Economic Highlights (Indonesia) - 09/04/2014

BI Hold the Benchmark Rate Unchanged at 7.5%

¨      Bank Indonesia (BI) board of governors meeting decided to hold the BI rate unchanged at 7.5% on 8^thApril2014. Similarly, the lending facility and the deposit facility rates were also kept unchanged at 7.5% and 5.75%, respectively. This was the sixth consecutive month of keeping its key policy rate unchanged, as the rupiah has bounced back and inflation targets of 3.5-4.5% in 2014 and 3.0-4.0% in 2015 will likely be met. In addition, the current account deficit will likely improve to a more healthy level during the year. Meanwhile, BI is monitoring recent development in the global situation as well as domestic economy closely in order to be ahead of the curve in preventing macro instability. Indeed, it has stated that it will put more attention on the development of private external debt after it grew by 12.2% y-o-y in January 2014, faster than +11.2% in December 2013.

¨      BI views the global economy will follow a moderate course of improvement, with some down risks emanating from a rebalancing of macro imbalances in China. This suggests that the upward movement of global commodity prices will likely be muted. On the domestic economy front, BI expects private consumption to increase in the 1Q14, due mostly to the election-related spending. On investment, BI expects it to gain pace in the 2H2014. As a result, BI still maintains the projection of 5.5-5.9% economic growth for the year 2014.

¨      Thus far the BI views the economic fundamental and the banking sector conditions to be in a healthy condition. Their internal assessment on credit default risk and the liquidity ratio pointed to sound and profound financial sector that could withstand a sudden capital flight. Additionally, credit growth has slowed to 19.9% y-o-y in February 2014, from +20.9% in January and compared from +21.4% in December, suggesting the monetary policy stance is at an appropriate to maintain a relatively stable economic output.

¨      In general, BI’s new assessment on the economic development is in line with our expectation. We are of the view that economic growth will likely moderate to 5.4% in 2014 before improving to +5.7% in 2015. The moderation will likely be reflected in a slowing investment due to higher funding costs, while international trade will likely improve modestly. This, however, will likely be mitigated by rising consumption in view of the upcoming general election. At the same time, we are still holding the inflation forecast of an average of 6.2% in 2014, compared with +7.0% in 2013. We are of the view that BI will hold the benchmark rate stable in 1H 2014, with upside bias in the 2H of the year. 

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