Tuesday, October 23, 2018

Indonesia holds rate, trims growth forecast on exports

      After five rate hikes in a row, Indonesia's central bank kept its benchmark BI 7-day reverse repo rate at 5.75 percent, saying this decision is consistent with its efforts to lower the current account deficit and maintain the attractiveness of domestic financial markets at a time of "persistently high global uncertainty."
      Reflecting weaker-than-expected economic growth from a decline in exports, Bank Indonesia (BI) trimmed its forecast for economic growth this year to the "lower range of 5.0 - 5.4%" from an earlier forecast of 5.0 - 5.4 percent.
      BI, which raised its key rate by 150 basis points from May to September bolster the exchange rate of the rupiah, confirmed its forecast for inflation in 2018 to remain within the central bank's target range of 3.5 percent, plus/minus 1 percentage point.
      The country's current account deficit, considered the country's Achilles heel, was confirmed by BI to narrow to 2.5 percent of gross domestic product in 2019. BI has previously forecast the current account deficit would rise to somewhere below 3 percent in 2018 from 1.7 percent of GDP in 2017.
      Despite a decline in exports, BI noted a US$0.23 billion trade surplus in September, up from a 0.94 billion deficit in August debt to a decline in imports of capital goods and raw materials.
      But for the first 9 months the trade deficit still amounted to US$3.78 billion but moving forward BI said it expects trade and current account balances to improve further.
     While BI did not mention the 2018 current account deficit, it said it was coordinating with the country's government to stimulate exports and lower imports to lower the deficit which widened to US$8.0 billion in the second quarter of this year from $5.7 billion in the first quarter for the highest deficit since the third quarter of 2014.
       The rupiah rose in response to BI's decision to maintain the rate but is still down sharply this year, as most other emerging market currencies. The rupiah was trading at 15,188.5 to the U.S. dollar, down 10.6 percent this year.
     "The rupiah is undergoing depreciation, albeit with contained volatility," BI said, confirming it will continue to stabilize the exchange rate to mitigate volatility and sustain market liquidity.
      Indonesia's reserves declined to US$114.8 billion at the end of September from $117.9 billion at the end of August but still enough for 6.3 months of imports and debt servicing.
      Indonesia's inflation rate dropped to 2.88 percent in September from 3.2 percent in August for a cumulative rise in consumer prices the year of 1.94 percent as food prices fell along with core inflation that eased to 2.82 percent from 2.90 percent.

      Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 22nd and 23rd October 2018 to hold the BI 7-Day Reverse Repo Rate at 5.75%, while also maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 5.00% and 6.50%, respectively. The decision is consistent with ongoing efforts to reduce the current account deficit within a manageable threshold, while maintaining the attractiveness of domestic financial markets, thereby bolstering external resilience in Indonesia against a backdrop of persistently high global uncertainty. Bank Indonesia constantly implements a monetary operations strategy oriented towards maintaining adequate liquidity in the Rupiah market and foreign exchange market, while also effectively commencing the Domestic Non-Deliverable Forwards (DNDF) on 1st November 2018. Bank Indonesia is always strengthening policy coordination with the Government and other relevant authorities in order to maintain economic stability and reinforce external resilience, including stimulating exports and lowering imports, which will reduce the current account deficit to 2.5% of GDP projected in 2019. Moving forward, Bank Indonesia will monitor prevailing economic developments, such as the current account deficit, exchange rates, financial system stability and inflation, as follow-up measures to maintain macroeconomic and financial system stability.
As predicted, the global economic growth projection has been downgraded, accompanied by a high global financial market uncertainty. On one hand, the US economy is expected to strengthen on the back of solid domestic demand, thus raising inflation expectations and prompting the US Federal Reserve to implement further policy rate hikes. On the other hand, however, economic growth in Europe and emerging markets, including China, is expected to be lower than previously projected and, in turn, impeded the global economic outlook. In addition, escalating trade tensions between the United States and several trading partners is constraining world trade volume and, therefore, affecting the global economic outlook. Export prices from Indonesia are rising more slowly despite the persistent upward global oil price trend. Meanwhile, the ubiquitous uncertainty blighting global financial markets is pushing investors towards safer assets, particularly in the US. The current spell of global headwinds has precipitated broad US dollar appreciation, thus perpetuating currency depreciation in the developing countries, up until mid October 2018.
Indonesia’s economic growth in the third quarter of 2018 is lower than expected, especially impacted by a decrease in nett export. Strong consumption figures are backed by maintained public purchasing power combined with election spending and upbeat consumers. Building investment linked to infrastructure projects and the property sector as well as non-building investment are sustaining solid investment performance. Nevertheless, the growth projection for exports has been downgraded on weaker agricultural and mining export performance. In contrast, import growth remain robust due to solid domestic demand, while monthly import growth has slowed down. Consequently, national economic growth in 2018 is predicted to be at the lower range of 5.0-5.4%.
Indonesia’s trade balance recorded a surplus in September 2018. The trade surplus stood at USD0.23 billion in the reporting period, reversing the USD0.94 billion deficit recorded the month earlier. The improvement was explained by a larger non-oil and gas trade surplus coupled with a narrower oil and gas trade deficit. In terms of the non-oil and gas trade surplus, the gains come amidst an import-side decline, particularly of capital goods and raw materials. Cumulatively from January-September 2018, therefore, Indonesia’s Trade Balance recorded a USD3.78 billion deficit. Meanwhile, the official position of reserve assets at the end of September 2018 stood at USD114.8 billion, equivalent to 6.5 months of imports or 6.3 months of imports and servicing government external debt, which is well above the international standard of three months. Moving forward, the trade balance and current account are expected to improve further in line with various government and Bank Indonesia efforts to reduce the current account deficit. 
The Rupiah is undergoing depreciation, albeit with contained volatility. The Rupiah depreciated in September, continuing into October 2018, in line with currencies of other peer countries. On average, the Rupiah depreciated 2.07% during September 2018, and continue to slightly depreciate in October 2018. As of 22nd October 2018, the rupiah had depreciated by 10.65% (ytd), which is not as severe as that felt in Brazil, India, South Africa and Turkey. Looking ahead, Bank Indonesia will continue to stabilise Rupiah exchange rates in line with the currency’s fundamental value, while maintaining market mechanisms, supported by financial market deepening. Such policy is focused on mitigating Rupiah volatility and sustaining adequate market liquidity, thus preventing risks to macroeconomic and financial system stability. 
Low and stable inflation has been maintained.  Consumer Price Index (CPI) deflation deepened to 0.18% (mtm) in September 2018 from 0.05% (mtm) the month earlier, spurred by volatile foods (VF) deflation, slower core inflation and stable administered prices (AP). Annually, therefore, inflation decreased to 2.88% (yoy) in the reporting period from 3.20% (yoy) previously. Price corrections to several food commodities were the main drag on volatile foods. Meanwhile, core inflation decelerated from 0.30% (mtm) in August 2018 to 0.28% (mtm) in September. Controlled core inflation in September 2018 is linked to policy consistency by Bank Indonesia with regards to anchoring rational inflation expectations to the target corridor, including maintaining Rupiah exchange rates in line with the currency’s fundamental value. Bank Indonesia projects headline inflation within the target range of 3.5±1% in 2018. Furthermore, Bank Indonesia and the Government will continue to strengthen policy coordination in order to control low and stable inflation. 
Financial system stability has been maintained as the bank intermediation function improves and the banking industry effectively contains credit risk.  Capital Adequacy Ratio (CAR) of the banking industry was reported high at 22.8% and the liquidity ratio at the safe level of 18.3% in August 2018. In addition, the banking sector maintained a low level of non-performing loans (NPL) at 2.7% (gross) or 1.3% (net). Credit growth was reported to accelerate from 11.3% (yoy) in July 2018 to 12.1% (yoy) in August 2018, while deposit growth was stable at 6.9% (yoy) in July and August 2018. On the other hand, economic financing through the financial markets, such as initial public offerings (IPO) and rights issues, corporate bonds, medium-term notes (MTN) and Negotiable Certificates of Deposit (NCD), reached a cumulative total of Rp146.1 trillion (gross) as of August 2018, which is below the Rp183.7 trillion (gross) recorded in the same period last year. Consequently, Bank Indonesia projects credit growth in 2018 at 10.0-12.0% (yoy), while deposit growth is predicted to slow down to the bottom of the 8.0-10.0% (yoy) range. 
In general, payment system and rupiah currency management stability have effectively been maintained.The settlement of high-value and retail noncash transactions as well as cash transactions posted growth in September 2018. The average daily growth of high-value transactions settled through the Bank Indonesia – Real Time Gross Settlement (BI-RTGS) system accelerated to 0.72% (yoy). Meanwhile, noncash transaction value settled through the National Clearing System (SKNBI) was recorded at 6.9% (yoy). Retail transactions through ATM, debit and credit cards as well as e-money expanded by 9.4% (yoy) in August 2018. The various transactions are supported by the exceptional operational availability of the payment systems operated by Bank Indonesia and the industry. In terms of cash payments, the position of currency in circulation increased to 10.7% (yoy) in line with demands for economic activity. "


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