Thursday, January 17, 2019

Indonesia holds rate steady to help narrow C/A deficit

     Indonesia's central bank kept its benchmark BI 7-day reverse repo rate steady at 6.0 percent, reiterating this "is consistent with ongoing efforts to reduce the current account deficit to a manageable threshold and maintain the attractiveness of domestic financial assets."
     However, Bank Indonesia (BI) omitted a reference from its December statement that the policy rate was also kept steady in consideration of the global trend in interest rates in the next few months, illustrating the recent downward shift in the outlook for U.S. and European growth and thus monetary policy.
      The decision to keep the rate steady was largely expected after BI Governor Perry Warjiyo on Wednesday told a panel of lawmakers that BI's policy remains pre-emptive and the policy rate had almost reached its peak.
     Wariyo added a more favorable outlook for U.S. interest rates would allow Indonesia to rely on other instruments to stabilize financial markets and support economic growth.
      Last year BI raised its policy rate 6 times and by a total of 175 basis points to bolster the exchange rate of the rupiah, which fell sharply from February to November on concern over the country's widening current account deficit and capital outflows amid a general strengthening of the U.S. dollar that drew strength from the Federal Reserve's rate hikes.
     But since BI's last rate hike in mid-November, supported by currency and bond market intervention, the rupiah has roared back to levels seen last June.
    Today the rupiah was trading at 14,188 to the dollar, up 7.3 percent from lows seen in late October and up 1.9 percent this year. However, the rupiah is still down 4.3 percent since the start of 2018.
      In today's statement BI said it was continuing its strategy of maintaining liquidity in the rupiah money market and foreign exchange market as part of its aim to keep the current account deficit below 2.5 percent of gross domestic product in 2019.
     In the third quarter of last year Indonesia's current account deficit almost doubled to US$8.8 billion, or 3.37 percent of GDP, the widest since the second quarter of 2014, boosted by the rising cost of oil imports.
     Bank Indonesia released the following statement:

"The BI Board of Governors agreed on 16th and 17th January 2019 to hold the BI 7-Day Reverse Repo Rate at 6.00%, while also maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 5.25% and 6.75%, respectively. The decision is consistent with ongoing efforts to reduce the current account deficit to a manageable threshold and maintain the attractiveness of domestic financial assets. Furthermore, Bank Indonesia continues monetary operations strategy to maintain adequate liquidity in the Rupiah money market and foreign exchange market in order to support monetary and financial system stability. Moving forward, Bank Indonesia will continue to optimise its policy mix and strengthen coordination with the Government and other relevant authorities in order to maintain economic stability and strengthen external sector resilience, which entails controlling the current account deficit within the threshold of 2.5% of GDP in 2019. 
Global economic moderation is continuing despite slightly less uncertainty. In terms of the advanced economies, economic consolidation is expected in the United States during 2019 due to a tightening in the labour market and constrained fiscal space. The US Federal Reserve’s dovish monetary stance is forecasted to reduce the pace of Federal Funds Rate (FFR) hikes. Europe’s economy is also predicted to moderate in 2019, which could seriously impact the speed of monetary policy normalisation by the European Central Bank (ECB). In terms of developing economies, China’s economy is decelerating on sluggish consumption and flagging net exports due to simmering trade tensions with the United States as well as the reverberations of the ongoing deleveraging process. Affected by the global economic outlook, international commodity prices are expected to slide, including the global oil price as the United States ramps up production. Meanwhile, global financial market uncertainty slightly eased and induced capital flows back to developing economies in line with the slower pace of FFR hikes and a moderate thawing of US-China trade tensions.
Robust national economic growth is projected in Indonesia on the back of solid domestic demand. Various economic indicators released in the fourth quarter of 2018 point to strong domestic demand, underpinned by private and government consumption. Maintained public purchasing power, upbeat consumer confidence and the favourable impact of preparations for the legislative and presidential elections to be contested this year are boosting private consumption, while government consumption has been be sustained by procurement policy and social assistance disbursements (bansos). Nevertheless, subdued export growth will persist due to a softening in the global economy and declining international commodity prices. On the other hand, imports are also expected to begin retreating in line with the policies implemented yet strong import growth will remain to satisfy domestic demand. Consequently, Bank Indonesia projects national economic growth for 2019 in the 5.0-5.4% range, backed by domestic demand and improvements in the position of net exports. 
Indonesia’s trade balance recorded a deficit in December 2018 despite an influx of non-resident capital flows. The trade deficit stood at USD1.1 billion in the reporting period due to restrained export performance, non-oil and gas exports in particular, as a corollary of global headwinds. Meanwhile, foreign capital inflows returned in December 2018, reaching USD1.9 billion, with the trend persisting into January 2019. A strong position of reserve assets was recorded at the end of December 2019, totalling USD120.7 billion, equivalent to 6.7 months of imports or 6.5 months of imports and servicing government external debt, which is well above the international standard of three months. Moving forward, Bank Indonesia will continue to strengthen coordination with the Government in order to reinforce external sector resilience, which includes controlling the current account deficit in 2019, going toward the range of 2.5% of GDP. 
The rupiah is appreciating, thus bolstering price stability. On average, the rupiah charged 1.16% higher against the US dollar in December 2018 despite experiencing 0.54% (ptp) depreciation in the same period on a point-to-point basis. The strong rupiah persisted into January 2019 as an influx of foreign capital flowed into the domestic markets in line with sound national macroeconomic fundamentals and slightly eased global financial market uncertainty. For the year, therefore, the Rupiah depreciated 6.05%, or 5.65% (ptp), in 2018. Nonetheless, the point to point Rupiah depreciation was less pronounced than the Indian rupee, South African rand Brazilian real, and Turkish lira. Looking ahead, Bank Indonesia will remain vigilant of global financial market uncertainty and continue to implement exchange rate stabilisation measures in line with the currency’s fundamental value, while continue to maintain market mechanisms and supporting financial market deepening efforts.
Inflation is low and stable in 2018, remaining within the target corridor of 3.5±1% (yoy). CPI inflation was recorded at 0.62% (mtm) in December 2018 in line with cyclical yearend trends. Therefore, inflation in 2018 stood at 3.13% (yoy), which marks the fourth consecutive year that headline inflation has remained on target. Low core inflation was also maintained in line with policy consistency by Bank Indonesia to maintain exchange rate stability and anchor rational inflation expectations. Price pressures on volatile foods were effectively controlled thanks to adequate supply and lower international food prices. Furthermore, inflationary pressures on administered prices were also mild due to minimal government policy prior to the general election. Moving forward, Bank Indonesia will consistently maintain price stability and strengthen policy coordination with the Central Government and Local Administrations to maintain low and stable inflation, which is projected within the inflation target of 3.5±1% in 2019.
Financial system stability has been maintained as the bank intermediation function improves and the banking industry effectively contains credit risk. The Capital Adequacy Ratio (CAR) of the banking industry improved to 23.3% and the Liquidity Ratio to 20.1% in November 2018. In addition, the banking sector maintained a low level of Non-Performing Loans (NPL) at 2.7% (gross) or 1.2% (net). In terms of the intermediation function, credit growth was reported to decelerate from 13.3% (yoy) in October 2018 to 12.1% (yoy) in November 2018, while deposit growth decreased from 7.6% (yoy) to 7.2% (yoy) in the reporting period. 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 Rp197.1 trillion (gross) as of November 2018, which is below the Rp276.9 trillion (gross) recorded in the same period last year. Consequently, Bank Indonesia projects credit growth in 2019 at 10-12% (yoy), while predicting deposit growth in the 8-10% (yoy) range. Moving forward, Bank Indonesia will continue to monitor liquidity adequacy and distribution in the banking system in conjunction with the other relevant authorities consistent with efforts to help maintain financial system stability.
Solid domestic economic performance is supported by uninterrupted cash and noncash payment systems. In terms of cash payments, the position of currency in circulation increased by 7.8% (yoy) in December 2018 compared with 7.3% in November 2018. Regarding wholesale noncash payments, the average daily growth of high-value transactions settled through the Bank Indonesia – Real Time Gross Settlement (BI-RTGS) system increased 1.53% (yoy) in December 2018 after declining 1.7% (yoy) in the month earlier. Meanwhile, growth of noncash transaction value settled through the National Clearing System (SKNBI) fell from 9.7% (yoy) in November 2018 to 8.08% in December 2018. Retail transactions through ATM/debit cards, credit cards and e-money grew by 14.3%, 7.9% and 215.4% respectively in the reporting period due to the seasonal effect of Christmas and New Year. Moving forward, Bank Indonesia will also ensure the availability of national payment systems, both operated by Bank Indonesia and the industry, in order to maintain macroeconomic stability."


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