Snapshot BI Rate July 2014

Remain on Hold for Eight Consecutive Months

BI Policy Review

      In the Board of Governors’ Meeting on July 10, 2014, Bank Indonesia decided to maintain BI rate at 7.50% (in line with our forecast). The policy is consistent with the inflation target to 4.5 ± 1% in 2014 and 4.0 ± 1% in 2015, as well as lowering the current account deficit to a more healthy level. Looking ahead, Bank Indonesia kept watch on a variety of risks, both global and domestic, and take anticipatory measures to ensure that stability is maintained economy and support improvements in the current account. Therefore, Bank Indonesia will continue to strengthen the monetary and macro prudential policy mix and to improve coordination with the government in controlling inflation and current account deficit, and policies to strengthen the management structure of the domestic economy and foreign debt, in particular corporate foreign debt.

      On the Domestic economy in 2Q 2014 still showed a slowing. Although it is still growing strong, household consumption is expected to slow. This is indicated by slowing retail sales index and car sales. Government consumption is also predicted to be lower due to the shifting of the 13th month salary payment to the third quarter 2014 and fiscal austerity ministries and agencies. Meanwhile, investment growth is also expected to slow down, especially construction investment as a result of stabilization policy. However, non-construction investment is forecasted to increase that, among others, supported by the performance of manufacturing exports are still strong. Overall, the performance of the external sector is still weak, muffled by the performance of coal and mineral exports. Despite the overall weakening exports, manufacturing exports (non-resource) showed an increasing trend, particularly transportation equipment. These are mainly supported by the economic recovery in developed countries and begin to make Indonesia as a production base for automobile major markets of ASEAN, Japan and other Asian countries. We expect Indonesia's economic growth reached 5.34% y-o-y in 2Q 2014. Overall, we expect Indonesia’s economic growth around 5.40% for the full year 2014 slowing from 5.78% in 2013.

      In line with the performance of the external sector, Indonesia’s trade balance in May 2014 returned surplus of USD 70 million compared with a deficit of USD 1,963 million in one month earlier. Exports in May stood at USD 14,825 million, rising by 3.73% (m-t-m), but still declining by 8.11% (y-o-y) due to rising of coal and CPO exports. The total imports dropped to USD 14,755 million, fell by 9.23% (m-t-m), from USD 16,255 million in one month earlier due to falling non-oil & gas imports by 12.05% (m-t-m). The weakening non-oil and gas import was triggered by falling imports of machinery/mechanical appliance, machinery/electrical appliance, and iron/steel by 12.69% (m-t-m), 14.77% (m-t-m), and 12.63% (m-t-m), respectively. In Apr-May 2014, trade deficit reached USD 1,893 million. High trade deficit is expected to make the current account deficit (CAD) swelled. We expect CAD increased from -2.06% per GDP in 1Q 2014 to -3.97% per GDP in Q2 2014. Nevertheless, overall we expect the current account deficit of -2.73% per GDP in 2014.

      Rupiah depreciated by 3.03% against USD in Jun’14 on corporate dividend payment season and oil price soaring. However, foreign inflows are still happening. In the stock market, foreigners are still recorded a net-buy of USD 229.7 million in June 2014. Similarly, the bond market, still recorded a net foreign-buy for IDR 6.43 trillion in June 2014. Later, Indonesia's foreign reserves in June 2014 reached US$ 107.68 billion slightly increase from US$ 107.05 billion in May 2014.

      Indonesia’s money supply (M2) in May’14 posted slowing growth to 10.5%yoy in May’14 from 10.9%yoy in Apr’14, driven by slowing quasi money (third party fund bank) and credit. The credit in May’14 grew slower at 17.4%y-o-y, down from 18.5%y-o-y in a month earlier.  The slowing credit and declining money supply were signals relatively tight liquidity in banking industry. However, banking liquidity condition is expected to be better in H2/2014 to early 2015 since election’s euphoria and better quality of government spending will lead to capital inflows. We expect credit growth reach 16.74% y-o-y in the end of 2014

Market Implication

FX Markets

As expected, BI rate is kept unchanged at 7.5% by the central bank today. With BI left the policy rate, it will have little impact on Rupiah. Euphoria Jokowi victory in president election by quick count version (LSI, CSIS, RRI, Saiful Mujani and others) makes capital inflow into Indonesia's capital markets in both the stock market and bond market. These conditions make the Rupiah strengthened. However, the strengthening seems a bit restrained because investors are still looking at the president's official election results will be announced on July 22, 2014. For the medium and long term, we expect the movement of Rupiah is still haunted by the swelling of the twin deficit (budget and current account) due to soaring fuel subsidies and export performance has not fully recovered.

Bond Markets

Although Bank Indonesia left its reference rate unchanged today, we expect that it will have minor impact on the movement of IDR Government Bond (IDR GB). Meanwhile, euphoria Jokowi victory in president election by quick count version (LSI, CSIS, RRI, Saiful Mujani and others) makes Indonesia’s bond market strengthened. Going forward, we expect the Indonesian bond market will be strengthened limited in the short term.