Indonesia’s central bank raised its key interest rates for the fifth time this year to maintain the rupiah’s attractiveness for global investors and confirmed its growth and inflation forecasts.
Bank Indonesia (BI) raised its benchmark BI 7-day reverse repo rate by another 25 basis points to 5.75 percent and has now raised it by 150 points since mid-May to support the exchange rate of the rupiah and maintain financial stability during downward pressure from capital outflows as global investors seek safer returns in advanced economies, especially in U.S. dollar assets.
In addition to the rate hike, which was expected, BI will also implement “Domestic Non-Deliverable forward (DNDF)” transactions to strengthen the rupiah by deepening the foreign exchange market and provide an alternate hedging instrument for banks and corporations.
DNDF transactions are forward transactions settled domestically in rupiah, supported by an underlying transaction in the form of goods and services, investments or foreign currency bank loans.
BI, which also raised its deposit facility and lending facility rates by 25 basis points to 5.0 percent and 6.50 percent, respectively, also said the rate hike was consistent with efforts to lower the current account deficit and maintain the attractiveness of domestic financial markets, thus strengthening the country’s resilience during “widespread global uncertainty.”
“The uneven global economic growth is inseparable from the trade tensions between the US and several countries,” BI said, adding the U.S. economy has maintained its pace of expansion while economic growth in emerging economies and Europe is seen weaker than expected and even Japan and China are expected to see a moderation in growth.
“The various headwinds have triggered broad US dollar appreciation and capital outflows from emerging markets, culminating in depreciatory pressures on currencies in developing countries,” BI said.
Indonesia’s rupiah has depreciated steadily since late January and BI said it would continue to stabilize the exchange rate in line with its fundamental value to contain volatility and maintain adequate liquidity in the market.
Today’s rate hike did little to reverse the recent trend with the rupiah easing slightly to trade at 14,922 to the dollar, down 9 percent this year.
Indonesia’s economy is still growing in line with BI’s earlier forecast, supported by strong consumption from higher incomes and election-related spending and investments from infrastructure projects.
Exports are restrained by weak agricultural exports while imports remain high on strong domestic demand, especially of capital goods used for investment.
BI confirmed its forecast from August that it expects growth this year of between 5.0 and 5.4 percent, rising to 5.1 to 5.5 percent in 2019. Growth in the second quarter was 5.27 percent, year-on-year, up from 5.06 percent in the first quarter.
Inflation in Indonesia rose to 3.2 percent in August from 3.18 percent in July and BI confirmed that it expects inflation to remain within its target range of 3.5 percent, plus/minus this year.
Bank of Indonesia issued the following statement:
“The BI Board of Governors agreed on 26th and 27th September 2018 to raise the BI 7-Day Reverse Repo Rate by 25 bps to 5.75%, while also raising the Deposit Facility (DF) and Lending Facility (LF) rates by 25 bps to 5.00% and 6.50% respectively. The decision is consistent with ongoing efforts to lower the current account deficit within a manageable threshold while maintaining the attractiveness of the domestic financial markets, thus further strengthens Indonesia’s external resilience despite widespread global uncertainty. The Government’s seriousness and concrete measures, with Bank Indonesia, to stimulate exports and reduce imports is expected to lower the current account deficit, specifically in 2019, to around 2.5% of GDP. Furthermore, Bank Indonesia will continue to strengthen coordination with the Government and other relevant authorities to maintain economic stability and bolster external resilience. Moving forward, Bank Indonesia will monitor prevailing economic developments, such as the current account deficit, exchange rates, financial system stability and inflation, as follow-up measures to maintain macroeconomic and financial system stability.
To strengthen the Rupiah stability, the policy rate hike is also supported by policies to implement Domestic Non-Deliverable Forwards (DNDF) transactions in order to accelerate forex market deepening while providing alternate hedging instrument for banks and corporations. DNDF transaction is a forward transaction with netting settlement in the domestic forex market, using Rupiah. The reference rates are JISDOR for USD against IDR and Bank Indonesia FX Transaction Midrate for for non-USD against IDR. DNDF transactions can be done by banks with customers and foreign parties to hedge foreign exchange risks, and must be supported by an underlying transaction in the form of trade in goods and services, investment, and bank loans in foreign currency.
Global economic growth becomes further uneven, accompanied by persistent global financial market uncertainty. The US economy has maintained pace on the back of faster consumption and investment growth, combined with rising inflation. In line with expectations, The Fed raised the FFR policy rate by 25bps as part of its monetary policy normalization. Meanwhile, economic growth in the emerging market economies (EMEs) and Europe is estimated to be weaker-than-expected. Economic moderation is even expected for Japan and China. The uneven global economic growth is unseparable from the trade tensions betwees the US and several countries. High uncertainty in the global financial markets also prompts investors to place their fund in safe assets, especially in the US. The various headwinds have triggered broad US dollar appreciation and capital outflows from emerging markets, culminating in depreciatory pressures on currencies in developing countries.
National economic growth in Indonesia remains in line with the previous projection, backed by domestic demand. Strong consumption data is supported by improving incomes and spending on the elections. Solid investment growth is expected to persist, bolstered by building investment in relation to infrastructure projects and property as well as non-building investment. Nevertheless, stronger export growth is expected to be restrained by weak agricultural exports despite improving manufacturing exports, boosted by the chemicals industry as well as iron and steel subsector. On the other hand, imports remain high on strong domestic demand, especially of capital goods as a corollary of increasing investment. Consequently, Bank Indonesia projects national economic growth in 2018 at 5.0-5.4%, increasing thereafter to 5.1-5.5% in 2019.
Indonesia’s trade balance recorded a deficit in August 2018. The trade deficit stood at USD1.02 billion in the reporting period, halving from USD2.01 billion the month earlier. The trade deficit stemmed from a growth surge of oil and gas imports, particularly crude oil. Meanwhile, the non-oil and gas trade balance recorded a surplus in line with fewer non-oil and gas imports, including machinery and mechanical appliances, iron and steel, vehicles and components, organic chemicals, as well as plastics and articles of plastic. Nevertheless, demand for non-oil and gas import remain high, as domestic demand remain high. Cumulatively from January-August 2018, therefore, Indonesia’s trade balance recorded a USD4.09 billion deficit. Consequently, the position of reserve assets stood at USD117.9 billion at the end of August 2018, equivalent to 6.8 months of imports or 6.6 months of imports and servicing government external debt, which is well above the international standard of three months.
The Rupiah has continued to lean against depreciatory pressures, while mitigating volatility. Rupiah depreciation is in line with the currencies of peer countries, spurred by broad US dollar appreciation. Therefore, the Rupiah depreciated by an average of 1.05% in August 2018 but defied pressures in September to close at a level of Rp14,905/USD on 26th September 2018. Year-to-date (ytd), therefore, the Rupiah has lost 8.97% in value against the US dollar as of 26th September 2018, faring better, however, than the Indian rupee, South African rand, Brazilian real and Turkish lira. Moving forward, Bank Indonesia will continue to implement exchange rate stabilisation measures in line with the currency’s fundamental value, while maintaining market mechanisms and financial market deepening efforts. Such policy is aimed to contain Rupiah volatility and liquidity adequacy in the market, to prevent risks on macroeconomic stability and financial system.
Low and stable inflation has been maintained. The Consumer Price Index (CPI) recorded 0.05% (mtm) deflation in August 2018, after posting 0.28% (mtm) inflation the month earlier. Deflation of volatile foods (VF) and administered prices (AP) was the main contributor to headline deflation in August, while the pace of core inflation slowed. Consequently, inflation recorded an annual rate of 3.20% (yoy), which is relatively stable compared with the 3.18% (yoy) recorded last month. Price pressures on volatile foods (VF) recorded deflation in the reporting period due primarily to corrections affecting several foodstuffs. Administered prices (AP) also experienced deflation because of corrections to airfares. Core inflation was controlled at 0.30% (mtm), falling from 0.41% (mtm) the month earlier. Controlled core inflation is linked to policy consistency by Bank Indonesia in terms of anchoring rational inflation expectations to the target corridor, including maintaining Rupiah exchange rates in line with the currency’s fundamental value. Looking ahead, Bank Indonesia projects inflation within the target range of 3.5±1% in 2018. Furthermore, Bank Indonesia and the Government will constantly strengthen policy coordination to control low and stable inflation.
Financial system stability has been maintained as the bank intermediation function improves and the banking industry effectively contained credit risk. Maintained financial system stability is reflected in the high Capital Adequacy Ratio (CAR) reported by the banking industry at 22.5% and the liquidity ratio of 19.8% in July 2018. In addition, the banking sector maintained a low level of non-performing loans (NPL) at 2.7% (gross) or 1.3% (net). Financial system stability is also contributing to improvements in the bank intermediation function. Credit growth was reported to accelerate from 10.8% (yoy) to 11.3% (yoy) in July 2018, while deposit growth was maintained at 6.9% (yoy) in the reporting period compared with 7.0% (yoy) the month earlier. On the other hand, nonbank economic financing through the financial markets, such as initial public offerings (IPO) and rights issues, corporate bonds, medium-term notes (MTN) and Negotiable Certificates of Deposit (NCD), reached a cumulative total of Rp133.2 trillion (gross) as of July 2018, which is below the Rp163.9 trillion recorded in the same period last year. Consequently, Bank Indonesia projects credit growth in 2018 at 10.0-12.0% (yoy), accelerating from the 8.2% (yoy) realised in 2017. Meanwhile, Bank Indonesia still predicts deposit growth to slow down from 2017 achievement of 9.4% (yoy), yet remain within the 8.0-10.0% (yoy) range. Moving forward, Bank Indonesia will continue to monitor and maintain sufficient liquidity to support financial system stability.
Positive domestic economic developments are backed by a secure, efficient, available and reliable payment system and Rupiah currency management. In August 2018, the financial system operated smoothly. Furthermore, the settlement of noncash transactions as well as cash transactions increased in the reporting period as economic activity accelerated. Such dynamics were confirmed by a 9.48% (yoy) bump in National Clearing System (SKNBI) transactions and a 13.6% (yoy) increase of noncash retail payment system transactions (ATM/debit cards, credit cards and e-money). Regarding cash payments (Rupiah currency management), the position of currency in circulation surged 10.2% (yoy) as in line with public transaction needs and cyclical pattern.”