Bank Indonesia Sees Improving Global & Domestic Economy

author : Administrator

The Bank Indonesia (BI) Board of Governors agreed to hold the BI 7-day Reverse Repo Rate at 4.25 percent, while maintaining the deposit facility and lending facility rates at 3.50 percent and 5.00 percent, respectively, effective per 20 October 2017. The decision was in line with efforts to maintain macroeconomic and financial system stability, while stimulating the domestic economic recovery.

However, BI also remained mindful of prevailing domestic and global economic dynamics. The current policy rate is considered adequate to maintain inflation within the target corridor and current account deficit at a sound level. Bank Indonesia also indicated that it shall remain vigilant of the global risks, relating to tighter monetary policy and fiscal reform plans in the US, geopolitical pressures in Europe and the Korean peninsula, as well as domestic risks, including the ongoing consolidation in the corporate and banking sectors.

The global economic gains have persisted, with an upward tendency, driven by stronger growth in Europe and China. In Europe, economic growth is predicted to accelerate along with improving export performance, increasing investment, and more conducive financial sector developments. Meanwhile, China's economic growth is expected to be higher than previously projected, in line with increasing international trade and resilient private consumption.

The US economy is expected to expand on track with the current projection, bolstered by solid consumption and production activities. India's economic growth is expected to be within the downward revised projection due to the adverse effect of demonetization and the implementation of GST.

Consistent with the improving global economic outlook, the assumptions for world trade volume and non-oil and gas commodity prices have been upgraded. Moving forward, Bank Indonesia will continue to monitor the global risks, including the next Federal Funds Rate (FFR) hike planned for December 2017 and the impact of the Federal Reserve normalizing its balance sheet, commencing at the end of October 2017, and transition of leadership in The Fed. In addition, geopolitical risks occurs from Spain and leadership transition process in several European countries. In Asia, geopolitical risks arise from the Korean peninsula.

Economic growth in Indonesia in the third quarter of 2017 is expected to outpace that achieved last period. The economic gains will be supported by fiscal expansion and monetary policy easing. Furthermore, third-quarter consumption accelerated due to 13th month salaries paid to civil servants and social assistance disbursements as well as the high realization of goods procured by the government. Investment should continue to improve on robust building investment and stronger non-building investment as reflected, among others, by an increase in heavy equipment sales for mining and plantation sector. By sector, economic growth was mainly supported by Trade, Hotel, and Restaurant sector, and Manufacture. Bank Indonesia expects economic growth in 2017 to potentially overshoot the previous expectation while remain within the 5.0-5.4 percent projection and then accelerate to 5.1-5.5 percent in 2018.

Indonesia's trade balance recorded a wider surplus in September 2017. Cumulatively from January-September 2017, the trade surplus stands at USD $10.87 billion, up from USD $6.41 billion in the same period one year ago. The increase in surplus mainly came from export of primary non-oil and gas products such as coal, palm oil, rubber, nickel, and tin. In addition, export increases are also supported by manufacturing products such as chemical and paper products. Meanwhile, foreign capital inflows to domestic financial markets reached USD $10.7 billion as of September 2017. External sector gains have edged up the position of official reserve assets, totaling USD $129.4 billion at the end of September 2017, which is equivalent to 8.9 months of imports or 8.6 months of imports and servicing government external debt, exceeding the international standard of around three months of imports.

The rupiah appreciated in September 2017, despite losing ground towards the end of the period. The rupiah strengthened by an average of 0.27 percent to IDR 13,307 per US dollar in the reporting period. Depreciation at the end of the month was also suffered by most global currencies as a result of heightened expectations of policy rate hike, monetary policy normalization, and planned tax reforms in the United States. Bank Indonesia will continue to stabilize the rupiah in line with the currency's fundamental value, while maintaining market mechanisms.

Low headline inflation was maintained in line with controlled core inflation and low volatile foods (VF) inflation. CPI inflation in September 2017 stood at 0.13 percent month-on-month (m/m) or 3.72 percent year-on-year (y/y), below the average in September for the past three years, recorded at 0.15 percent (m/m). Core inflation has tracked a downward trend due to anchored expectations, low import price, and limited consumption. Furthermore, VF recorded low inflation, supported by sliding international commodity prices, improving supply and various government policies. Looking forward, Bank Indonesia shall continue to strengthen policy coordination with the Central and Regional Government to control inflation within the target corridor, namely 4.0±1 percent in 2017 and 3.5±1 percent in 2018 and 2019.

Banking industry resilience and stable financial markets continued to underpin financial system stability. Maintained stability was reflected by the high Capital Adequacy Ratio (CAR) in the banking industry (23.1 percent) and a liquidity ratio of 23.4 percent in August 2017. Meanwhile, non-performing loans (NPL) were recorded at 3.0 percent (gross) or 1.4 percent (net). While picking up slightly from 8.2 percent (y/y) the previous month, credit growth was recorded low at 8.3 percent (y/y). Meanwhile, deposit growth dropped slightly in August 2017 to 9.6 percent (y/y) from 9.7 percent (y/y) the previous month.

Bank Indonesia predicts financial intermediation to improve in line with the lower reference rate and macro-prudential policy easing, combined with the progress made in terms of banking and corporate sector consolidation. Furthermore, economic financing through the capital market is expected to increase in line with financial market deepening efforts. Bank Indonesia, with other relevant authorities, will continue to coordinate to make sure that financial system stability are well maintained to support economic recovery momentum.

Source: Indonesia Investment




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