Potential room to cut

Potential room to cut

       The global recovery has weakened further amid increasing financial turbulence. Prospects across the main countries and regions remain uneven. The World Bank lowered its forecast global economic growth of 2.9% to 2.4% for this year. Meanwhile, China's economy still slowed growth to 6.7% y-o-y in 1Q 2016 compare with 6.8% y-o-y in the previous quarter. Furthermore, the China’s Purchasing Manager Index (PMI) manufacturing indicator unchanged at 50.1 in May 2016 compare with the previous month. The China’s Industrial Production Index maintained growth at 5.8% y-o-y in April 2016, unchanged compare with March 2016. In the meantime, EU economy growth slowed to 1.5% y-o-y in 1Q 2016, compare 1.6% y-o-y in the previous quarter. European PMI Manufacturing indicator decreased to 51.5 in May 2016 from 51.7 in one month earlier. European Industrial Production Index slowing growth to 0.1% y-o-y in March 2016 from 1.1% y-o-y in the previous month. Meanwhile, Japanese economy growth slowed to 0.0% y-o-y in 1Q 2016, compare with 0.7% y-o-y in the previous quarter. In the other hand, Japanese PMI Manufacturing indicator decreased from 48.2 in April 2016 to 47.7 in May 2016.  Japan industrial production index was slowing growth to -1.9% y-o-y in April 2016 compare than -1.5% y-o-y in March 2016.  Meanwhile, the US economy maintained growth at 2.0% y-o-y in 1Q 2016, unchanged compare with 4Q 2015. The US Purchasing Manager Index (PMI) increased to 51.3 in May 2016 compare 50.8 in one month earlier. The US industrial production index was improving growth to contracted 1.1% y-o-y in April 2016 from contraction 1.9 % y-o-y in March 2016. We expect the US Fed maintained the target range for the federal funds rate at 1/4 to 1/2 percent in June 2016.

       On the domestic side, Indonesian Economy slowed to 4.92% y-o-y in 1Q 2016 compared 5.04% y-o-y in 4Q 2015, but increased compared to 1Q 2015 which grew only 4.73% y-o-y. On the expenditure side, the economic slowdown in 1Q 2016 was caused by the weakening export performance. Indonesia's exports contracted 3.88% y-o-y in 1Q 2016, driven by weakening commodity prices and the slowdown in Indonesia's main trading partner countries such as China, Japan, US, Singapore, and the European Union. Furthermore, the government spending grew 2.93% y-o-y in 1Q 2016, lower compared 7.31% y-o-y in 4Q 2015. The slow pace of government spending was caused by slow land acquisition and the face of rising fiscal constraints. Investment growth was relatively bright with expanding 5.57% y-o-y, but decelerating from 6.90% y-o-y in Q4 2015. Meanwhile, household spending was resilient which grew 4.94% y-o-y in 1Q 2016, up slightly compared 4.92% y-o-y in 4Q 2015. Furthermore, we still expect Indonesia's economy will grow 5.20% in 2016.

       Indonesia's trade balance recorded a surplus US$ 0.67 billion in April 2016, increased from a surplus US$ 0.51 billion in March 2016. The widening of trade surplus is due to the decrease in imports faster than exports. Indonesia’s exports in April 2016 stood at USD 11,447.3 million fell by 3.07% m-o-m. On yearly basis, Indonesia’s exports decreased by 12.65% y-o-y. On the other hand, the total imports in April 2016 reached to USD 10,780.1 million, fell by 4.62% m-o-m. The decreasing of imports was driven by weakening domestic economy activities. Meanwhile, Indonesia’s current account deficit recorded -2.14% per GDP in 1Q 2016, better from -2.37% per GDP in 4Q 2015. Current account deficit narrowed in 1Q 2016, mainly driven by the growing trade surplus. However, we expect Indonesia's current account deficit will be reached approximately -2.45% per GDP in 2016, widening from -2.05% per GDP in 2015. The widening current account deficit is caused due to domestic economic recovery leads to increased imports, at the same time export performance is still pressured by lower commodity prices and the weakening of global demand.

       Yearly inflation fell to 3.33% y-o-y in May 2016, compared with 3.60% y-o-y in the previous month. Meanwhile, monthly inflation increased to 0.24% m-o-m from -0.45% m-o-m in the preceding month. Furthermore, the monthly deflation in May 2016 mainly comes from higher prices of foodstuffs, housing contracts, and air freight rates. Looking ahead, we still expect yearly inflation will reach around 4.05% by the end of this year.

       Rupiah weakened by 3.11% m-o-m against USD to 13,615 in May 2016 due to the strengthening USD and the increasing domestic demand for debt and dividend payment. Nevertheless, the Rupiah rose back to 13 300 in this moment due to the weakening USD. Meanwhile, foreign outflows occurred on Indonesia stock market. Foreigners booked net-sell of USD 17.3 million in May 2016. On other side, from latest data showed foreigner booked net sell in bond market during the month of May 2016 by reducing IDR 4.2 trillion. Furthermore, Indonesia's foreign reserves in May 2016 reached US$103.6 billion, decreased from US$ 107.7 billion in the previous month was mainly influenced by supply of foreign exchange for repayments of residents’ foreign currency obligations in line with its seasonal pattern that resulted in lower placement of banks’ foreign currency term deposit at Bank Indonesia. In addition, the decline in reserve assets was also affected by the use of foreign exchange for repayments of government external debt and stabilization of rupiah exchange rate in accordance with its fundamental.

       Indonesia’s money supply (M2) growth in April 2016 slowed. M2 position in April 2016 stood at Rp 4,580.8 tn, or grew 7.1% y-o-y, lower than 7.4% y-o-y in the previous month. Based components, the decreasing in M2 growth derived from slowing growth of Quasi Money. In April 2016, quasi money grew 5.3% y-o-y down compared with 6.3% y-o-y in March 2016. Moreover, bank loan grew 8.0% y-o-y in April 2016, lower from 8.7% y-o-y in March 2016. Meanwhile, the growth of third party funds relatively stable at 6.4% y-o-y April 2016 compare with the previous month.

       Based on the factors mentioned above, in this month Bank Indonesia has potential room to cut the policy rates to stimulate domestic economic growth. We expect the central bank to cut the policy rates around 25 bps. The BI rate would cut to 6.50%, the deposit facility rate to 4.50%, the BI 7-day reverse repo rate to 5.25%, and the lending facility rate to 7.00% on the Board of Governors Meeting June 15-16^th, 2016.