Thursday, April 20, 2017

Indonesia maintains rate, growth to accelerate in Q2

    Indonesia's central bank left its benchmark 7-day reverse repo (RR) rate steady at 4.75 percent, as expected, saying economic growth in the first quarter of this year was likely to be below expectations due to slower growth in retail and automotive sales.
     However, growth is expected to accelerate in the second quarter, supported by stronger investment and exports while consumption would be stable. Rising commodity prices and stronger external demand would help drive exports and investment, Bank Indonesia (BI) said.
    Last month BI forecast economic growth this year of 5.0 to 5.4 percent, up from 5.02 percent in 2016 and 4.88 percent in 2015 on stronger private consumption, rising exports, higher government spending and improve private and government investment.
     Economic activity in Indonesia slowed in the fourth quarter of last year as consumer spending eased along with government spending while exports and investments rose. On a quarterly basis, Gross Domestic Product shrank by 1.77 percent from the third quarter while on an annual basis GDP rose by 4.94 percent, down from 5.01 percent in the third quarter.
    BI cut its 7 day RR 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.
    As in its March statement, BI said global economic growth is expected to continue to improve although it was keeping a close eye on a number of risks, such as inflationary pressure in developed countries, which could trigger tighter monetary policy,  higher U.S. interest rates and asset sales that could boost the U.S. dollar and thus the cost borrowing, geopolitical risks in Europe "related to the strengthening of the wave of populism," U.K. talks about leaving the EU, and Greek debt talks.
   Indonesia's inflation rate eased to a lower-than-expected 3.61 percent in March from 3.83 percent in February due to higher supply of food while administered prices declined due to lower airfares that helped reduce the impact of higher electricity rates.
    Indonesia's rupiah has been firm this year and was trading at 13,327 to the U.S. dollar today, up 1.3 percent since the start of this year.
     BI said appreciation of the rupiah was supported by macroeconomic stability and investors' positive view of the country's economic outlook coupled with easing global risks. This lead to an influx of non-resident capital to Indonesian stocks and government debt.

    Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 18th and 20th April 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 21st April 2017. The decision is consistent with Bank Indonesia’s efforts to maintain macroeconomic and financial system stability by driving the domestic economic recovery process. Bank Indonesia continues to monitor various global and domestic risks. Globally, there are indications of a more promising economic outlook for advanced countries but several risks continue to demand vigilance, especially the current discourse on the Federal Reserve reducing its overall balance sheet along with geopolitical factors. At home, Bank Indonesia will monitor the impact of adjustments to administered prices (AP) on inflation as well as ongoing consolidation in the corporate and banking sector, which has undermined the impact of economic stimuli. Therefore, Bank Indonesia will constantly strive to strenghten its monetary, macroprudential and payment system policy mix to maintain macroeconomic and financial system stability. Furthermore, Bank Indonesia will continue coordinating with the Government to control inflationary pressures within the target corridor and accelerate structural reforms to support sustainable economic growth.
The global economic outlook is expected to keep improving, albeit several risks that needs to be monitored.The gains are supported by the ongoing strengthening of US economy and accompanied by improvements of Europe and China economies. US growth is becoming increasingly solid on the back of consumption with positive labour market conditions and improved investment, primarily in the energy sector as the oil price continues to rise. Furthermore, economies in Europe could potentially improve on consumption and export gains. Moreover, China’s economy is expected to remain robust, supported by consumption and investment, particularly infrastructure investment. While international commodity prices, including oil, are predicted to remain high, global inflation is predicted to remain under control. Moving forward, several global risks will continue to demand vigilance, including the Federal Reserve’s plan to reduce its overall balance sheet and the impact on global financial markets, the FFR hike plans, and recent geopolitical conditions in several regions. 
Economic growth momentum in Indonesia is expected to remain well in the first quarter of 2017, albeit below previous expectations. The main sources of the growth are stronger investment, solid consumption and positive export performance. First-quarter investment increased on building and non-building investment. Non-building investment improved on the back of commodity price hike, as reflected in the increase of heavy machineries sales for mining and farming. The hike in commodity prices also promoted export growth. Meanwhile, household consumption growth can potentially moderate slightly in the first quarter of 2017, indicated by slower growth of retail and automotive sales, as an effect of ongoing consolidation in the corporate sector. Economic growth is predicted to accelerate in the second quarter of 2017, supported by stronger investment and export performance, while consumption should remain relatively stable. Meanwhile, rising commodity prices and stronger demand due to the global economic recovery are expected to drive exports and investment. Looking forward, the role of fiscal stimuli, in terms of catalysing economic growth, should be maintained.
Indonesia’s trade balance recorded another USD1.23 billion surplus in March 2017, primarily supported by a non-oil and gas trade surplus. Indonesia’s trade balance surplus reached USD3.93 billion in the first quarter of 2017, more than twice of last year’s surplus of USD1.66 billion over the same period. Meanwhile, foreign capital inflows to financial markets in Indonesia reached USD5.33 billion in the first quarter of 2017. Consequently, the position of reserve assets at the end of March 2017 stood at USD121.8 billion, equivalent to 8.9 months of imports or 8.6 months of imports and servicing government external debt, which is well above the international standard of three months. 
The rupiah continued to appreciate in March 2017, supported by macroeconomic stability and the positive perception of investors towards Indonesia’s promising economic outlook, coupled with easing global risks. Throughout the first quarter of 2017, the rupiah appreciated 1.09% (ytd) to close at Rp13,326/USD. Rupiah appreciation was driven by an influx of non-resident capital due to attractive domestic investment assets as well as sounder global factors. Foreign capital inflows were primarily drawn to stocks and government debt securities (SUN). Moving forward, Bank Indonesia will continue to stabilise rupiah exchange rates in line with the currency’s fundamental value, while maintaining market mechanisms.
The Consumer Price Index (CPI) recorded deflation in March 2017 as the supply of foodstuffs increased. CPI deflation was recorded at 0.02% (mtm), contrasting inflation of 0.23% (mtm) the month earlier. The main contributors to CPI deflation were volatile foods (VF) after the harvests of several food crops boosted supply. Furthermore, controlled prices were also supported by low core inflation, decelerating from 0.37% (mtm) last month to 0.10% (mtm) in the reporting period. Administered prices (AP) declined due to lower airfares, which reduced the impact of hikes to electricity rates. Moving forward, to maintain inflation within the target range of 4±1%, policy coordination between the Government and Bank Indonesia in inflation control requires constant strengthening, primarily in the face of adjustments to administered prices (AP) as part of the Government’s ongoing energy reforms, coupled with the expected seasonal spike of inflationary pressures during the approach to the holy fasting month. 
Maintained banking industry resilience and stable financial markets continued to support solid financial system stability. In February 2017, the Capital Adequacy Ratio (CAR) of the banking industry was recorded at 23.0% and the liquidity ratio at 22.2%, while non-performing loans (NPL) stood at 3.2% (gross) or 1.4% (net). The transmission of easing monetary and macroprudential policy continued, albeit restrained by banks’ prudence in managing credit risks. Based on the types of credit, the banks lowered interest rates on working capital loans most significantly (113 bps, yoy), followed by investment loans (83 bps, yoy) and consumer loans (37 bps, yoy). Credit growth in February 2017 was recorded at 8.6% (yoy), up from 8.3% (yoy) the month earlier but curbed by corporate and banking consolidation. On the other hand, deposit growth stood at 9.2% (yoy) in February 2017, down from 10.0% (yoy) in January. On the other hand, nonbank economic financing through the capital market in the form of initial public offerings (IPO) and rights issues, corporate bonds and medium-term notes (MTN) continue to increase. Consistent with expectations of stronger economic growth and the ongoing impact of existing monetary and macroprudential policy easing, credit and deposit growth in 2017 are expected to accelerate to 10-12% and 9-11% respectively.  "


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