ECONOMIC UPDATE - Monetary Review - Wait-and-see stance maintained

ECONOMIC UPDATE - Monetary Review

Wait-and-see stance maintained

 

BI holds policy rate at 6.00%

Bank Indonesia (BI) decided to maintain policy rate at 6.00%, deposit facility rate at 5.25% and lending facility rate at 6.75%. This move is seen in line with central bank’s effort to reduce current account deficit (CAD) and maintain the attractiveness of Indonesia’s financial market.

 

High risk of BI’s forecast on CAD

BI puts a conservative view on 4Q18 CAD as it predicted the figure would be around USD 8.8 bn, similar with 3Q18 figure. However, it believed a turnaround will happen in 1Q19 as the import growth will fall further. The central bank expect CAD in 2019 to be around 2.5% of GDP, quite optimistic as 2018 CAD may reach 3.0% of GDP. We view downside risk to BI’s view on CAD as export may become game changer. The weakening China’s growth due to trade war will hurt Indonesia’s export. Non oil and gas export to China declined by -23.9% YoY (-17.9% MoM), bringing overall export growth fell 4.6% YoY in December. Although China has responded by initiate tax cut, there is still high risk of its further growth and its spillover effect to other emerging market like Indonesia. BI still explores other macroprudential policies to boost tourism and export.

 

But the capital inflow saved BoP and Rupiah

Although CAD is seen worse than previous forecast, capital inflow in 4Q18 saved the BoP and Rupiah. The fall of oil price starting November 2018 and caution of slowing down global economic made investors see that the Fed will take dovish approach in 2019 FFR movement. Exhibit 3 even denoted market predicted no FFR hike at all in 2019 according to Bloomberg world interest rate probabilities. This situation favored capital inflow to emerging market, especially Indonesia. BI believe BoP will have surplus around USD 4-5  that means financial account should have around USD 12.8 – 13.8 bn surplus.

 

Despite its conservative FFR view, BI believe investors’ confidence to Indonesia is high

In its statement, Bank Indonesia still follows FFR hike projection of 50 bps hike in 2019. However, it believed investors’ confidence to Indonesia is still quite high. The main proofs are the significant financial account surplus in 4Q18. It is also followed by oversubscribed in bonds auction. Moreover, Indonesia’s investment growth was still high at 6.96% YoY in 3Q18 and BI still see the growth will be above 6% YoY in both 4Q18 and 1Q19. However, we need to be more cautious on investment as the FDI realization trend since 3Q18 has been negative, even in double digit. Moreover, previous experience showed that significant policy rate change will be followed by change of direction in investment growth in following year as exhibit 4 denote. Significant rate hike in 2018 may deliver negative effect to investment in 2019.

 

Wait and see further development on Fed, trade war and China

We cannot deny that FFR, trade war and China’s domestic economic have significant effects to Indonesia macroeconomic performance. Indonesia financial market will have more favorable condition as slowing down global growth may lead to more dovish the Fed. However, the risk of real sector, especially to CAD, is expected to remain high as lower demand from weakening China will lead to falling growth of Indonesia’s export. We put our GDP, current account deficit (CAD) and Rupiah target for 2019 under review considering current circumstances.