Thursday, November 21, 2019

Indonesia holds rate but lowers reserve ratio 2nd time

    Indonesia's central bank left its benchmark 7-day reverse repo rate steady at 5.0 percent after four consecutive cuts and signaled it would pause in further easing by saying its monetary policy remains accommodative and consistent with inflation in its target corridor and its efforts to maintain momentum in domestic economic growth against a backdrop of global economic moderation.
    But Bank Indonesia (BI), which cut its rate by 100 basis points in July, August, September and October, still eased its policy stance slightly by lowering the rupiah reserve requirements for conventional commercial bans and islamic banks by 50 basis points to 5.5 percent and 4.0 percent, respectively, to "ensure adequate liquidity in the banking system to increase financing and support economic growth."
    This is the second time this year BI has lowered its reverse requirement, bringing the cumulative decline to 100 basis points following a similar cut in June. The average reserve requirement would be maintained at 3.0 percent as of Jan. 2, 2020, BI said.
    "Bank Indonesia will continue to direct the full panoply of its policy instruments towards catalyzing economic growth," BI said, adding macro prudential policy would also remain accommodative to stimulate bank lending and expand economic financing while maintain financial system stability.
     Indonesia's economy has slowed in the last three quarters in line with the global economy, hit by the "fallout from the ongoing trade war between the United States and China," and while BI expects domestic economic growth to remain upward momentum in the fourth quarter of this year due to fiscal expansion, it said risks from the trade war still demand vigilance due to the potential influence on domestic growth and foreign capital flows.
     Indonesia's gross domestic product growth decelerated to 5.02 percent in the third quarter from 5.05 percent in the second and 5.07 percent in the first, and BI forecast full-year growth of around 5.1 percent.
     This is in line with with BI's forecast in October of 2019 growth in the lower end of a 5.0 to 5.4 percent and stable from 2018's growth of 5.17 percent.
     Inflation in Indonesia has been stable in recent months and eased to 3.13 percent in October from 3.39 percent in September and BI expects low inflation to persist with consumer price inflation averaging around 3.1 percent this year, slightly below its 2019 target range of 3.5 percent, plus/minus 1 percentage point.
     In 2020 BI is lowering its inflation target to 3.0 percent, plus/minus 1 percentage point.
     Indonesia's rupiah has firmed this year, with BI describing it as "strong" and supported by an improving balance of payments, foreign exchange from exporters and foreign capital inflows from a favorable economic outlook, attractive domestic financial markets and slightly less uncertainty in global financial markets.
     The rupiah was trading around 14,088 to the U.S. dollar today, up 3.4 percent this year.


     Bank Indonesia released the following statement:

"The BI Board of Governors agreed on 20th and 21st November 2019 to hold the BI 7-Day Reverse Repo Rate at 5.00%, while also maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 4.25% and 5.75%, respectively. Monetary policy remains accommodative and is consistent with controlled inflation in the target corridor, maintained external stability as well as efforts to maintain domestic economic growth momentum against a backdrop of global economic moderation. Bank Indonesia has also agreed to lower the minimum Rupiah Reserve Requirements for Conventional Commercial Banks and Islamic Banks/Islamic Business Units by 50bps to 5.5% and 4.0% respectively, while holding the average reserve requirements at 3.0%, effective from 2nd January 2020. The policy move was taken to ensure adequate additional liquidity in the banking system to increase financing and support economic growth. The prevailing monetary operations strategy was further strengthened to maintain adequate liquidity and facilitate effective transmission of the accommodative policy mix.
Bank Indonesia will continue to direct the full panoply of its policy instruments towards catalysing economic growth. Macroprudential policy shall remain accommodative to stimulate bank lending and expand economic financing, while maintaining financial system stability. Congruently, Bank Indonesia is also holding the Countercyclical Capital Buffer (CCB) at 0% and the Macroprudential Liquidity Buffer at 4%, with 4% repo flexibility. Meanwhile, payment system policy and financial market deepening have been strengthened to support economic growth. Going forward, Bank Indonesia will monitor domestic and global economic development in using its room to implement an accommodative policy mix in order to maintain controlled inflation and external stability as well as to support economic growth momentum. Furthermore, coordination between Bank Indonesia, the Government and other relevant authorities will be strengthened in order to maintain economic stability and catalyse domestic demand, while boosting exports and tourism and attracting foreign capital flows, including Foreign Direct Investment (FDI).
Fallout from the ongoing trade war between the United States and China has hindered global economic growth in 2019. The global economy is projected to decelerate from 3.6% in 2018 to just 3.0% in 2019. In the United States, the trade war has slashed economic growth from 2.9% in 2018 to around 2.3% in 2019, with intense downside pressures on exports that have hurt domestic demand, non-residential investment and household consumption in particular. Similarly, muted export and investment performance in China are expected to weigh on the economy, with growth stuttering from 6.6% in 2018 to around 6.2% in 2019. Pressure on economic growth has also been felt in Europe, Japan, India and various other countries. Furthermore, measures to relax monetary policy by lowering interest rates and expanding central bank balance sheets in several countries have thus far failed to stem global economic moderation. In the global financial markets, the latest developments point to slightly less uncertainty, thus maintaining foreign capital inflows to developing economies. Moving forward, global economic growth is expected to improve, yet the risks associated with the US-China trade war and other geopolitical tensions demand ongoing vigilance due to their potential influence on domestic economic growth and foreign capital flows.
Indonesia's economy remains resilient despite a moderate slowdown in line with the global economy. GDP growth in the third quarter of 2019 remained relatively stable at 5.02% (yoy), albeit down slightly from the 5.05% (yoy) recorded in the previous period. The main driver of resilient national economic growth remains household consumption, supported by a flourishing middle-class, the positive impact of consistent monetary policy to maintain price stability as well as the government’s social aid program (bansos) disbursements, which have maintained consumption amongst low-income earners. Building investment growth remains solid in line with the development of national strategic infrastructure projects. Meanwhile, exports continue to languish on dwindling demand and sliding international commodity prices, which have fed through to lower imports and weaker non-building investment. Spatially, economic growth has been supported by robust household consumption in various regions along with strong investment in national strategic projects located in Sulawesi, Kalimantan and Java. Economic growth is expected to regain upward momentum in the fourth quarter of 2019 on seasonal trends in line with fiscal expansion. Consequently, Bank Indonesia projects economic growth to reach around 5.1% in 2019.
Indonesia's balance of payments is improving, thereby reinforcing external resilience. Indonesia’s BOP deficit shrank significantly from USD2.0 billion in the second quarter of 2019 to just USD46 million in the three months to September 2019. The narrower deficit was supported by an improvement in the current account deficit from USD8.2 billion (2.9% of GDP) in the second quarter of 2019 to USD7.7 billion (2.7% of GDP) in the reporting period. Furthermore, the capital and financial account recorded a large surplus in the third quarter of 2019, namely USD7.6 billion, riding on strong investor confidence in the domestic economic outlook coupled with attractive domestic financial assets for investment. Looking forward, the overall BOP for 2019 is projected to record a surplus in line with the current influx of foreign capital inflows combined with a manageable current account deficit that has narrowed to 2.7% of GDP. The position of reserve assets remains strong, reaching USD126.7 billion at the end of October 2019, increasing from USD124.3 billion at the end of September 2019. The current position of FX reserves is equivalent to 7.4 months of imports or 7.1 months of imports and servicing government external debt, which is well above the international adequacy standard of three months. Bank Indonesia will continue to strengthen policy synergy with the Government and other relevant authorities in order to bolster external resilience, while attracting more FDI.
The rupiah continues to appreciate in line with improving BOP performance. In November 2019, the rupiah appreciated by an average of 0.42% despite depreciating 0.41% (ptp) compared to the level recorded at the end of October 2019. Since the beginning of the year, therefore, the rupiah had gained 2.03% (ytd) as of 20th November 2019. The strong rupiah is supported by the supply of foreign exchange from exporters and maintained foreign capital inflows due to the favourable national economic outlook, highly attractive domestic financial markets and slightly less uncertainty in global financial markets. Moving forward, Bank Indonesia is confident that rupiah exchange rates will remain stable in line with the currency's fundamental value and maintained market mechanisms. This is also supported by a solid BOP outlook based on the inflow of foreign capital to Indonesia, triggered by various positive factors. Supporting exchange rate policy effectiveness and strengthening domestic financing, Bank Indonesia constantly seeks to accelerate financial market deepening, targeting the money market and foreign exchange market.
Low and stable inflation remains under control. CPI inflation in October 2019 was recorded at 0.02% (mtm) after recording 0.27% (mtm) deflation the month earlier. Annually, CPI inflation stood at 3.13% (yoy) in October 2019, down from 3.39% (yoy) in September 2019. Inflation remains under control in accordance with lower core inflation as a result of rational inflation expectations and monetary policy consistency by Bank Indonesia to maintain price stability, manage aggregate demand, ensure the exchange rate moves in line with the currency's fundamental value and minimise the impact of global prices. Volatile foods experienced another period of deflation, albeit shallower than the previous period. Meanwhile, inflationary pressures on administered prices have remained stable. Cumulatively as of October 2019, therefore, headline inflation stands at 2.22% (ytd). Bank Indonesia projects low inflation to persist, thus maintaining CPI inflation in 2019 at around 3.1%. Looking forward, Bank Indonesia will consistently maintain price stability and strengthen policy coordination with the central and regional governments to control inflation within the target corridor.
Effective transmission of the looser monetary policy stance has been strengthened by adequate liquidity in the banking industry together with a stable and efficient money market. The average daily transaction volume on the interbank money market remained high in October 2019 at Rp18.12 trillion. Adequate liquidity was also maintained in the banking industry, as reflected by a ratio of liquid assets to deposits of 19.43% in September 2019, relatively stable compared with the 19.47% recorded in August 2019. Consequently, interbank rates have fallen across all tenors, including the overnight interbank rate as the operational target of monetary policy, which continues to converge on the policy rate at 5.04% in October 2019. The weighted average deposit rate also fell 12bps on the previous period to 6.45% in October 2019. On the other hand, lending rates have also started to come down, primarily due to investment loans and working capital loans, which were recorded at 10.04% and 10.26% respectively in the reporting period. Meanwhile, growth of narrow money (M1) and broad money (M2) in September 2019, at 6.88% (yoy) and 7.08% (yoy) respectively, was consistent with domestic economic growth. Bank Indonesia will continue to ensure adequate liquidity and increase efficiency in the money market, while strengthening transmission of the accommodative policy mix.
Financial system stability has been maintained despite the bank intermediation function requiring attention. Financial system stability was reflected by a high Capital Adequacy Ratio (CAIR) of 23.19% in September 2019 along with a low level of non-performing loans at 2.66% (gross) or 1.18% (nett). Public listed corporations have maintained solid performance in line with sound repayment capacity, which further reinforced financial system stability. Nonetheless, credit growth declined from 8.59% (yoy) in August 2019 to 7.89% (yoy) in September 2019, primarily held back by restrained demand for corporate loans. On the other hand, deposit growth in September 2019 was recorded at 7.47% (yoy), falling from 7.62% (yoy) in August 2019. Therefore, Bank Indonesia projects growth of outstanding loans disbursed by the banking industry at around 8% in 2019, supported by deposit growth of around 8%.
Payment system availability, both cash and non-cash, remains uninterrupted. The position of currency in circulation grew 4.49% (yoy) in October 2019, while non-cash payment transactions using ATM/debit cards, credit cards and electronic money expanded 32.09% (yoy) in the reporting period, dominated by ATM/debit cards with a 94.55% share. Impressive growth of e-money transactions was maintained in September 2019 at 268% (yoy) in line with greater public uptake of digital currency and broader e-money integration into the digital ecosystem. Bank Indonesia constantly strives to expand the payment systems’ role in supporting economic growth, while actively promoting digital economic and financial transformation. A comprehensive approach to transforming the role of the payment system is contained in the new vision of Indonesia’s Payment System (SPI) 2025. Through that approach, inclusive digital transformation will be achieved by integrating the roles of all economic agents through coordination with various relevant authorities and institutions within an integrated digital ecosystem."


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