Thursday, February 18, 2016

Indonesia cuts rate for 2nd time in 2016 to boost growth

    Indonesia's central bank cut its key interest rates for the second time in a row, a move that was expected by many, along with the reserve requirement for banks in a move to boost economic growth while inflationary pressures are easing and the exchange rate of the rupiah currency has been rising.
   Bank Indonesia (BI) cut its benchmark BI rate by another 25 basis points to 7.0 percent and the deposit facility rate - known as Faspi - and the lending facility rate by the same amount to 5.0 percent and 7.50 percent, respectively.
    The primary reserve requirement on rupiah deposits was lowered by 100 basis points to 6.5 percent, effective from March 16.
    BI did not issue a specific guidance though it said recent government deregulation had given it "greater room to ease monetary policy while maintaining macroeconomic stability" in 2016.
    In January the BI also cut its rate by 25 basis points and it has now cut the rate by a total of 75 points since November 2014, including a 25 point cut in February 2015.
  "The dual policy of lowering the BI rate and primary reserve requirement is expected to strengthen efforts to boost the ongoing economic growth," BI said.
    Expectations that BI would cut its rate today firmed following data that showed a larger-than-expected 21 percent plunge in Indonesia's exports in January, the 16th month of decline, while a 17 percent fall in imports also topped forecasts.
    Indonesia's economy shrank by 1.83 percent in the fourth quarter from the third quarter but on an annual basis Gross Domestic Product rose by 5.04 percent, up from 4.74 percent, supported by government spending on infrastructure.
    But personal consumption and non-construction investment is sluggish, BI said, adding that the slump in exports is persisting in line with the global economic slowdown and falling commodity prices.
    For 2016 BI is expecting growth of 5.2 to 5.6 percent, up from 2015's 4.8 percent, with activity  supported by fiscal stimulus in the form of accelerated infrastructure project development while private investment is expected to improve after government deregulation and the greater room to ease monetary policy.
    Inflation in Indonesia fell in the last four months of 2015 but rose to 4.14 percent in January from December's 3.35 percent but low oil prices are expected to restrain any inflationary pressures and the BI confirmed that it expects inflation in 2016 to remain in the middle of its target range of 4.0 percent, plus/minus 1 percentage point.
    The rupiah fell out of favor with investors last year, dropping almost 10 percent against the U.S. dollar but this year it has been on a firmer trend, with BI attributing this to foreign capital inflows as uncertainty eased on global financial markets and confidence in the domestic economy was restored following the government's move to improve the investment climate and begin infrastructure projects.
    BI also said a more "dovish" outlook for the U.S. federal funds rate, with expectations for further hikes pushed back until the second half of this year and the size of these increases now smaller, also drove an appreciation of the rupiah.
    The rupiah was trading at 13,490 to the dollar today, up 2.3 percent from the start of the year.

    Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 17 th and 18th February 2016 to lower the BI Rate 25 bps to 7%, as well as the Deposit Facility rate and the Lending Facility rate, to 5% and 7.5%, respectively. Bank Indonesia also concurred to reduce the rupiah denominated primary reserve requirement by 1%, from 7.5% to 6.5%, effective from 16 th March 2016.
The move is consistent with greater room to ease monetary policy on the back of solid macroeconomic stability, especially in terms of less intense inflationary pressures in 2016 as well as less uncertain global financial markets. The dual policy of lowering the BI Rate and primary reserve requirement is is expected to strengthen efforts to boost the ongoing economic growth. In addition, Bank Indonesia will continue to strengthen coordination with the Government to control inflation, bolster growth stimuli and accelerate structural reforms, thereby supporting sustainable economic growth moving forward, while maintaining macroeconomic stability.
The global economic recovery is expected to remain weak. On the other hand, risk on global financial markets, related to possible Federal Funds Rate, has eased. Weak consumption in the United States held back the recovery along with a sluggish housing market and manufacturing sector contraction. US economic fragility pushed back expectations of a further FFR hike until the second half of the year, coupled with a magnitude that is now lower than previously expected. The quantitative easing policy of the European Central Bank (ECB) continues with the economic growth and inflation in Europe remains low, while Japan’s central bank implements negative interest rate. On the other hand, economic moderation lingered in China on weak manufacture and investment along with the deleveraging process by the corporate sector. Meanwhile, in the commodity market, the oil price was predicted to slide due to excess supply and dwindling demand. 
Economic growth momentum in Indonesia, beginning at the third quarter of 2015, continues in the fourth quarter of 2015, on the back of government spending. Economic growth in Q4/2015 stood at 5.04% (yoy), up from 4.74% (yoy) in the previous period. The government contributed to stronger growth in terms of consumption and infrastructure investment along with local elections contested nationwide. On the other hand, the role of the private sector remained limited, with sluggish consumption and non-construction investment reported. Externally, the export slump persisted in line with the global economic slowdown and sliding international commodity prices. By sector, economic imbalances remained, with the construction sector supporting growth due to infrastructure development along with the services sector. Growth in 2016 is projected in the 5.2-5.6% (yoy) range, supported by fiscal stimuli in the form of accelerated infrastructure project development. Furthermore, private investment is expected to pick up after recent government deregulation and greater room to ease monetary policy while maintaining macroeconomic stability. 
The Indonesia Balance of Payments (BOP) improved in Q4/2015, underpinned by an increase in capital and financial account surplus. The balance of payments recorded a surplus in Q4, due to the capital and financial account surplus, which was higher than the current account deficit. The capital and financial account surplus was boosted by an increase in foreign capital inflow, along with the decreased global economic uncertainty and improved confidence on Indonesia’s economic prospect. Meanwhile, economic rebalancing policy in Indonesia along with sluggish global demand widened the current account deficit to 2.4% of GDP. Consequently, the yearly 2015 current account deficit stood at 2.06% of GDP, much lower than that of 2014, which stood at 3.09% of GDP. On the other hand, the trade balance registered a surplus in January 2016, supported by a narrower oil and gas trade deficit. Therefore, official reserve assets were recorded at USD102.1 billion at the end of January 2016, equivalent to 7.5 months of imports or 7.2 months of imports and servicing public external debt, which is well above international adequacy standards of around three months of imports. Moving forward, Bank Indonesia believes that the BOP will improve along with the manageable current account deficit of under 3% of GDP. 
The rupiah was stable and tracked an upward trend on the back of foreign capital inflow, as uncertainty eased on global financial markets and confidence in the domestic economic outlook was restored. In Q4/2015, the rupiah appreciated 6.27% (ptp – point to point) to a level of Rp13,785 per USD. Furthermore, rupiah appreciation persisted into January 2016, with the currency climbing 0.1% (ptp) to close at a level of Rp13,775 per USD at the end of the month. Rupiah appreciation was bolstered by an influx of foreign capital to government securities in line with favourable investor perception of domestic economic fundamentals due to the lower BI rate, government policy packages aimed at improving investment climate, and an increasingly effective implementation of various infrastructure projects. In addition, less risk on global financial markets, reflecting a more dovish FFR path, also drove rupiah appreciation. Bank Indonesia will always maintain exchange rate stability in line with the currency’s fundamental value. 
Inflation fell in January 2016, thereby supporting achievement of the inflation target in 2016, namely 4.0±1%. CPI inflation was recorded at 0.51% (mtm), down from 0.96% (mtm) the month earlier. Deflation of administered prices and relatively low core inflation contributed to lower headline inflation. CPI data showed that fuel prices, airfares and 12kg cylinders of LPG all dropped in price, which weighed down administered prices. Meanwhile, core inflation was low at just 0.29% (mtm) or 3.62% (yoy), supported by anchored inflation expectations and sluggish demand. On the other hand, volatile food inflation was controlled despite the ongoing severe El Nino weather phenomenon. Looking forward, the sliding global price of oil is expected to lower pressures on inflation. Bank Indonesia confirmed that inflation will be controlled in the middle of the 4.0±1% range throughout 2016. Furthermore, Bank Indonesia will continue to coordinate with the Government to control inflation, particularly that affecting food.
Financial system stability endured, underpinned by a resilient banking system and relatively stable financial markets. In December 2015, the Capital Adequacy Ratio (CAR) was recorded at 21.2%, while non-performing loans (NPL) stood at 2.5% (gross) or 1.2% (net). The banking system resilience remains strong, although corporate performance is on a downward trend due to economic slowdown and developments in the global economy. In terms of the intermediation function, credit growth accelerated from 9.8% (yoy) the month earlier to 10.45% (yoy). In contrast, deposit growth slowed from 7.7% (yoy) to 7.3% (yoy) over the same period. Bank Indonesia will watch overliquidity conditions in the economy to support further credit distribution. In addition, to further support the policy rate easing, the term structure are also lowered, in line with liquidity conditions in each tenor."


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