Bank Indonesia Leaves Interest Rates Unchanged in April 2018

In a statement, released on Thursday evening (19/04), Bank Indonesia said the current interest rate environment is sufficient to maintain economic and financial system stability amid rising external pressures, specifically global financial market uncertainty, the rising crude oil price, and concerns surrounding the USA-China trade war.

According to the central bank of Indonesia, global economic growth will accelerate in 2018 despite a number of downside risks that demand vigilance. Economic growth in advanced and developing economies will drive faster global economic growth. In the advanced economies, higher economic growth is expected in the USA, accompanied by rising inflation and backed by strong investment, as well as consumption in line with the recent fiscal stimuli. Meanwhile, stronger economic growth is also expected to occur in Europe on the back of increasing consumption and accommodative monetary policy. In the developing economies, China is expected to maintain solid economic growth as consumption replaces weaker investment in line with the ongoing economic re-balancing process.

The promising global economic recovery outlook will induce world trade volume and elevate international commodity prices in 2018, including crude oil. Nevertheless, several external risks will continue to demand vigilance, among others related to the impact of the continuing process of US monetary normalizing in the form of a rising Fed Funds Rate and the reduction of the central bank balance, inward-oriented trade policies, and geopolitical factors (especially in the Middle East which could increase volatility in financial markets further and reduce trade volume and global economic growth).

Regarding domestic economic growth in Q1-2018, Bank Indonesia expects to see a higher gross domestic product (GDP) figure than in the same period one year earlier due to an improvement in domestic demand and investment. Building investment increases as private and public infrastructure projects continue to progress, while non-building investment will be drawn to the primary sector, particularly mining. Bank Indonesia's Business Activity Survey shows an increase in business activity in Q1-2018. Also an improvement was detected in non-financial corporations' performance in various sectors. Meanwhile, private consumption is expected to grow as consumers' purchasing power improves on the back of rising incomes and accelerated social assistance disbursements, coupled with increased spending during the run up to the local elections in mid-2018.

Regarding the external sector, commodities will be the key driver of Indonesia's export growth, particularly mining products. But stronger manufacturing exports are also seen. Imports are also projected to increase in particular on capital goods and raw materials. Consequently, Bank Indonesia projects domestic economic growth in 2018 in the range of 5.1 - 5.5 percent year-on-year (y/y).

Indonesia's trade balance recorded a surplus in March 2018, backed by improvement of non-oil and gas exports. Therefore, the country's trade surplus stood at USD $1.09 billion in March 2018, reversing the USD $0.05 billion deficit recorded the preceding month. The nascent trade surplus stemmed from a larger non-oil and gas trade surplus that exceeded the increasing oil and gas trade deficit. The non-oil and gas surplus increased on solid export growth at 8.2 percent (y/y), buoyed primarily by mining commodities such as coal, as well as manufacturing products including base metal, textile and textile's product, processed food, footwear, and machinery and mechanical appliances.

On the other hand, non-oil and gas imports posted an 11.1 percent (y/y) growth, backed by imports of capital goods and raw materials. Cumulatively, from January-March 2018, the trade balance has recorded a USD $0.28 billion surplus. Meanwhile, foreign portfolio investment on stocks and government obligations had recorded outflows during Q1-2018, but this recovered in the first two weeks of April. Consequently, the position of Indonesia's official foreign exchange reserves at the end of March 2018 stood at USD $126.00 billion, equivalent to 7.9 months of imports or 7.7 months of imports and servicing government external debt, which is well above the international standard of three months. As domestic economic growth accelerates, the current account deficit of Indonesia is projected in the range of 2.0 - 2.5 percent of GDP in full-year 2018, which is considered a safe level (remaining within a safe threshold of below 3 percent of GDP).

The Indonesian rupiah exchange rate depreciated in March 2018 (followed by a stable rate in the first half of April). In March, the rupiah depreciated by an average of 1.13 percent (month-on-month). The improvement of US economic indicators, accompanied by market expectations of aggressive tightening by the Federal Reserve, heightened pressures on the rupiah a long with the impending risk of a trade war between the US and China. Such inauspicious dynamics triggered a capital reversal and global exchange rate depreciation pressure, including the rupiah. Nonetheless, congruent with Bank Indonesia's efforts to stabilize the rupiah, controlled domestic inflation, Indonesia's sovereign ratings upgrade (by Moody's Investors Service) and the Q1-2018 trade surplus drew non-resident capital inflows, hence the rupiah quickly stabilized in the first half of April 2018.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Meanwhile, Indonesian inflation remained under control in March 2018 and well within the target range of Bank Indonesia (2.5 - 4.5 percent y/y). The country's consumer price index (CPI) inflation stood at 0.20 percent (m/m) in March, up slightly from 0.17 percent (m/m) in the preceding month. Annually, inflation was recorded at 3.40 percent (y/y). Minimal core inflationary pressures, coupled with rising administered prices (AP) and volatile foods (VF) inflation, were the main determinants of controlled headline inflation.

Meanwhile, inflationary pressures on volatile foods escalated due to rising prices of chili pepper and onions. Furthermore, prices of non-subsidized fuels were adjusted, which prompted inflationary pressures. Nevertheless, inflation is projected to remain within the central bank's target corridor in 2018.

Indonesia's financial system remains stable and the bank intermediation function is improving. Maintained financial system stability is reflected in the high capital adequacy ratio (CAR) of the banking industry, reaching 23.1 percent, and the liquidity ratio of 23.0 percent in February 2018. Meanwhile, the banking industry maintained stable non-performing loans (NPL) at 2.9 percent (gross) or 1.3 percent (net). Monetary and macroprudential policy easing was effectively transmitted through the interest rate channel, with the banks inclined to lower deposit and lending rates by 203 basis points (bps) and 155 bps, respectively, since Bank Indonesia began easing monetary policy.

The banking industry reported credit growth at 8.2 percent (y/y) in February 2018, up from 7.4 percent (y/y) the preceding month, but still sluggish. Meanwhile, economic financing through the capital market, including initial public offerings (IPOs) and rights issues, corporate bonds as well as medium-term notes (MTN), increased by 14.3 percent (y/y) in February 2018 in line with the financial market deepening program. Furthermore, the banking industry confirmed relatively similar deposit growth at 8.4 percent (y/y) in the reporting period. In line with previous forecast, Bank Indonesia projects stronger deposit and credit growth in 2018 at 10 - 12 percent (y/y) and 9 - 11 percent (y/y), respectively.

Source: Bank Indonesia

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