Bank Indonesia, the central bank of Indonesia, kept its benchmark interest rate unchanged at the December 2016 policy meeting, nearly a day after the US Federal Reserve decided to raise its key Fed Funds Rate by 25 basis points to the range 0.50 - 0.75 percent. Moves of both central banks were expected. Monetary tightening in the USA triggers capital outflows from emerging markets (the Indonesian rupiah depreciated around 0.70 percent against the US dollar on Thursday). Therefore, Bank Indonesia had little room to seek monetary easing.
At the December policy meeting (14-15 December 2016) Bank Indonesia agreed to hold the seven-day reverse repurchase rate (BI 7-day RR Rate) at 4.75 percent, while it also maintained the deposit facility and lending facility rates at 4.00 percent and 5.50 percent, respectively. This decision was regarded consistent with efforts to optimize Indonesia's domestic economic recovery while maintaining macroeconomic stability, amid a period characterized by uncertain global financial markets.
Bank Indonesia stated that its previous monetary and macro-prudential policy easing will continue to boost domestic growth momentum. In 2016 Bank Indonesia cut interest rates six times. At the year-start the key interest rate still stood at 7.50 percent. However, after six interest rate cuts (and the change from the 12-month BI rate to the 7-day reverse repurchase rate in August) the nation's benchmark interest rate is now at 4.75 percent.
However, Bank Indonesia remains vigilant of several risks, including those deriving from global economic uncertainties, especially those related to US and China policies, as well as domestic risks relating to administered price inflation.
The global economy is plagued by uneven economic growth and highly volatile financial markets (caused by the high degree of uncertainty that lingers). The global economic recovery remains slow due to sluggish growth in advanced countries (with the exception of the US economy). The US economy improved on the back of a stronger labor sector and rising inflation, which prompted the Federal Reserve to raise its Federal Funds Rate at the December 2016 policy meeting. Moreover, Federal Reserve Chair Janet Yellen hints at three more interest rates in 2017.
On the other hand, growth in emerging market economies, particularly India and China, can be the motor of global economic growth and recovery in several commodity prices. The global crude oil price, while remaining low, has shown signs of recovery after the OPEC agreed to cut output at the November 2016 meeting in Vienna. Similarly, prices of several export commodities from Indonesia continued to rise, including crude palm oil (CPO), coal and other mined commodities. Moving forward, global risks demand vigilance, such as the uncertain fiscal and international trade policy direction of the USA, as well as the economic rebalancing and financial system restructuring process in China.
Meanwhile, the national economy of Indonesia performed solidly, underpinned by maintained domestic demand. Bank Indonesia predicts economic growth to reach 5.0 percent year-on-year (y/y) in 2016, up from 4.8 percent (y/y) in the preceding year, supported by robust consumption and investment, particularly investment in construction. Conversely, the export contraction persisted but has shown improvements in the fourth quarter of 2016. Especially export growth in November 2016 was encouraging. Exports from Indonesia surged 21.3 percent (y/y) to USD $13.5 billion, from USD $12.7 billion in November 2015 (by far exceeding analysts' expectations).
Bank Indonesia expects that in 2017 the Indonesian economy is predicted to enter a recovery phase, with corporate sector performance improving and supported by increased financing from banking loans and the capital market financing. Consequently, Bank Indonesia predicts economic growth in the 5.0-5.4 percent range, buoyed by solid domestic demand and an export recovery, along with the improvements in Indonesia’s export commodity prices.
Indonesia’s balance of payments (BOP) is estimated to record a relatively large surplus and the current account deficit is expected at a level below 2 percent of the nation's gross domestic product (GDP). The large BOP surplus is supported by a significantly larger capital and financial account surplus, while the current account deficit is supported by a large non-oil and gas surplus and a narrower oil and gas deficit.
The position of Indonesia's foreign exchange reserves was recorded at USD $111.5 billion at the end of November 2016, down from the position in the preceding month due to government debt payments and Bank Indonesia's efforts to stabilize the rupiah rate after the unexpected victory of Donald Trump in the 2016 US presidential election. However, the forex reserves are still larger than the USD $105.9 billion at end-2015. The position of Indonesia's forex reserves at the end of November 2016 is equivalent to 8.5 months of imports or 8.1 months of imports and servicing government external debt, well above the international adequacy standard of three months. In addition, the government’s plan to issue USD $3.5 billion worth of global bond is expected to increase the forex reserves in December 2016.
The rupiah exchange rates are stable and in fact tend to appreciate in 2016 although somewhat weakening in November after the US presidential election and rising expectations of another US Fed Funds Rate hike. Point-to-point, the rupiah strengthened 1.7 percent (year-to-date) to IDR 13,550 per US dollar at the end of November 2016. The rupiah appreciated on positive sentiment concerning the domestic economic outlook in line with stable macroeconomic conditions and the successful implementation of the tax amnesty program. In terms of asset declaration the program's target has already been achieved (today it was reported that Indonesian taxpayers have so far declared IDR 4,009 trillion of previously unreported assets, which include IDR 144 trillion worth of repatriated assets, IDR 988 trillion in offshore assets and IDR 2,877 trillion worth of assets in the country). Since the beginning of December the rupiah started to appreciate again along with rising foreign capital inflow.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
In full-year 2016 inflation is expected to remain low, around 3.0 - 3.2 percent (y/y), which is towards the floor of the current target corridor, namely 4±1 percent. Core inflation is supported by limited domestic demand, anchored inflation expectations and rupiah appreciation. Meanwhile, administered prices recorded deflation on the back of low energy prices. On the other hand, volatile food inflation accelerated due to supply disruptions caused by inclement weather. Furthermore, CPI inflation was also controlled by Bank Indonesia's policy to maintain exchange rate stability and anchor inflation expectations, while strengthening policy coordination with the central and local Government. In November 2016, CPI inflation stood at 0.47 percent (m/m) or 2.59 percent (ytd) and 3.58 percent (y/y).
Bank Indonesia also stated that inflation in 2017 is predicted to remain within the target corridor of 4±1 percent (y/y). Several inflation risks require careful observation, especially related to volatile food prices and the planned adjustments to administered prices.
Indonesia's financial system remains stable, supported by resilience in the banking system. In October 2016, the Capital Adequacy Ratio (CAR) stood at 22.9 percent and the liquidity ratio (liquid assets/deposits) at 20.2 percent. Meanwhile, non-performing loans (NPL) were recorded at 3.2 percent (gross) or 1.5 percent (net). The looser monetary policy stance was successfully transmitted through the interest rate channel, reflecting lower deposit and lending rates. Notwithstanding, monetary policy transmission through the credit channel remained sub-optimal, in line with limited demand, including investment from the corporate sector. Credit growth in October 2016 was recorded at 7.5 percent (y/y), higher than in the preceding month when it was recorded at 6.5 percent (y/y).
On the other hand, economic financing increased through the capital market in the form of stocks, bonds and medium-term notes (MTN). Deposit growth accelerated from 3.2 percent (y/y) in September 2016 to 6.5 percent (y/y) in October 2016. However, the deposit growth decelerated from the previous year, that was recorded at 9.0 percent (y/y). Moving forward, Bank Indonesia predicts credit and deposit growth in 2017 to improve in line with increased economic activity and the loose monetary and macro-prudential policy stance that has been adopted.
Source: Bank Indonesia (with additional reporting from Indonesia Investments)