* Indonesia's trade balance recorded a surplus US$ 0.60 billion in July 2016, decreased from a surplus US$ 0.

Remain on Hold

       The global recovery has weakened further amid increasing financial turbulence. Prospects across the main countries and regions remain uneven. The IMF lowered its forecast global economic growth of 3.2% to 3.1% for this year. Meanwhile, China's economy kept stable on modest growth at 6.7% y-o-y in 2Q 2016. Meanwhile, the China’s Purchasing Manager Index (PMI) manufacturing indicator slightly fell to 49.9 in July 2016 compare 50.0 in the previous month. The China’s Industrial Production Index slightly improved growth to 6.0% y-o-y in June 2016 compare with 5.9% in May 2016. The China’s exports growth fell by 4.4% y-o-y in July 2016. In the meantime, EU economy growth slowed to 1.6% y-o-y in 2Q 2016, compare 1.7% y-o-y in the previous quarter. European PMI Manufacturing indicator decreased to 52.0 in July2016 from 52.8 in one month earlier. European Industrial Production Index slowing growth to 0.6% y-o-y in May 2016 from 2.1% y-o-y in the previous month. Meanwhile, Japanese economy growth slowed to 0.1% 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 increased from 48.1 in June 2016 to 49.3 in July 2016.  Japan industrial production index was improving growth to -1.8% y-o-y in June 2016 compare than -2.1% y-o-y in May 2016.  Meanwhile, the US economy slowed growth to 1.2% y-o-y in 2Q 2016, compare 1.6% y-o-y in 1Q 2016. The US Purchasing Manager Index (PMI) decreased to 52.6 in July 2016 compare 53.2 in one month earlier. The US industrial production index was improving growth to contracted 0.7% y-o-y in June 2016 from contraction 1.4 % y-o-y in May 2016.

       On the domestic side, Indonesia’s economic growth accelerated from 4.91% y-o-y in 1Q16 to 5.18% y-o-y in 2Q16. It indicated that the Indonesian economy is still promising during recent global economic slowdown. The government’s strategy to give cash transfer in the form of 13^th and 14^th of salary payments to the public servant Moslem’s during fasting month in Jun-16 have successfully created multiplier effects for the national economy. Household spending grew 5.04% y-o-y in 2Q 2016, higher compare 4.94% y-o-y in previous quarter. Furthermore, government spending acceleration was also to contribute the recovery Indonesia’s economy in 2Q 2016. Government spending grew 6.28% y-o-y in 2Q 2016, higher than 2.94% y-o-y in 1Q 2016. Meanwhile, in line with slowing global economy, Indonesia’s trade performance was under pressure and still negative growth in 2Q 2016. Overall, Indonesia’s economic growth has reached 5.04% in 1H16. Looking ahead, we expect Indonesia’s economy will grow 5.09% in 2016.

       Indonesia's trade balance recorded a surplus US$ 0.60 billion in July 2016, decreased from a surplus US$ 0.88 billion in June 2016. The narrowing of trade surplus is due to the decrease in exports faster than imports. The decline in exports and imports in July 2016 caused more by the impact of the long Eid holiday that causes the activity of loading and unloading of goods at the port has decreased. Indonesia’s exports in July 2016 stood at USD 9,514.3 million fell by 26.67% m-o-m. On yearly basis, Indonesia’s exports decreased by 12.02% y-o-y. On the other hand, the total imports in July 2016 reached to USD 8,916.0 million, fell by 26.28% m-o-m. On yearly basis, Indonesia’s imports decreased by 11.56% y-o-y. Meanwhile, Indonesia’s current account deficit recorded -2.02% per GDP in 2Q 2016, better from -2.19% per GDP in 1Q 2016. Current account deficit narrowed in 2Q 2016, mainly driven by the growing trade surplus. However, we expect Indonesia's current account deficit will be reached approximately -2.20% 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 3.21% y-o-y in July 2016, compared with 3.45% y-o-y in the previous month. Meanwhile, monthly inflation slightly increased to 0.69% m-o-m from 0.66% m-o-m in the preceding month. Furthermore, the monthly inflation in July 2016 mainly comes from higher prices of foodstuffs, tuition fees, electricity rates, housing contracts, and transportation tariff. Looking ahead, we expect yearly inflation will reach around 3.15% by the end of this year.

       Rupiah strengthened by 0.65% m-o-m against USD to 13,094 in July 2016 due to the weakening USD and the euphoria of the tax amnesty implementation. Meanwhile, foreign inflows occurred on Indonesia stock market. Foreigners booked net-buy of USD 905.3 million in July 2016. On other side, from latest data showed foreigner also booked net buy in bond market during the month of July 2016 by adding IDR 15.8 trillion. Furthermore, Indonesia's foreign reserves in July 2016 reached US$111.4 billion, increased from US$ 109.8 billion in the previous month was attributable to foreign exchange receipts, primarily from tax revenues and oil & gas export proceeds and the auction of Bank Indonesia foreign exchange bills, which were more than the use of foreign exchange among other for repayments of government external debt and Bank Indonesia foreign exchange bills matured during period.

       Indonesia’s money supply (M2) growth in June 2016 accelerated. M2 position in June 2016 stood at Rp 4,738.4 tn, or grew 8.7% y-o-y, higher than 7.6% y-o-y in the previous month on the back of quasi-money and securities other than shares, for which growth was confirmed to increase from 5.8% y-o-y and -17.2% y-o-y to 7.1% y-o-y and 1.1% y-o-y. Furthermore, bank loan grew 8.7% y-o-y in June 2016, higher from 8.3% y-o-y in May 2016. Meanwhile, the growth of third party funds slowed to 5.7% y-o-y in June 2016 compare with 6.5% y-o-y in the previous month.

        Based on the factors mentioned above, in this month Bank Indonesia has the opportunity to cut the policy rates. Nevertheless, to allow time for the effective transmission of monetary policy in the domestic financial market, and coincided with changes in the policy rate of the BI rate to the BI 7-day reverse repo rate, we expect the central bank would remain on hold the BI 7-day reverse repo rate. We expect the BI 7-day reverse repo rate remain unchanged at 5.25%, the deposit facility rate at 4.50%, the lending facility rate at 7.00%, and the BI 12 month rate (previously BI rate) at 6.50% on the Board of Governors Meeting August 18-19^th, 2016.