Third Economic Policy Package of Indonesia to Cut Fuel Price & Lending Rates

Interest rates on loans in Indonesia are among the highest in the ASEAN region. For example, the average interest rate on a car loan or a mortgage loan is around 11.3 percent. As such, most Indonesian banks have been enjoying wide net interest margins and have therefore been an investor darling. If the government will indeed decide to ease lending rates it is expected to impact particularly on state-owned lenders Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI), and Bank Tabungan Negara. These four state-controlled lenders are withing the top ten of Indonesia's biggest lenders and, together, control about 36 percent of the nation's banking assets. On the last trading day of the week, listed Indonesian banks saw their shares fall significantly on concerns that banks' profitability is to be undermined by the government's move.

The central bank of Indonesia (Bank Indonesia), however, is not to lower its key interest rate (BI Rate) anytime soon. Bank Indonesia Governor Agus Martowardojo told reporters on Friday (02/10) that the global situation is still too uncertain amid looming higher US interest rates and the hard landing of China's economy. This puts great pressure on the rupiah exchange rate. Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.38 percent to IDR 14,709 per US dollar on Friday (02/10). So far this year, the rupiah has depreciated nearly 18 percent against the greenback.

Indonesian Rupiah versus US Dollar (JISDOR):

| Source: Bank Indonesia

Meanwhile - despite improving and most likely to fall within Bank Indonesia's year-end target - inflation is still somewhat high at 6.83 percent (y/y) in September 2015.

Headline Inflation in Indonesia:

Period	2013	2014	2015
September (month/month)	-0.35%	0.27%	-0.05%
Calendar Year (Jan-Sep)	7.57%	3.71%	2.24%
Annual Inflation (Sep'14-Sep'15)	8.40%	4.53%	6.83%

^{Source: Statistics Indonesia (BPS)}

Bank Indonesia also announced that Indonesian consumers have become pessimistic in September according to the latest consumer confidence survey conducted by the central bank. The index fell to 97.5 from 112.6 in the preceding month (a reading of 100 separates pessimism from optimism). It was the first time since August 2010 that Indonesian consumers were pessimistic and it was the lowest reading since February 2009.

The third package will also focus on supporting the country's manufacturing industry by providing more subsidies for fuel and electricity as well as by offering cheap loans to companies engaged in labor-intensive industries to prevent more layoffs. According to data from the Confederation of Indonesian Workers Unions (KSPSI), more than 62,000 Indonesian workers have lost their jobs in the first nine months of 2015 due to the global and domestic economic slowdown. Indonesia's manufacturing industry in particular has been plagued by this economic context. Earlier this week it was announced that Indonesia's manufacturing activity contracted for the 12th consecutive month in September as output and new orders declined. Indonesia's Nikkei/Markit purchasing managers' index (PMI) fell to 47.4 in September 2015 from 48.4 in the preceding month (a reading of 50.0 separates contraction from expansion). The contraction in September was the second-fastest drop in Indonesia's manufacturing activity since the index was started in early 2012. Meanwhile, due to the heavily depreciated rupiah manufacturers have been raising selling prices (as import costs for raw materials jumped severely) hence curtailing people's purchasing power.

Indonesia Manufacturing PMI: