Indonesia’s central bank (Bank Indonesia) decided to maintain its benchmark interest rate (BI rate) at 7.50 percent, the deposit facility rate at 5.50 percent and lending facility rate at 8.00 percent. This interest rate environment is considered to be in line with the central bank’s ongoing efforts to push the country’s inflation figure within its target of 4±1 percent for 2015 and 2016, as well as to control the country’s current account deficit towards a healthier level at 2.5-3 percent of gross domestic product (GDP) in the medium term.
According to Bank Indonesia, the global economic recovery persists albeit sluggish due to weaker-than-expected gains in the US economy, the main engine of global economic growth. This development in the US economy was partly due to US dollar appreciation, which negatively affects the country’s export demand. In this light, the Federal Reserve revised down its macroeconomic projections while pointing towards a smaller-than-previously-projected Fed Fund Rate hike, as well as a later onset.
In contrast, stronger consumption and production signaled a turnaround in the economy of Europe. The latest FOMC result and asset purchases by the European Central Bank (ECB) have driven a downturn in yield and improved portfolio investments in emerging markets, including Indonesia. In Asia, Japan’s economy is expected to improve moderately, while China’s economy continued to slow down as investment declined. International commodity prices remained low despite a rising oil price due to geopolitical dynamics in the Middle East.
Domestically, first-quarter economic growth in Indonesia was moderate, with a rebound forecasted in the second quarter of 2015. Consumption is expected strong in the first quarter, while investment and exports indicated a decline. A surge in private consumption due to controlled inflation helped to maintain strong consumption. Government expenditure, expected to lead to accelerated growth, was anticipated to grow, albeit limited, in line with seasonal trends at the beginning of the year and will increase starting the second quarter of 2015. Exports continued to contract, despite early signs of improvement, in line with low commodity prices and sluggish global demand, particularly for manufactured products. Investment growth was stifled but is projected to pick up in the second quarter of 2015 and thereafter as government capital spending on infrastructure projects spikes. This is also in line with the monitoring of construction progress in various infrastructure projects. Looking ahead, there is a risk that the economy in 2015 may grow slower, nearing the lower end of the 5.4-5.8 percent range. This will be determined by the vast and promptness of government infrastructure projects realization, along with resilient consumption and gradually improving exports.
Indonesia’s trade balance is expected to record a surplus in March 2015, primarily bolstered by a non-oil & gas surplus. A decrease in the oil & gas trade deficit also occurred on the January-March 2015 period, as an implication of the government’s subsidy reform. Bank Indonesia is assured that the January-March 2015 trade surplus is congruous with the expected shrinking current account deficit in the first quarter of 2015, compared to the fourth quarter of 2014. In terms of the financial account, despite growing uncertainty on global financial markets that pressured foreign capital inflows, cumulative foreign portfolio investment to Indonesia reached USD $3.5 billion by March 2015. Consequently, foreign exchange reserves fell to USD 111.6 billion at the end of March, equivalent to 6.9 months of imports or 6.6 months of imports and servicing the government’s external debt, which is well above the international adequacy standard of three months.
The rupiah depreciated as the US dollar strengthened against nearly all global currencies. The rupiah slid by an average of 2.37 percent month-to-month (m/m) to IDR 13,066 per US dollar in March 2015. Point to point, the rupiah closed down 1.14 percent to IDR 13,074 per US dollar. Albeit weakening, depreciation of the rupiah was somewhat limited compared to other emerging market currencies. The FOMC’s dovish statement, coupled with the rupiah stabilization efforts of Bank Indonesia, has eased pressures on rupiah, causing it to appreciate from the middle of March. This is also in line with the increase in foreign portfolio investment to Indonesia on April 2015, as a consequence of the FOMC announcement and ECB’s asset-buying.
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia
Inflation was under control in March 2015, thereby supporting the inflation target of 4±1 percent in 2015. After experiencing deflation during the first two months of 2015, inflation was 0.17 percent (m/m) or 6.38 percent year-on-year (y/y) in March 2015, stemming from administered prices. Nonetheless, volatile food deflation and smaller core inflation helped to keep March inflation under control. Administered prices climbed as the prices of premium and Pertamax petrol, diesel, and 12 kg canisters of LPG increased due to a more expensive international oil price as well as rupiah depreciation. Conversely, volatile food deflation was attributed to growing food supply, including rice as the harvesting season commenced. On the other hand, core inflation dropped from 0.34 percent (m/m) the previous month to 0.29 percent (m/m) or 5.04 percent (y/y) on March 2015 as domestic demand moderated, inflation expectations were anchored and international non-oil commodity prices decreased. Bank Indonesia will continue to monitor inflation risks, particularly the global oil price, the rupiah depreciation effect, potential administered price corrections and food supply.
Financial system stability remained solid, supported by banking system resilience and stable financial market performance. The banking industry remained resilient, with credit, liquidity and market risks well mitigated and the support of a sound capital base. The Capital Adequacy Ratio (CAR) in February 2015 was 21.3 percent, well beyond the 8 percent minimum, while non-performing loans (NPL) remain low and stable at 2.0 percent. In terms of the intermediation function, credit growth was recorded at 12.2 percent (y/y), increasing from 11.5 percent (y/y) the previous month. Moreover, liquidity in the banking sector was more than sufficient, as reflected by an acceleration in deposit growth to 15.2 percent (y/y), from 14.2 percent (y/y) the previous month. Bank Indonesia believes that credit growth will increase from the second quarter of 2015 and forth, in line with the increase in economic activities and adequate banking liquidity. Overall, deposit and credit growth in 2015 is expected to increase, reaching the ranges of 14-16 percent and 15-17 percent, respectively. To achieve this, Bank Indonesia will immediately communicate a more accomodative macro-prudential policy. This, amongst which, will be done through (i) expanding the coverage of deposit definition by including securities into the LDR calculation within the GWM-LDR regulation, (ii) providing incentives to banks that managed to meet the required lending to SMEs at an earlier time, by relaxing the LDR’s upper threshold. On the other hand, capital market performance improved, as the IDX Composite continues to rally.