth combined with maintained macroeconomic and financial system stability."
    Bank Indonesia (BI) cut its new benchmark rate twice last year by a total of 50 basis points following four cuts in its previous benchmark rate by a total of 100 points from January through June.
    Despite the risks from U.S., China, higher oil prices and inflation from higher fuel and electricity prices, BI said it expects gains in exports to continue, not only in commodities but also in manufactured products.
    Although government spending was lower than expected in the fourth quarter of last year, BI said consumption and investment was "solid" and exports "surged" while commodity prices rebounded.
    Growth for 2016 was seen around 5.0 percent, the same forecast as in December and up from 4.8 percent in 2015, and this year the central bank expects the economic recovery to continue, driven by exports and investments with stable household consumption.
    In the third quarter of last year Indonesia's Gross Domestic Product grew by an annual rate of 5.02 percent, down from 5.19 percent in the second quarter.
    For 2017 BI has forecast growth of 5.0 to 5.4 percent.
    Like many other emerging market currencies, Indonesia's rupiah fell in response to the election of Donald Trump as U.S. president in November last year. Although it rebounded in December, the rupiah remains below the level seen before Trump's election.
   The rupiah was trading around 13,386 to the U.S. dollar today, down 2.2 percent since the U.S. election but up 0.8 percent since the start of this year.
    BI said the appreciation of the rupiah in December was due to a "deluge" of capital inflows to the government bond market while the outflow from its stock market decreased after the U.S. Federal Reserve's rate hike, with a reversal seen at the end of December.
    In 2016 the rupiah appreciated by 2.32 percent, the BI said, on positive investor perception of the domestic economy but it added that it would remain vigilant of the risks from global financial uncertainty and stabilize the exchange rate in line with its fundamental value.
    Indonesia's inflation rate eased to 3.02 percent in December from 3.58 percent in November, close to the central bank's lower target range of 3.0 to 5.0 percent, with BI saying this was due to low core inflation and minimal administered prices while inflation pressures on food remained.

    Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 18-19th January 2017 to hold the BI 7-day (Reverse) Repo Rate (BI-7 day RR Rate) at 4.75%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 4.00% and 5.50% respectively, effective 20th January 2017. The decision was consistent with Bank Indonesia’s effort to maintain macroeconomic and financial system stability, while keep optimizing domestic economic recovery amid uncertainties in the global financial market. After performing relatively well throughout 2016, improvement in the national economic outlook is expected to continue, with stronger growth combined with maintained macroeconomic and financial system stability. Bank Indonesia will continue to monitor risks in 2017. Globally, the risks include the policy directions taken in the US and China and global oil price hike, while the domestic risks are linked to the impact of administered prices (AP) on inflation. Consequently, Bank Indonesia will continue to optimise its monetary, macroprudential and payment system policy mix in order to maintain macroeconomic and financial system stability, while considering the impact on the optimilization of economic recovery. Furthermore, Bank Indonesia will strengthen policy coordination with the Government, focusing on inflation control to keep within the target range, as well as structural reforms to support sustainable economic growth. 
Bank Indonesia predicts the global economy to improve, supported by gains in the US and China, albeit several risks that need to be observed. The US economy has been buoyed by increased consumption and non-residential investment. In addition, US unemployment is low and inflation is on track to meet its long-term target. Growth in China has also accelerated, reflected by increased retail sales and private investment. On the commodity markets, the global oil price is expected to follow an upward trend, while export prices from Indonesia improved on the back of coal and various metals, including copper and lead. Looking forward, several global risks shall continue to demand vigilance, including the impact of US fiscal and international trade policy, Federal Funds Rate (FFR) hikes that could raise the cost of borrowing, economic and financial rebalancing in China, as well as geopolitical risks. 
The domestic economy remained within expectation in the fourth quarter of 2016. Actual government spending was lower than expected but consumption and investment remained solid. Externally, exports surged as trading partner economies improved and international commodity prices rebounded. Bank Indonesia expects the export gains to persist, not only supported by exports of commodities but also manufactured products, the outlook for which continue to improve. Consequently, economic growth in 2016 is predicted at around 5% (yoy). In 2017, however, the economic recovery should continue, driven by exports and investment as financing increases from bank loans and nonbank financing. On the other hand, stable household consumption is also predicted.
Indonesia’s balance of payments during the fourth quarter of 2016 was expected to record a relatively large surplus and lower than expected current account deficit. The BOP surplus was bolstered by a large capital and financial account surplus along with sound export performance. Meanwhile, the low current account deficit was supported by a large non-oil and gas trade surplus thanks to robust export performance. This brings the position of official reserve assets in Indonesia at the end of December 2016 stood at USD116.4 billion, up from USD111.5 billion the month earlier, equivalent to 8.8 months of imports or 8.4 months of imports and servicing government external debt, which is well above the international standard of three months. 
After pressures following the result of the US election, the rupiah appreciated in December as capital flowed back onto domestic financial markets. Point-to-point, the rupiah appreciated 0.59% (mtm) to close at a level of Rp13,473 per USD in line with a deluge of capital inflow, primarily to government debt securities (SUN). In contrast, outflow from the domestic stock market decreased after the FFR hike, with a reversal noted at the end of December 2016 to record an inflow. Point-to-point, in 2016, the rupiah appreciated 2.32% (ytd) on the positive investor perception of the domestic economic outlook, which attracted non-resident capital. Bank Indonesia will remain vigilant of risks from the global financial uncertainty, however, while continuing to stabilise the rupiah in line with the currency’s fundamental value and maintaining market mechanisms. 
Bank Indonesia maintained low inflation throughout 2016, towards the floor of the inflation target, namely 4±1%. CPI inflation in December 2016 was recorded at 0.42% (mtm), down from 0.47% (mtm) the month earlier. Therefore, inflation of 3.02% (yoy) was recorded for the year. Low inflation was supported by low core inflation and minimal administered prices, while inflationary pressures on volatile foods remained. Such achievements were supported by Bank Indonesia policy and increasingly solid coordination with the central and local governments to control inflation. Moving forward, efforts to control inflation will confront risks that demand vigilance, primarily in the form of administered prices adjustments along with government’s structural reform policies in energy subsidies, as well as risks of volatile food inflation. To that end, policy coordination between Bank Indonesia and the Government will constantly be strengthened.
Financial system remained stable, supported by resilience of the banking industry. In November 2016, the Capital Adequacy Ratio (CAR) was recorded at 22.8% and the liquidity ratio at 20.5%. Meanwhile, non-performing loans (NPL) were recorded at 3.2% (gross) or 1.4% (net). The looser monetary and macroprudential policy stance was able to lower deposit rate by 131 bps, working capital loan rate by 94 bps, investment loan rate by 79 bps, consumption loan rate by 23 bps during January-November 2016. Credit growth in November 2016 was recorded at 8.5% (yoy), down from 9.8% (yoy) one year earlier. On the other hand, economic financing increased through the capital market in the form of stocks (IPO and right issue), corporate bonds and medium-term notes (MTN). Deposit growth accelerated in November 2016 from 7.7% (yoy) the year earlier to 8.4% (yoy). Consequently, Bank Indonesia predicts credit growth in the 10-12% range and deposit growth at around 9-11% in 2017 in line with increased economic activity and the looser monetary and macroprudential policy stance adopted."


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