ECONOMIC UPDATE - Monetary Review - Rest after the fifth rate cut

 

 

BI-7DRRR at 3.75% for YE 2020

Bank Indonesia (BI) held its benchmark interest rate at 3.75% in Dec-20 or in line with our and  consensus expectations. Thus, the deposit and lending facility were also unchanged at 3.0% and 4.5% respectively. The rate cut is consistent with the higher projected inflation in 2021 and BI’s target of exchange rate stability. Thus, BI has cut the rate by 125 bps in 2020 to combat Covid-19 pandemic downside effect. BI stays relatively unaggressive in rate cut to keep the monetary ammo as the economic uncertainty lurks out there, looking the high Covid-19 cases in Indonesia and the upcoming challenges on vaccination in Indonesia. 

 

Resiliency remains

The external factors showed stronger resiliency reflected by CAD that will get narrower to below 1.5% of GDP where trade surplus in Nov-20 was at USD2.61 bn or higher than expected. The foreign exchange (forex) reserves in Nov-20 was at USD133.6 bn or equivalent to 9.9 months of imports or 9.5 months of imports and servicing government external debt, which is well above the international adequacy standard of 3 months. Rupiah also showed more stable movement since the beginning of Nov-20 to around Rp14,125 in Dec 17^th 2020 although rate cut was taken in Nov-20. We see the stable exchange rate will remain until at least 1H21 as for the next year dollar index (DXY) might drop to the lowest since April 2018 of below 90 levels. 

 

Focus on liquidity

BI also focuses on liquidity whereas on Dec 15^th 2020, BI has injected Rp694.7 tn of additional liquidity into the banking system through quantitative easing, primarily in the form of lower reserve requirements totaling Rp155 tn and monetary expansion totaling Rp524.1 tn. The loose liquidity conditions pushed up the ratio of liquid assets to deposits to 31.5%, coupled with a low overnight interbank rate of 3.20% in Nov-20. Furthermore, loose liquidity and BI-7DRRR contributed to lower deposit and lending rates from 4.93% and 9.38% in Oct-20 to 4.74% and 9.32% in Nov-20 respectively. Moving forward, BI has identified six priority sectors for which banks should disburse credit in 2021: (1) food and beverage industry, (2) chemical, pharmaceutical, traditional medicine industries, (3) forestry and logging, (4) horticultural crops, (5) plantation crops (6) and metal ore mining. We believe that BI will stay accommodative and encourage lower banks rate in 2021.

 

BI may be cautious on inflation, but is low-key

M1 and M2 growth recorded high to 15.8% YoY and 12.2% YoY respectively in Nov-20 but with slightly lower rate than Oct-20. Still, the relatively high money supply has not translated into higher inflation. As the economy gets better ahead, we see the inflation will pick up to 1.7% in Dec-20 supported by the festive month although it has limited impact as 

the government has cut short year-end holiday and the local large-scale social restriction (PSBB) remains.

 

Better prospect ahead

The positive news on vaccine progress reduces the likelihood of BI feeling more pressured with unconventional monetary policies such as the burden sharing scheme with the government. Thanks to the trillions of dollars in monetary and fiscal support from the Fed and the US government, dollar has fallen by over 16% and leads to the appreciation of rupiah as well. Wider room for rate cut remains exist 1H21. Concerning on the similar real interest rate in Nov-20 (2.19%) with Jan-20 (2.32%) where Covid-19 has not kicked in, we see 3.5% is the most reasonable rate in 2021 as the inflation will be higher eventually. All in all, considering every vicissitude in 2020. we see BI has undertaken its role very well in 2020.