Update COVID-19 in Indonesia: 24,538 confirmed infections, 1,496 deaths (28 May 2020)
29 May 2020 (closed)
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The central bank of Indonesia (Bank Indonesia) decided to keep its benchmark interest rate (BI rate) at 7.75 percent at its Board of Governors’ Meeting on Thursday (15/01). The country’s Lending Facility and Deposit Facility were maintained at 8.00 percent and 5.75 percent, respectively. According to the bank this interest rate environment is sufficient to push inflation, which has accelerated to 8.36 percent year-on-year (y/y) in December due to fuel subsidy reforms, back towards its target of 3 to 5 percent (y/y) in 2015.
Bank Indonesia also believes that the current interest rate environment will push the country’s current account deficit to a more sustainable level and guards the country against volatility amid global uncertain times (ahead of a looming US interest rate hike). As such, the central bank has preferred to safeguard financial stability at the expense of higher (short-term) economic growth. In a press release the central bank stated that the year 2014 was a year full challenges due to sluggish global economic growth (dragging down commodity prices and thereby impacting negatively on Indonesia’s export performance) and monetary tightening in the USA (triggering capital outflows from emerging markets such as Indonesia). This context led to a bullish US dollar in the second half of 2014 and as a consequence most currencies, including emerging Asian currencies, depreciated. These pressures remain as we entered 2015.
Economic growth in 2014 only reached 5.1 percent (y/y), down significantly from the 5.8 percentage point growth recorded in 2013, due to the rebalancing of the Indonesian economy in combination with declining exports (amid low global demand and Indonesia’s ban on exports of raw minerals) and limited government consumption (due to budget cuts). Meanwhile, investment realization in Southeast Asia’s largest economy also slowed. Indonesia’s economic growth in 2014 was -as usual - supported by solid household consumption (which accounts for about 57 percent of the country’s total economic growth). Bank Indonesia expects to see domestic economic growth in the range of 5.4 to 5.8 percent (y/y) in 2015 on the back of strong household consumption and expanding government investment (due to greater fiscal room after the fuel subsidy reforms).
The country’s balance of payments and current account deficit improved due to a rise in manufacturing exports while imports declined amid weaker demand and sharply falling oil prices. Meanwhile, Indonesia’s capital and financial account recorded a substantial surplus on the back of foreign direct investment and portfolio investment. This also led to an increase of the country’s foreign exchange reserves (USD $111.9 billion at end-December 2014). Bank Indonesia expects that the current account deficit, which makes the country vulnerable to capital outflows as it signals that the country is dependent on foreign funding, will continue to improve in 2015 due to falling oil prices and the scrapping of fuel subsidies.
Although the rupiah exchange rate depreciated 1.74 percent against the US dollar in 2014, it strengthened against the currencies of other leading trading partners (for instance the yen and euro).| Source: Bank Indonesia
According to the central bank, the country’s financial system stability is solid with the support of tenacious banking sector resilience and improving financial market performance in 2014. On the institution’s website it states that “banking industry resilience remained solid with credit risk, liquidity risk and market risk well mitigated and the support of a sound capital base. In November 2014, the capital adequacy ratio remained high at 19.6 percent, which is well above the minimum threshold of 8 percent, while the ratio of non-performing loans (NPLs) remained low and stable at around 2.0 percent.”
In November 2014, the country’s credit growth is estimated at 11.9 percent (y/y), down from 22.2 percent (y/y) in the same period of the previous year. This slowdown is in line with domestic economic moderation. Deposit growth unchanged from the previous year at 13.8 percent (y/y) in November 2014. Indonesia’s deposit and credit growth are estimated to accelerate to between 14 and 16 percent, and 15 and 17 percent, respectively.