Thursday, February 16, 2017

Indonesia holds rate, global risks demand high vigilance

    Indonesia's central bank left its benchmark BI 7-day Reverse Repo rate steady at 4.75 percent, as widely expected, but warned in no uncertain terms about the risks it faces from changes to United States policy, the impact of Brexit and events in Europe.
    "Several global risks demand heightened vigilance," Bank Indonesia said, adding domestic risks include the impact on inflation from the government's increase of electricity rates, special fuel prices and vehicle registrations.
    Bank Indonesia (BI) cut its BI-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.
     Despite the risks it faces, BI said the global economy had improved on the back of gains in the U.S. and China and rising commodity prices, and this momentum is expected to continue.
     But the central bank said U.S. fiscal expansion along with an earlier-than-expected monetary tightening could push up the dollar and while a relaxation of U.S. financial regulations would boost domestic financial activities, it "may elevate risks in the global financial system stability."
     In addition, a protectionism in the U.S., along with Brexit and European risks, could "reduce the world trade volume and increase global uncertainty."
     However, BI's baseline forecast is for Indonesia's economy to expand by 5.0 to 5.4 percent this year - up from 5.02 percent in 2016 and 4.88 percent in 2015 - on strong private consumption, higher government spending and improved private and government investments. Exports are also expected to rise along with imports due to domestic demand.
     Inflation in Indonesia is also under control despite what BI described as a "slight bump" in January as higher administered prices pushed up headline inflation to an annual rate of 3.49 percent from 3.02 percent.
     The central bank said it would continue to strengthen its coordination with the government to control inflation in the face of risk from administered prices, a reform to energy subsidies and the risk of rising, volatile food prices.
    "With these steps, Bank Indonesia predicts inflation within the target corridor for 2017, namely 4+/-1%," BI said.
     After being hit by the election of Donald Trump as U.S. president in November, the rupiah has stabilized and firmed as foreign capital has flowed back into the country on a promising domestic outlook.
    The rupiah was trading at 13,303 to the U.S. dollar, up 1.5 percent this year.

    Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 14th and 16th February 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. The decision is consistent with Bank Indonesia’s efforts to maintain macroeconomic and financial system stability, while preserving domestic economic recovery momentum. Congruent with the global economic improvements, stronger economic growth in Indonesia is expected, with maintained macroeconomic and financial system stability at home. Nevertheless, Bank Indonesia shall remain vigilant of global risks in the form of US policy direction and geopolitical risks in Europe, as well as domestic risks linked to the impact of administered prices (AP) on inflation. To that end, Bank Indonesia will constantly seek to optimise its monetary, macroprudential and payment system policy mix in order to maintain macroeconomic and financial system stability. Furthermore, Bank Indonesia will also strengthen policy coordination with the Government, focusing on controlling inflation within the target corridor as well as ongoing structural reforms to support sustainable economic expansion.
The global economy improved on the back of gains in the US and China, as well as rising international commodity prices. US economic momentum is expected to persist, driven by increased consumption and investment. Meanwhile, robust growth in China is also predicted in line with the gradual economic rebalancing process. On the other hand, world commodity prices, including oil and Indonesia’s export commodities, has shown improvement. Nevertheless, several global risks demand heightened vigilance. The US fiscal expansion plan amid signals of monetary tightening can prompt the US currency strenghtening as well as earlier than expected policy rate adjustment. Relaxations in the US financial sector, while boosting domestic financial activities in the US, may elevate risks in the global financial system stability. Moreover, the US protectionism trade policy, the approval of “Hard Brexit” by the British parliament and several geopolitical risks in Europe, can reduce the world trade volume and increase global uncertainty.
At home, economic growth accelerated on strong household consumption, and improvements in exports and investment. The national economy achieved 5.02% (yoy) growth, up from 4.88% (yoy) in 2015. Households were inclined to consume as controlled inflation helped maintain public purchasing power. Exports improved on the back of the increasing world trade volume and several commodity prices such as coal and palm oil. Stronger investment was down to non-building investment in the form of automotive and other equipment, while building investment slowed down along with the lower fiscal stimulus. Regionally, the islands of Sumatra and Java supported stronger national economic growth, while growth in Eastern Indonesia continued to moderate. Bank Indonesia projects economic growth in 2017 at 5.0-5.4% (yoy), on the back of strong private consumption, increase in government consumption, and improvements in both private and government investments. Export growth is expected to increase, coupled with increasing imports due to domestic demand. 
The balance of payments (BOP) recorded a surplus totalling USD4.5 billion in the fourth quarter of 2016, bolstered by a narrower current account deficit and a significant capital and financial account surplus. The current account deficit stood at USD1.8 billion (0.8% of GDP) in the fourth quarter, down considerably from USD4.7 billion (1.9% of GDP), supported by gains in the goods trade balance and primary income account. Economic momentum in trading partner countries and elevated international commodity prices translated into a larger goods trade surplus. On the other hand, the capital and financial account recorded a significant surplus totalling USD6.8 billion, with a growing other investment surplus confirmed as the main contributor along with repatriated funds from the successful tax amnesty. For the year, the BOP recorded a surplus totalling USD12.1 billion, significantly improved from the USD1.1 billion deficit posted in 2015. Consequently, the position of reserve assets at the end of December 2016 stood at USD116.4 billion, increasing thereafter in January 2017 to USD116.9 billion, equivalent to 8.7 months of imports or 8.4 months of imports and servicing government external debt, which is well above the international adequacy standard of three months.
After suffering in the fourth quarter of 2016, the rupiah relatively stabilized with a tendency to strenghten amid uncertainty regarding policy direction in the United States. In the fourth quarter of 2016, point-to-point, the rupiah depreciated 3.13% (ptp) to a level of Rp13,473 per USD. Pressures on the rupiah originated from increased global uncertainty due to the US presidential election, the FFR hike and increased demand for USD to service government external debt at yearend. However, the rupiah rebounded 0.9% to Rp13,352 per USD in January 2017 as foreign capital flowed back into the country on the promising domestic economic outlook perceived by investors. Bank Indonesia will continue to monitor global financial uncertainty, while instituting measures to stabilise the rupiah in line with the currency’s fundamental value and maintaining market mechanisms. 
Inflation remained under control, despite the slight bump recorded at the beginning of 2017. Administered prices (AP) and core inflation pushed CPI inflation to 0.97% (mtm) in January 2017, accelerating from 0.42% (mtm) the month earlier. Meanwhile, inflationary pressures on volatile foods (VF) were controlled and low, along with various food price corrections. The government raised administered prices (AP) through higher administration price to extend vehicle registrations as well as more expensive electricity rates and special fuel prices. Core inflation was controlled at 0.56% (mtm) or 3.35% (yoy) despite a moderate increase. Bank Indonesia will continue to strenghten coordination with the government to control inflation, specifically in the face of several risks stemming from administered prices, as the government reforms energy subsidies, as well as the risk of rising volatile food prices. With these steps, Bank Indonesia predicts inflation within the target corridor for 2017, namely 4±1%.
The financial system remained stable, supported by banking system resilience and financial market stability. In December 2016, the Capital Adequacy Ratio (CAR) stood at 22.7% and the liquidity ratio at 20.9%, while non-performing loans (NPL) were recorded at 2.9% (gross) or 1.2% (net). Throughout January-December 2016, monetary and macroprudential policy easing has led to lower rates on term deposits by 122 bps and loans by 79 bps. Based on the type of loan, the interest rates on working capital loans decreased by 110 bps, investment loans by 91 bps and consumer loans by 29 bps. Meanwhile, credit growth was recorded at 7.9% (yoy), down from 10.5% (yoy) one year earlier. This was due to the low demand on loans along with corporate consolidation and the sluggish global economic growth. Conversely, deposit growth has accelerated from 7.3% (yoy) to 9.6% (yoy) over the same period, driven by an influx of repatriated funds at yearend as part of the successful tax amnesty. Economic financing through the capital market, including IPOs and rights issues, corporate bonds and medium-term notes (MTN), also increased. Bank Indonesia projects credit and deposit growth to accelerate in 2017 to 10-12% and 9-11% respectively on the back of increasing economic activity, coupled with the looser monetary and macroprudential policy stance adopted."


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