BI Rate Outlook April 2014

Still Maintain at 7.50%

·         Global economic growth is still sluggish. This is indicated by the slowing economies of China and the mixed growth of US Economy. China economy still seen slowing of the relatively stable of manufacturing Purchasing Managers' Index (PMI) in March 2014 at 50.3 compare than 50.2 in February 2014. Furthermore, HSBC China’s manufacturing PMI slightly fell from 48.1% in February 2014 to 48.0 in March 2014. China's Leading Economic Indicator Index in February 2014 slightly fell from 99.20 in January 2014 to 99.07. Meanwhile, the US GDP in 4Q 2013 was revised up from 2.4% q-o-q to 2.6% q-o-q. The US unemployment rate also edged up to 6.7% in February 2014 from 6.6% in January 2014. The US trade balance deficit in February 2014 was also widening from –US$39.1 billion to –US$42.3 billon. The US Initial Jobless Claim in fourth week March 2014 rose to 326K from 311K in the previous week.

·         On the Indonesia’s economy front, we expect domestic economic growth slowed in Q1 2014. This is due to the impact of the increase in the BI rate by 175 bps last year began to be felt at the beginning of this year. As a result, people purchasing power drops and the impact on the decline in private consumption. In addition, the economic slowdown is also caused by the slowdown of export performance in this period. We expect domestic economic growth in Q1 2014 was only 5.59% slower than 5.72% in Q4 2013.

·         Furthermore, Indonesia's trade balance in February 2014 returned a surplus of US$ 0.79 billion. The improving of performance trade balance is influenced by the increasing of non-oil trade balance surplus and the narrowing of oil and gas trade balance deficit. Non-oil trade balance surplus increased from US$ 0.60 billion in January 2014 to US$ 1.58 billion in February 2014. Meanwhile, oil and gas trade balance deficit narrowed in February 2014 from -U$1.05 billion in January 2014 to –US$0.80 billion. Trade surplus in February 2014 was caused by the decline in imports due to the slowdown in the domestic economy, at the same time export performance has improved slightly. We expect Indonesia’s trade balance reach a surplus US$ 4.2billion in FY2014, up from a deficit US$4.1 billion in FY2013.

·         Moreover, inflation pressure is still manageable in March 2014. Inflationary pressures eased from 0.26% m-o-m in February 2014 to 0.08% m-o-m in March 2014. On a yearly basis, inflation remains in check with the downward trend still intact, as the inflation fell from 7.75% y-o-y in February 2014 to 7.32% y-o-y in March 2014. The fall in inflation due to the impact of floods and landslides to the rise in prices of goods and services is limited. In addition, strengthening the rupiah also turn lowers the pressure of imported inflation. We expect inflationary pressures will be eased in this month regarding with the coming of the harvest season. We also expect inflation reach 5.12% y-o-y in the end of 2014.

·         Meanwhile, USD/IDR also showed strengthening in March 2014. Rupiah strengthened from 11634/US$ in February 2014 to 11404/US$ in March 2014 (rose by 1.98% m-o-m). The strengthening Rupiah is supported by the improving domestic macroeconomic conditions that impact on the foreign investor reentry to Indonesia. In addition, the strengthening of Rupiah also impact of the weakening of the USD against other currencies. Later, Indonesia's foreign reserves in March 2014 reached US$ 102.6 billion, a slightly decrease from US$ 102.7 billion in February 2014. At this level, reserves could finance 5.9 months of imports, or 5.7 months of imports and servicing of official external debt, as well as being at the top of the adequacy of international standards around 3 months of imports.

·         Furthermore, bank credit has shown a slowdown as a result of the increase in the BI rate (175 bps), followed by an increase in banking deposit rate and banking lending rate. Slowing credit is also due to the domestic economic slowdown that led to a slowdown in demand for credit. As of February 2014, bank credit growth slowed from 20.9% y-o-y in January 2014 to 19.9% y-o-y. We still expect credit growth reach 17.73% y-o-y in the end of 2014.

·         Based on the factors mentioned above, in this month Bank Indonesia is expected to maintain its monetary policy in the same tone as in the last month. We expect the BI rate would remain unchanged at 7.50%, the deposit facility rate at 5.75% and the lending facility rate at 7.50% on the Board of Governors Meeting April 8th, 2014.

Regards,

Juniman

Chief Economist

PT Bank Internasional Indonesia Tbk (BII)

Sentral Senayan III, 8th Floor

Jl. Asia Afrika No. 8, Gelora Bung Karno

Jakarta 10270, Indonesia