Indonesia Bank: Deposit Rate Facility 3.50% and Lending Facility 5.00%, Effective from 19 February 2018

DOMESTIC ECONOMY


The Governors Meeting (RDG) of Indonesia Bank Board on 14-15 February 2018 decided to keep the BI 7-day Reverse Repo Rate fixed at 4.25%, with the Deposit Facility fixed at 3.50% and the fixed Lending Facility at 5.00 %, is effective since February 19, 2018. The policy is consistent with efforts to maintain macroeconomic stability and financial system and contribute to the domestic economy recovery. Indonesia Bank sees the easing of monetary policy has been sufficient to continue to boost the domestic economic recovery momentum. Going forward, Indonesia Bank believes in sustaining the economy stability becomes the main foundation for the creation of stronger and sustainable economic growth. A number of risks remain to be watched, whether from external sources such as increased global financial market uncertainty related to expectations of higher Fed of Rate (FFR) increase than expected and rising world oil prices, as well as from domestic concerns on continued consolidation of corporations, banking intermediation which has not been strong and the of inflation risk. To that end, Indonesia Bank will continue to optimize the monetary, macro prudential and payment system mix to maintain a balance between macroeconomic stability and the financial system with ongoing economic recovery processes.
Indonesia Bank is also further strengthening policy coordination with the Government to maintain macroeconomic stability and financial system and strengthening the structural reforms implementation. Global economic growth in 2018 is expected to increase and followed by rising world commodity prices. The increase in global economic growth stems from improved developed economies and developing countries are stronger than originally forecast. In developed countries, US economic growth is forecasted to be buoyed by stronger investment and consumption as optimism over US tax reforms. In line with these developments, FFR interest rates are predicted to rebound along with a decrease in the central bank’s balance sheet to respond to inflation expectations will increase in its target range. The European economy is also predicted to chart better growth, supported by improved exports and consumption as well as accommodative monetary policy. Japan’s economic growth is also revised upward in line with strong export growth, tax incentives implementation for corporations, and accommodative monetary policy. Meanwhile, in developing countries, China’s economic growth is predicted to remain high, driven mainly by exports as demand increases, especially from developed countries. The Indian economy is forecasted to recover following the impact loss of the demonization and a new tax system adoption. The prospect of an improving global economic recovery will boost world trade volume and global commodity prices, including oil, by 2018. The Indonesian economy continues to show improved performance with a more balanced structure. Realized quarterly GDP growth of Q3 / 2017 to 5.19% (yoy) from 5.06% (yoy) in the preceding quarter indicated the ongoing recovery of the domestic economy. The improvement in economic growth is also supported by a stronger structure with investment and exports as the growth main source. Investments grew quite high by 7.27% (yoy) driven by an increase in construction investment in line with continued infrastructure development and rising non-construction investment in anticipation of an upswing in demand. Meanwhile, exports grew quite high 8.5% (yoy) affected by the positive impact of world economic recovery and commodity price increase. In addition, economic growth is also driven by the government spending amid acceleration quite stable household consumption supported by controlled inflation. On the business side (LU), continued economic recovery is mainly driven by improved performance of LU Construction, LU Transportation and Warehousing, as well as LU Information and Communications. Meanwhile, the LU Processing Industry performance as a whole is still limited even though the performance of a number of industries has started to increase, such as food and beverage industry, textile and garment industry, and basic metal industry. On the spatial side, the Sulawesi, Maluku, and Papua economies grew increasing amid economic growth in Java, Kalimantan and Balinusra slowed and stable economic growth in Sumatra. With these developments, economic growth for the whole of 2017 reached 5.07% (yoy), the highest in the last four years. Looking ahead, Indonesia Bank predicts, economic growth in 2018 will be in the 5.1-5.5%. range The economic growth will be supported by investments as infrastructure projects continue and increased non-construction investment including private investment, especially machinery and equipment. In addition, exports are forecasted to maintain high growth as the world economy continues to recover and commodity prices remain high. Indonesia’s payments balance returned a surplus with a current account deficit that remains under control. Indonesia’s balance of payments surplus in Q4 / 2017 was supported by a substantial capital and financial account surplus (TMF) and a controlled current account deficit (TB). The positive performance of TMF mainly comes from the surplus of direct investment and portfolio investment. On the other hand, the deficit in fourth quarter TB 2017 was driven by a declining trade surplus of goods and an increasing deficit in service payments. With these developments, the NPI’s performance for the whole of 2017 recorded a surplus of 11.6 billion US dollars supported by a larger TMF surplus than the previous year and a current account deficit that dropped to 1.7% of GDP. In line with these developments, Indonesia’s foreign exchange reserves at the end of December 2017 increased to 130.2 billion US dollars. In January 2018, the trade balance recorded a deficit of 0.68 billion US dollars, but accompanied by high inflows of foreign capital. The position of foreign exchange reserves increased again in January 2018 to 132.0 billion US dollars, the highest ever achieved by Indonesia. The foreign exchange reserve is equivalent to 8.5 months of import financing or 8.2 months of imports and servicing of official foreign debt, and is above the approximately international standard 3 months of imports. Going forward, the current account deficit in 2018 is expected to remain under control within safe limits despite rising to 2.0-2.5% of GDP, in line with improving domestic economic growth. The rupiah exchange rate moved higher in January 2018 after experiencing pressure in Q4 / 2017. In the fourth quarter of 2017, the average daily rupiah weakened by 1.51% to Rp13,537 per US dollar. However, the rupiah strengthened by 1.36% to Rp13,378 per US dollar in January 2018. This strengthening was driven by foreign capital inflows that re-entered in line with positive perceptions of investors on the domestic economy and strengthening the region’s currency. In early February 2018, the increasing uncertainty of global financial markets particularly related to expectations of higher-than-expected FFR increases put pressure on global currencies, including the rupiah. Indonesia Bank will continue to be increasing risk aware of global financial market uncertainty and continue to take measures to stabilize the exchange rate to match its fundamental value while maintaining market mechanisms. Inflation in January 2018 remained under control within the target range. CPI inflation in January 2018 was recorded at 0.62% (mtm), down from the previous month’s inflation of 0.71% (mtm). Annually, CPI inflation was recorded at 3.25% (yoy) or within the targeted inflation target of 2018 of 3.5 ± 1% (yoy). Controlled inflation is influenced by core inflation remains consistent with the Indonesia’s Bank policy consistency of maintaining exchange rate stability and driving inflationary expectations. In addition, controlled inflation also comes from deflationary administered prices as normalization of freight rates after the holiday season. However, volatile foods inflation increased primarily due to rising rice prices. Looking ahead, inflation is expected to remain on target for inflation in 2018, which is 3.5 ± 1% (yoy). The policy coordination of the Government and Indonesia Bank in controlling inflation will continue to be strengthened, among others, in anticipation of risks of rising inflationary pressures, especially those sourced from volatile foods. The financial system condition remains stable amid the banking intermediation that has not been strong yet. The stability of the financial system is reflected in a high capital adequacy ratio (CAR) of banking at 23.0% and a liquidity ratio (AL / DPK) of 21.5% in December 2017. Meanwhile, in line with efforts to strengthen management good bank credit risk, non-performing loan (NPL) ratio decreased to 2.6% (gross) or 1.2% (net) by the end of 2017. Transmission of monetary and macro prudential policy easing through the interest rate channel continues. During the period from January to December 2017, deposit and lending rates continued to decline by 65 bps and 74 bps respectively. Nevertheless, the transmission through the credit line is still not optimal in line with the demand for credit has not been high and the selective bank behavior in giving new credit. Credit growth in 2017 was recorded at 8.2% (yoy), higher than the previous year’s growth of 7.9% (yoy). Amidst limited lending growth, economic financing through capital markets, such as IPOs and rights issues, corporate bonds and medium term notes (MTN) has continued to increase by 29.8% in 2017, in line with the market deepening program finance. Meanwhile, growth in Third Party Funds (DPK) in 2017 was 9.4% (yoy), slightly lower than the previous year’s growth of 9.6% (yoy). With the improvement of the economy and the progress of the corporate and banking consolidation program, Indonesia Bank predicts growth in Credit and deposits will be better by 2018, each in the range of 10.0-12.0% (yoy) and 9.0-11.0% yoy). Going forward, in order to optimize the monetary transmission and macro prudential policy, Indonesia Bank will continue to coordinate with the relevant authorities.
Along with the increase in domestic economic activity, Indonesia’s trade balance in January 2018 recorded a deficit of 0.68 billion US dollars. The deficit was caused by a non-oil / gas trade larger surplus balance compared to the decline in oil and gas trade balance deficits. The non-oil / gas trade surplus in January 2018 was 0.18 billion US dollars, lower than the previous month’s surplus of US $ 0.83 billion. The lower non-oil / gas trade balance surplus was influenced by the non-oil / non-gas imports increase by 0.46 billion US dollars (mtm) accompanied by a decrease in non-oil exports by 0.19 billion US dollars (mtm). The increase in non-oil and gas imports was mainly due to the increase in imports of electric machines and planes, plastics and articles from plastics, vehicles and parts, organic chemicals, and weapons and ammunition. Meanwhile, the decline in non-oil and gas exports was primarily due to lower exports of animal / vegetable fats and oils, iron and steel, tin, ores, crust, and metal ash, and nickel. On the other hand, oil and gas trade balance deficits decline as import declines are greater than exports. The oil and gas trade balance deficit fell from 1.05 billion US dollars in December 2017 to 0.86 billion US dollars in January 2018. The development was mainly influenced by the of oil and gas imports decrease by 0.42 billion US dollars (mtm) occurred both in oil imports crude, oil, or gas. Meanwhile, in the same period, oil and gas exports also decreased by 0.22 billion US dollars (mtm). Indonesia Bank views the trade balance deficit as inseparable from increased production and investment activities, in line with improving domestic economic outlook, and the rising prices impact of imported goods. Going forward, trade balance performance is expected to improve as the world economy continues to recover and global commodity prices remain high. These developments will support improvement in the outlook for economic growth and current account performance. Indonesia Composite Bond Index (ICBI) on Thursday’s trading closed down -0.1976 point at the 244.6262level. The weakness also occurred in the second index of other returns, namely INDOBeXG-Total Return (government bonds) which fell -0.2159 points to 241.6645 levels, and INDOBeXC-Total Return (corporate bonds) ie -0.0618 points to the level of 255,8731. The IBPA-IGSYC curve (IBPA-Indonesia Government Securities Yield Curve) is bearish with average yield on all tenors (1-30years) up + 0.97bps. The average short tenor groups (<5years) yield rose as high as + 2.48bps. While the average yield of long tenor group (> 7years) and medium (5-7years) rose by + 0.80bps and + 0.22bps respectively. INDOBeXG-Effective Yield at the close of Thursday up + 0.0164 point to 6.4356 level. The price correction continues to color the fourth series of benchmark SUNs with an average down -18.78bps. The biggest deterioration in the price of FR0075 is -36.49bps. While the lowest price weakening occurred in FR0065 series (-10.59bps). The price correction also appears to dominate the FR and ORI-type SBN prices majority by an average down -11.85 bps. INDOBeXG-Clean Price yesterday closed down to level 119.1937 (-0.11%). The secondary bond market yesterday was up more than Wednesday’s session from the total volume, up 34.47% to Rp14.22tn from the previous Rp10.58tn. Amid the increase in total volume, the total frequency decreased by -0.64% to 780 times from the previous 785 times. The same pattern also occurred in the benchmark SUN transaction on Thursday where its total volume rose by + 65.67% to Rp5,16tn and its total frequency decreased -12.81% to 320 transactions. FR0075 became the most widely traded SBN series on Thursday (183 times) and recorded the largest total volume of Rp2,86tn. For corporate bonds, the BBTN01CN1 series becomes the most active with 11 transactions (Rp 35 billion). Closing the second trading session on Thursday last week, the domestic bond market has not been able to get out of the pressure. Amid expectations of an FFR rise could be more aggressive after the US inflation release also rose above expectations, domestic data have not been able to ease the pressure on the market. On Thursday, BPS has released a trade balance in January that is a deficit of US $ 670 million or a two-consecutive deficit since December 2017. The condition is expected to further increase pressure and increase risk expectations in the market. Reflected by the increase in yields of all state bonds and the widening of the 5-year Indonesian Treasury Credit Default swap (CDS) value up to 88.31 bps (+ 0.64 bps). In Monday’s trading session this week, the domestic bond market is expected to move sideways along with national holidays in China and the United States, as well as the absence of further dominant sentiment from domestic.

GLOBAL ECONOMY


Earlier this week, the dollar potentially rebounded after Friday gained a positive catalyst from upbeat US home data again reinforced speculation for a US interest rate hike later in March despite allegations the US was deliberately weakening its currency to gain profits in trading globally in the other developed countries midst have begun to slash their monetary easing. With today’s lack of economic data, the investors focus may be on Japan trade balance data and Euro zone current balance which is released at 06:50 WIB and 16:00 WIB.

Potential Movement
Gold
Gold prices have the potential to weaken in the short term as the dollar strengthens on US interest rate hikes speculation in March and investor appetite for riskier assets such as equities by testing support at $ 1341. To target the nearest resistance level at $ 1355.
Oil
The increase in the US drill rigs number in Baker Hughes’ report at the end of last week could potentially again raise concerns over high US production could push the downside to test support at $ 61.00.
EURUSD
Dollar strengthening sentiment and a dovish statement from ECB Coeure saying that the ECB will not raise interest rates before the end of bond purchases could be a negative EURUSD movements catalyst on the day by testing the nearest support level at 1.2380. The today’s data focus is the current balance sheet and Euro zone meeting as well as the monthly Bundesbank report.

GBPUSD
The potential for the GBPUSD movement may weaken today with investors worried about pessimistic British economic data of late as well as sentiment on the strength of the US dollar with potential support seen at 1.4000. USDJPY Japanese trading data released optimistic potentially sustains a decline in USDJPY as demand for haven yen rises amid no government intervention from recent yen strengths by testing the support level at 105.50. AUDUSD RBA Governor Philip Lowe said at the weekend, the central bank likes the weak Aussie is likely to push the AUDUSD down on the day amid solid greenback gains due to a rise in US interest rates with support targets seen at 0.7870. Here are the Indonesian Economic Indicators that we update on Thursday 15/02/2018 at 11:21 am :


Source: bloomberg / afp / xhua / bi / ojk / kemenkeu / bps / reuters / antara/ ibpa / kontan / bisnis / wartaekonomi / investordaily / bbc / kompas / liputan6

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