FW: BI Policy Rate Outlook August 2017

 

Remain Unchanged

 

 

       The process of global economic recovery shows signs of improvement in moderate levels. However, geopolitical pressure in some countries was still color the process of global economic recovery. Meanwhile, China's economy growth was maintained at 6.9% y-o-y in 2Q 2017, stable compare with the previous quarter. The China’s Purchasing Manager Index (PMI) manufacturing indicator decreased to 51.4 in July 2017 compare 51.7 in the previous month. The China’s Industrial Production Index growth improved to 6.9% y-o-y in June 2017, compare 6.7% y-o-y in one month earlier. The China’s export was slowing growth to 7.2% y-o-y in July 2017 from 11.3% y-o-y in the previous month. Meantime, EU economy growth improved to 2.1% y-o-y in 2Q 2017 from 1.9% y-o-y in the previous quarter. European PMI Manufacturing indicator decreased to 56.6 in July 2017 from 57.4 in one month earlier. European Industrial Production Index growth improved to 3.9% y-o-y in May 2017, compare 1.2% y-o-y in the previous month. Meanwhile, Japanese economy growth improved to 2.0% y-o-y in 2Q 2017, compare with 1.5% y-o-y in the previous quarter. In the other hand, Japanese PMI Manufacturing indicator decreased from 52.4 in June 2017 to 52.1 in July 2017.  Japan industrial production index was improving growth to 4.8% y-o-y in June 2017 compare 4.7% y-o-y in previous month.  Meantime, the US economy was improving growth to 2.1% y-o-y in 2Q 2017, compare 2.0% y-o-y in the previous quarter. US unemployment rate in July 2017 decreased to 4.3%, compare 4.4% in the previous month. Furthermore, the US Purchasing Manager Index (PMI) decreased to 56.3 in July 2017 compare 57.8 in one month earlier. The US industrial production index was improving growth to 2.0% y-o-y in June 2017 from 1.9 % y-o-y in previous month.

 

       On the domestic side, Indonesia's economic growth maintained steady 5.01% y-o-y in 2Q 2017, unchanged compared to the previous quarter. This economic growth is mainly supported by stable private spending and increased investment. Meanwhile, the performance of imported exports experienced slowing growth in tandem with slowing commodity prices. Likewise, government spending declined mainly due to the late spending on prosperous rice, the Hope Family Program, and the salary to 14 civil servants. Going forward, we expect Indonesia's economic growth to increase in the second half of 2017, primarily supported by government spending, private spending and investment. We also expect Indonesia's economic growth to reach 5.07% in 2017, slightly improved compared to 5.02% in the previous year.

 

       Indonesia's trade balance recorded a deficit US$ 0.27 billion in July 2017, deteriorated from a surplus US$ 1.66 billion in June 2017. The trade balance deficit was due to the increase in imports faster than exports. Indonesia’s exports in July 2017 stood at USD 13,617.0 million rose by 16.83% m-o-m. On yearly basis, Indonesia’s exports increased by 41.12% y-o-y. On the other hand, the total imports in July 2017 reached to USD 13,888.2 million, rose by 39.00% m-o-m. On yearly basis, Indonesia’s imports also increased by 54.02% y-o-y. Meanwhile, Indonesia’s current account deficit recorded -1.96% per GDP in 2Q 2017, worse compare from -0.98% per GDP in 1Q 2017. The widening current account is mainly due to a decrease in trade balance surplus, an increase in service deficit, and an increase in primary income deficit mainly influenced by seasonal patterns of declining surplus travel services and increased dividend payment. Forward looking, we expect Indonesia's current account deficit will be reached approximately -1.38% per GDP in 2017, narrowing from -1.80% per GDP in 2016. It’s supported by recent decisive trade balance surplus performance and solid domestic financial markets.

 

       Yearly inflation slowed to 3.88% y-o-y in July 2017, compared with 4.37% y-o-y in the previous month. Meanwhile, consumer price index rose by 0.22% m-o-m in July 2017, eased from 0.69% m-o-m in the preceding month. Furthermore, the monthly inflation in July 2017 mainly comes from higher prices of foodstuffs, cigarette, and tuition fee (primary school, high school, and learning tuition rates). Looking ahead, we expect yearly inflation will reach 4.28% in 2017 increase compare 3.02% in 2016. The increase in inflation this year due to the increase in administered tariffs such as electricity tariff, vehicle registration fee, and the price of non-subsidized fuel. On the other hand, food prices are still fluctuating in this year.

 

       The rupiah slightly weakened 0.03% m-o-m to 13323 in July 2017. Meanwhile, foreign outflows occurred on Indonesia stock market. Foreigners booked net-sell of USD 797.9 million in July 2017. On other side, from latest data showed foreigner booked net buy in bond market during the month of July 2017 by adding IDR 3.47 trillion. Furthermore, Indonesia's foreign reserves in July 2017 rose to US$127.76 billion, compare from US$ 123.09 billion in the previous month. The increase was primarily attributable to foreign exchange receipts, among other from government’s issuance of global bonds, tax revenues and government oil & gas export proceeds, as well as auction of Bank Indonesia foreign exchange bills. The reserve asset position at the end-July 2017 adequately covered 9.0 months of imports or 8.7 months of imports and servicing of government external debt repayments, well above the international standards of reserves adequacy at 3 months of imports.

 

       Indonesia’s money supply (M2) growth in June 2017 improved. M2 position in June 2017 stood at Rp 5,278.9tn, or grew 11.4% y-o-y, higher than 11.1% y-o-y in the previous month. Based on its components, M2 growth increased from the narrow money (M1) which grew 17.8% y-o-y, higher than 14.0% y-o-y in May 2017. Based on the factors that influence, the growth of M2 growth is mainly caused by the expansion of financial operation of Central Government. Meanwhile, bank loan grew 7.7% y-o-y in June 2017, lower from 8.7% y-o-y in May 2017. Furthermore, the growth of third party funds slowed to 10.5% y-o-y in June 2017 compare with 11.2% y-o-y in the previous month.

 

       Based on the above factors and to maintain the balance of Indonesia's macroeconomic stability and the recovery of the domestic economy, we expect Bank Indonesia remains unchanged the policy rates in this month. We expect the BI 7-day reverse repo rate is maintained at 4.75%, the deposit facility rate at 4.00%, and the lending facility rate at 5.50% on the Board of Governors Meeting August 21-22^nd, 2017.