Thursday, May 18, 2017

Indonesia holds rate, confirms 5.0-5.4% growth forecast

    Indonesia's central bank left its benchmark 7-day reverse repurchase rate (RR) at 4.75 percent, as expected, and confirmed that it expects the country's economy to grow between 5.0 and 5.4 percent this year, supported by stronger exports and investments along with "tenacious consumption."
     Bank Indonesia (BI) has maintained its rate since October 2016 when it last cut its rate. From January through June last year BI lowered its previous benchmark rate four times by a total of 100 basis points and then cut the current RR rate by a total of 50 basis points in August and October.
     Indonesia's Gross Domestic Product grew by an annual rate of 5.01 percent in the first quarter of this year, up from 4.94 percent in the first quarter, helped by higher government spending on infrastructure projects, improved exports and higher commodity prices, especially of coal and rubber.
     Last year Indonesia's economy grew by 5.02 percent, up from 4.88 percent in 2015.
     While BI expects the global economy to improve, it noted several risks, including the Federal Reserve's expected rate hike in June and the reduction in its balance sheet, U.S. fiscal and trade policies, and the geopolitical condition in the Korean Peninsula.
    "As global economic growth improves, world trade volume and non-oil commodity prices increase," the BI said.
     Domestically, BI is keeping a close eye on the impact on inflation from administered prices.
     Indonesia's headline inflation rate rose to 4.17 percent in April from 3.61 percent in March, still within the bank's target range of 4.0 percent, plus/minus 1 percentage point.
     Administered prices were the main contributor to higher consumer prices, with a rise in electricity rates for some users, airfares, petrol and cigarette prices. From March administered prices were up 1.27 percent in April for an annual rise of 8.68 percent wile volatile food prices fell by a monthly 1.26 percent due to an abundant supply.
    Core inflation, however, eased to 3.2 percent in April from 3.3 percent in March, helping anchor inflation expectations and the appreciating rupiah, BI said.
      After falling sharply from June 2013 through October 2015, the rupiah has been more stable in 2016 and this year.
     "Rupiah appreciation was driven by maintained non-resident capital inflows after the sovereign rating outlook was upgraded, solid macroeconomic data was released and positive sentiment regarding the domestic economic outlook prevailed," BI said.
      But shortly after today's BI's decision, the rupiah dropped sharply to around 1,3454 a U.S. dollar from around 1,3320. Compared with the start of this year, the rupiah is up 0.3 percent.

     Bank Indonesia issued the following statement:

"The BI Board of Governors agreed on 17th and 18th May 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 19th May 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, the US policy directions and geopolitical conditions, specifically in the Korea Peninsula, are several risks that require vigilance. Domestically, however, the risks include the possible impact of adjustments to administered prices (AP) on inflation, coupled with ongoing consolidation in the banking and corporate sectors. Therefore, Bank Indonesia will continue to optimise its monetary, macroprudential and payment system policy mix in order to maintain macroeconomic and financial system stability. Furthermore, Bank Indonesia will continue to strengthen coordination with the Government to control inflation within the target corridor and accelerate structural reforms to support sustainable economic growth.
The global economy is expected to improve despite the broad range of risks that must be monitored. The global economic outlook are improving on the back of stronger growth in the US, China, Europe and Japan. Solid consumption is driving the US economy, supported by a bump in non-residential investment. In China, economic growth improved along with stronger private investment and export. In Europe, the manufacturing sector is leading economic growth in line with improvements in consumption and export, combined with milder geopolitical risks after the result of the French Presidential Election was announced. In Japan, increasing domestic demand and exports have supported its national growth. As global economic growth improved, world trade volume and non-oil commodity prices increases. Looking forward, Bank Indonesia shall continue to remain vigilant of the various global risks, including the proposed Fed Fund Rate (FFR) hike, US fiscal and trade policies, planned reduction to the Fed’s balance sheet as well as geopolitical condition in various regions, especially the Korea Peninsula.
Indonesia’s economic growth improved in the first quarter of 2017. Economic growth was recorded at 5.01% (yoy) in the reporting period, up from 4.94% (yoy) last period, and 4,92% (yoy) the same period last year. Export and government expenditure recorded ample growth. Stronger export are mainly caused by the improvement in global commodity prices such as coal and rubber, as well as global economic growth. Government capital dan goods expenditure may improve investment, specifically building investment, as government infrastructure projects continued. Regionally, national GDP growth was supported by economic momentum on the islands of Java on the back of investment, and Kalimantan on the back of export. On the other hand, slower growth was recorded in Sumatra due to lower investment and inter-region trade, whereas a decrease in mining export caused slower growth in Sulawesi, Maluku, Papua, Bali and Nusa Tenggara. Bank Indonesia predicts the domestic economy to grow in the range of 5.0-5.4% (yoy) in 2017, underpinned by stronger export and investment performance as well as tenacious consumption.
Indonesia’s balance of payments (BOP) recorded another surplus in the first quarter of 2017. The BOP surplus stood at Rp4.5 billion in the reporting period, relatively unchanged on the previous quarter but much improved on the Rp0.3 billion deficit posted one year ago. Foreign capital flow was large enough to elevate the capital and financial account surplus to USD7.9 billion. The improvement was in line with increased economic growth momentum and investors’ positive perception of the domestic economic outlook. Meanwhile, the current account deficit was recorded at USD2.4 billion on the back of deficits in the oil and gas trade balance and primary income account, which are larger than the increase of non-oil and gas trade. The oil and gas trade deficit expanded as the global oil price increased against a backdrop of less lifting, while the larger primary income account deficit stemmed from higher scheduled interest payments on government debt. Consequently, the position of reserve assets at the end of the first quarter of 2017 stood at USD121.8 billion, rising thereafter to USD123.2 billion in April 2017, 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 appreciated throughout the first quarter and remained relatively stable in April 2017. In the first quarter of 2017, the rupiah appreciated 1.1% (ptp) to a level of Rp13,326/USD. The Rupiah remained stable throughout April 2017, closing at Rp13,329/USD. Rupiah appreciation was driven by maintained non-resident capital inflows after the sovereign rating outlook was upgraded, solid macroeconomic data was released and positive sentiment regarding the domestic economic outlook prevailed. Bank Indonesia shall continue to stabilise rupiah exchange rates, however, in line with the currency’s fundamental value, while maintaining market mechanisms.
Headline inflation was controlled within the target corridor for 2017, namely 4±1%. The Consumer Price Index (CPI) recorded inflation of 0.09% (mtm) or 4.17% (yoy) in April 2017. Administered prices (AP) were cited as the main contributor to CPI inflation, as phase II of the adjustments to electricity rates for non-subsidised 900VA subscribers, higher airfares as well as rising petrol and cigarette prices drove AP inflation to 1.27% (mtm) or 8.68% (yoy). Low core inflation was recorded at 0.13% (mtm) or 3.28% (yoy), in line with limited domestic demand, anchored inflation expectations and rupiah appreciation. In contrast, volatile foods (VF) experienced deflation of 1.26% (mtm) or 2.66% (yoy) due to abundant supply in the wake of the harvesting season. Moving forward, Bank Indonesia shall continue to strengthen coordination with the Government to control inflation in the face of several risks, including adjustments to administered prices (AP) as part of the Government’s energy reforms, as well as the risk of rising volatile food prices during the approach to the holy fasting month of Ramadan.
Maintained banking industry resilience and stable financial markets continued to support solid financial system. In March 2017, the Capital Adequacy Ratio (CAR) of the banking industry was recorded at 22.7% and the liquidity ratio at 22.0%, while non-performing loans (NPL) stood at 3.0% (gross) or 1.3% (net). The transmission of easing monetary and macroprudential policy continued to improve, albeit restrained by the banks’ prudence in managing credit risks. Credit growth in March 2017 was recorded at 9.2% (yoy), up from 8.6% (yoy) the month earlier, boosted by the increase of forex and corporate loans. Furthermore, stronger credit growth is expected to persist as economic activities gain traction. Deposit growth in March 2017 stood at 10.0% (yoy), accelerating from 9.2% (yoy) one month earlier. Congruent with the expected economic gains and ongoing impact of monetary and macroprudential policy easing, credit and deposit growth are predicted to accelerate to 10-12% and 9-11% respectively in 2017."


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