The central bank of Indonesia (Bank Indonesia) left its interest rate policy unchanged at the March 2017 policy meeting. This decision was in line with expectations especially after Bank Indonesia officials had stated that they see few room for monetary easing in the foreseeable future considering the US Federal Reserve is likely to raise its key rate several times this year (which could encourage capital outflows from Indonesia), while inflationary pressures in Indonesia are rising.
Bank Indonesia held the BI 7-day (Reverse) Repo Rate (BI-7 day RR Rate) at 4.75 percent at the 14-16 March 2017 policy meeting, while maintaining the Deposit Facility and Lending Facility rates at 4.00 percent and 5.50 percent, respectively. According to Bank Indonesia this decision is consistent with its efforts to maintain macroeconomic and financial system stability amidst growing global uncertainty. Global risks include rising global inflation, uncertainty about the direction of US economic and trade policies, as well as the impact of the Fed Fund Rate hike. Meanwhile, there remain geopolitical risks from Europe (although the results of the Dutch election show that local populist or anti-Euro movements won less seats than expected). Domestically, the impact of administered price adjustments (especially the electricity tariff hikes) on inflation still need to be monitored.
Economic growth is expected to continue improving, despite a number of risks. The global economy continued to post positive growth on the back of the US and emerging markets economic gains as well as rising commodity prices. Consumption and investment continues to buoy the US economy, coupled with improvements in terms of employment and incomes. Moreover, international commodity prices, including oil and Indonesia’s export commodity prices, continue to rise. On the other hand, a number of global risks demand vigilance, including the increase of inflation in advanced economies that can trigger monetary tightening in said countries. Meanwhile, further Fed Funds Rate hikes can potentially boost US dollar strengthening and elevating cost of borrowing. The Brexit issue, along with geopolitical risks in several European countries due to growing populist sentiments and debt settlement in Greece, could exacerbate global uncertainty.
Indonesia’s economy is predicted to remain strong in the first quarter of 2017, compared to the previous quarter, driven by stronger investment, robust household and government consumption as well as improving export performance. Bank Indonesia stated that non-building investment is predicted to gain traction, reflected by an uptick in sales of heavy equipment and cement. However, according to data collected by Indonesia Investments Indonesia's heavy equipment sales and cement sales remain very bleak, actually. Household consumption is expected to continue increasing as indicated by a stable retail growth and positive consumer expectations. Meanwhile, government’s contribution towards consumption and investment tend to improve. Externally, export performance is predicted to improve as commodity prices increase. Consequently, the Indonesian economy is projected to grow in the 5.0-5.4 percent year-on-year (y/y) range in 2017.
Indonesia’s trade balance recorded a surplus in February 2017, primarily supported by the non-oil and gas trade surplus. Indonesia’s trade balance stood at USD $1.32 billion in February 2017, easing from USD $1.43 billion the preceding month but increasing from February 2016's surplus of USD $1.14 billion. The surplus, among others, was due to increase in exports of palm oil, coal, rubber, and chemicals. On the other hand, non-resident capital recorded a net inflow of USD $2.2 billion year-to-date (ytd) in February 2017. Consequently, the position of reserve assets stood at USD $119.9 billion at the end of February, equivalent to 8.9 months of imports or 8.5 months of imports and servicing government external debt, which is well above the international standard of around three months.
The Indonesian rupiah continued to appreciate in February 2017 in line with maintained macroeconomic stability and despite a backdrop of growing global uncertainty. On average, the rupiah appreciated by 0.17 percent month-to-month (m/m) to IDR 13,338 per US dollar in the reporting period, supported by forex sales by exporter corporations along with improving exports, and a net inflow of foreign capital to purchase tradeable government securities (SBN) along with positive investor perceptions towards the domestic economy. However, Bank Indonesia sees several risks that could cause rupiah volatility. These include US economic policy and the impact of Fed Funds Rate hikes as well as political uncertainty in several European countries.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Indonesian inflation was controlled in February 2017 at 0.23 percent (m/m) in February 2017, down from 0.97 percent (m/m) in the preceding month. Pressures stem from administered price adjustments and core inflation, while volatile foods experienced deflation. Bank Indonesia will strengthen policy coordination with the central government to control inflation in response to several risks, including further adjustments to administered prices as the government continues to reform energy subsidies as well as inflationary pressures on volatile foods. With that strategy, inflation is projected to remain within the target corridor of 4±1 percent this year.
Indonesia's financial system remained stable, supported by solid banking industry resilience and maintained financial market stability. In January 2017, the Capital Adequacy Ratio (CAR) stood at 23.0 percent and the liquidity ratio at 21.8 percent, while non-performing loans (NPL) were recorded at 3.1 percent (gross) or 1.4 percent (net). Bank Indonesia has eased monetary and macroprudential policy, which successfully fed through to lower deposit rate by 128 bps (y/y) and lending rate by 80 bps (y/y). Accordingly, interest rates on working capital loans were lowered most significantly (112 bps, y/y), followed by investment loans (95 bps, y/y) and consumer loans (30 bps, y/y). Credit growth in January 2017 was recorded at 8.3 percent (y/y), accelerating from 7.9 percent (y/y) one month ago. Nonetheless, corporate consolidation and limited credit demand continues to squeeze the expansion of new loans. Deposit growth, however, was reported to accelerate from 9.6 percent (y/y) to 10.0 percent (y/y) in January 2017. Meanwhile, economic financing through the capital market, including IPO and rights issues, corporate bonds and medium-term notes (MTN), continue to increase. Credit and deposit growth are predicted to improve in 2017 in the range of 10-12 percent and 9-11 percent respectively, in line with increased economic activity and a looser monetary and macroprudential policy stance.