Thursday, April 19, 2018

Indonesia maintains rate and confirms growth forecast

      Indonesia's central bank left its benchmark 7-day reverse repurchase rate steady at 4.25 percent, as expected, and confirmed that it still expects economic growth this year of 5.1-5.5 percent while inflation should remain within the bank's target range despite "rising external pressures."
      Bank Indonesia (BI), which lowered its key rate by 200 basis points in 2016 and 2017, also reiterated its recent view that it considers this past easing of monetary policy as sufficient to boost the momentum behind the economic recovery.
      However, BI also echoed other central banks' concern of the risks facing the global economy from increased uncertainty in financial markets from a normalization of U.S. monetary policy and "inward-oriented trade policy, geopolitical risks from the Middle East, rising oil prices, and the possibility of a trade war between the United States and China.
        Indonesia's economy, which grew 5.1 percent last year, is forecast to expand at a faster rate in the first quarter of this year than in the same 2017 quarter, buoyed by domestic demand, particularly investment, BI said.
        Investments are up in building and non-construction investment, supported by government and private infrastructure projects, and mining investment.
        BI's first quarter business survey shows higher business activity along with improved performance by non-financial corporations while private consumption is expected to rise due to higher income and accelerated social assistance.
        Exports of mined commodities and manufacturing is also positive while imports are seen rising, particularly of capital goods and raw materials.
        Indonesia's Gross Domestic Product grew by an annual rate of 5.19 percent in the fourth quarter of last year, up from 5.06 percent in the third quarter.
        Indonesia's trade balance recorded a surplus of US$1.09 billion in March, after a deficit of $0.05 billion in February, with a surplus in the first quarter of $0.28 billion, helping boost foreign reserves to $126.0 billion at the end of March, the equivalent of 7.7 months of imports and serving of official external debt.
        The current account deficit is forecast to be in a range of 2.0-2.5 percent of GDP in 2018, below the 3.0 percent limit considered safe.
        Indonesia's inflation rate rose to 3.4 percent in March from 3.18 percent in February - within the BI's target of 3.5 percent, plus/minus 1 percentage point - and is expected to remain in the range this year, BI confirmed.
        The exchange rate of Indonesia's rupiah depreciated in February and March, with BI attributing this to an improvement in U.S. economic data along with expectations of more aggressive rate hikes by the U.S. Fed and the risk of a US-China trade war.
        These factors encouraged the reversal of foreign capital and put pressure on the exchange rate of currencies worldwide, including the rupiah.
        However, the rupiah has stabilized in April, helped by BI's "stabilization measures," continued control of inflation, a rising rating on its debt, and a surplus in the trade balance that boosted the inflow of foreign portfolio capital.
        Last week Moody's joined other ratings agencies and upgraded Indonesia's rating to Baa2 from Baa3 and raised its outlook to stable, noting the country's control of budget deficits and inflation.
       The rupiah was trading around 13,790 to the U.S. dollar today, down 1.6 percent this year.
       Indonesia's parliament earlier this month confirmed Perry Warjiyo as the next governor of BI. Warjiyo, who has been deputy governor since April 2013, will take over from Agus Martowardojo when his term expires in May.

       Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 18th and 19th April 2018 to hold the BI 7-day Reverse Repo Rate at 4.25%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 3.50% and 5.00% respectively, effective 20th April 2018. The policy is consistent with efforts to maintain macroeconomic and financial system stability as external pressures begin to build. Bank Indonesia considers the previous measures taken to ease monetary policy, supported by macroprudential and payment system policies, adequate to boost domestic economic recovery momentum. Moving forward, Bank Indonesia will remain focus on maintaining economic stability as the foundation of robust and sustainable economic growth. Nevertheless, several risks continue to demand vigilance, including external risks in the form of global financial market uncertainty, the rising of oil price and possible furtherance of the US-China trade war. To that end, Bank Indonesia continues to optimise the mix of monetary, macroprudential and payment system policies to strike an optimal balance between macroeconomic stability, financial system stability and the current domestic economic recovery process. In addition, Bank Indonesia also constantly strengthens policy coordination with the Government to maintain macroeconomic and financial system stability, while enhancing structural reforms.
Global economic growth is predicted to accelerate in 2018 despite a number of downside risks that demand vigilance. Economic growth in advanced and developing economies will drive faster global economic growth. In the advanced economies, higher economic growth is predicted in the United States, accompanied by rising inflation and backed by strong investment, as well as consumption in line with the recent fiscal stimuli. Meanwhile, stronger growth is forecasted in Europe on increasing consumption and accommodative monetary policy. In the developing economies, China is expected to maintain solid economic growth as consumption replaces weaker investment in line with the ongoing economic rebalancing process. The promising global economic recovery outlook will induce world trade volume and elevate international commodity prices in 2018, including oil. Nevertheless, several external risks will continue to demand vigilance, among others related to the impact of the continuing process of normalising US monetary policy in the form of an increase in the interest rate of FFR and the reduction of central bank balance, inward-oriented trade policy, and geopolitic factors especially in the Middle East which be able to increase volatility in financial markets and reduce trade volume and global economic growth.
At home, national economic growth at first quarter of 2018, is predicted to surpass that achieved in the same period one year ago on the back of domestic demand especially investment. Building investment increases as private and public infrastructure projects continue to progress, while nonbuilding investment will be drawn to the primary sector, particularly mining. Bank Indonesia Business Activity Survey Result quarter I 2018 shows an increase in business activity and followed by improved nonfinancial corporations performance in various sectors. As well, private consumption is expected to increase as public purchasing power improves on rising incomes and accelerated social assistance disbursements, coupled with increased spending during the run up to the local elections in 2018. Concerning the external sector, commodities will be the keys driver of export growth, particularly mining products, and sustained by stronger manufacturing exports. Imports are also projected to increase in particular on capital goods and raw materials. Consequently, Bank Indonesia projects domestic economic growth in 2018 in the 5.1-5.5% (yoy) range.
Indonesia’s trade balance recorded a surplus in March 2018, backed by improvement of non-oil and gas exports. Therefore, the Indonesia trade surplus stood at USD1.09 billion in March 2018, reversing the USD0.05 billion deficit recorded the month earlier. The nascent trade surplus stemmed from a larger non-oil and gas trade surplus that exceeded the increasing oil and gas trade deficit. The non-oil and gas surplus increased on solid export growth at 8.2% (yoy), buoyed primarily by mining commodities such as coal, as well as manufacturing products including base metal, textile and textile’s product, processed food, footwear, and machinery and mechanical appliances. On the other hand, non-oil and gas imports posted 11.1% (yoy) growth, backed by imports of capital goods and raw materials. Cumulatively from January-March 2018, the trade balance has recorded a USD0.28 billion surplus. Meanwhile, foreign portfolio investment on stocks and government obligations had recorded outflows during the first Quarter of 2018, but already back as inflows in the first two weeks of April Consequently, the position of official reserve assets at the end of March 2018 stood at USD126.00 billion, equivalent to 7.9 months of imports or 7.7 months of imports and servicing government external debt, which is well above the international standard of three months. Moving forward, as domestic economic growth accelerates, the current account deficit is projected at 2.0-2.5% of GDP in 2018, which is under control and remaining within a safe threshold of not more than 3% of GDP.
The rupiah exchange rate depreciated in March 2018 but then moved steadily in the first half of April 2018.  In March 2018, rupiah depreciated by an average of 1.13%. Improvement of US economic indicators, accompanied by market expectations of aggressive FFR hike, heightened pressures on the rupiah a long with the impending risk of a trade war between the US and China. Such inauspicious dynamics triggered a capital reversal and global exchange rate depreciation pressure, including the rupiah. Nonetheless, congruent with Bank Indonesia efforts on stabilisation, controlled domestic inflation, Indonesia’s upgraded rating and trade surplus that drew non-resident capital inflows, the rupiah quickly stabilised in the first half of April 2018. Bank Indonesia will continue to monitor the build-up of uncertainty risk in the global financial market, while implementing exchange rate stabilisation measures to safeguard the rupiah’s fundamental value and maintain market mechanisms.
Inflation remained under control in March 2018 and within the target corridor. CPI inflation stood at 0.20% (mtm) in March 2018, up slightly from 0.17% (mtm) the month earlier. Annually, CPI inflation remained within the target corridor for 2018 of 3.5±1% at 3.40% (yoy). Minimal core inflationary pressures, coupled with rising administered prices (AP) and volatile foods (VF) inflation, were the main determinants of controlled headline inflation. Core inflation decelerated as a result of on anchored expectations, buoyed by consistent monetary policy and strong coordination between Bank Indonesia and the Government in controlling inflation. Meanwhile, inflationary pressures on volatile foods escalated due to rising prices of various chilli and onion varieties. Furthermore, the government adjusted the price of non-subsidised fuels, which prompted inflationary pressures on administered prices. Nevertheless, inflation is projected to remain within the target corridor in 2018
The financial system remains stable and the bank intermediation function is improving. Maintained financial system stability is reflected in the high Capital Adequacy Ratio (CAR) of the banking industry, reaching 23.1%, and liquidity ratio of 23.0% in February 2018. Meanwhile, the banking industry maintained stable non-performing loans (NPL) at 2.9% (gross) or 1.3% (net). Monetary and macroprudential policy easing was effectively transmitted through the interest rate channel, with the banks inclined to lower deposit and lending rates by 203bps and 155bps respectively since Bank Indonesia began easing monetary policy. The banking industry reported credit growth at 8.2% (yoy) in February 2018, up from 7.4% (yoy) the month earlier. On the other hand, economic financing through the capital market, including initial public offerings (IPO) and rights issues, corporate bonds as well as medium-term notes (MTN), increased by 14.3% (yoy) in February 2018 in line with the financial market deepening program. Furthermore, the banking industry confirmed relatively similar deposit growth at 8.4% (yoy) in the reporting period. In line with previous forecast, Bank Indonesia projects stronger deposit and credit growth in 2018 at 10-12% (yoy) and 9-11% (yoy) respectively."


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