Indonesia maintains rate, raises 2018 growth forecast

November 16, 2017

By CentralBankNews.info
        Indonesia’s maintained its benchmark 7-day Reverse Repo Rate at 4.25 percent, saying the domestic economy is continuing to grow “with a more equitable and balanced structure” and the current interest rate is sufficient to keep inflation in line with the target range and the current account at a healthy level.
       Bank Indonesia (BI), which has cut the rate twice this year by a total of 50 basis points, added it was aware of both global and domestic risks, including “limited growth in household consumption and banking intermediation,” and the risks from a tightening of monetary policy in several developed economies.
        Based on rising exports and investments, BI raised its 2018 growth forecast slightly to between 5.1 – 5.5 percent from a previous 5.0 – 5.5 percent.
        Noting improved growth in the third quarter of this year, BI estimated 2017 growth of around 5.1 percent compared with its previous estimate of 5.0-5.4 percent.
        Indonesia’s Gross Domestic Product grew by an annual rate of 5.6 percent in the third quarter, up from 5.01 percent in the previous two quarters, boosted by higher exports and rising commodity prices, while investments rose to the highest level since the second quarter of 2013 based on construction and non-construction investment.
        BI also sounded optimistic about global growth, saying strong exports and domestic demand are driving China’s economy and restoring consumer confidence while the outlook for economic growth in both Japan and Europe have been upgraded.
      “Meanwhile, tenacious consumption and increasing investment contributed to the US economic gains,” BI said.
        Indonesia’s inflation rate remains low, with headline inflation easing further to 3.58 percent in October from 3.72 percent in September, with BI expecting inflation around 3.0-3.5 percent by the end of this year, within the lower end of its target range of 4.0 percent, plus/minus 1 percentage point.
       For 2018 BI expects inflation to remain within next year’s target range of 3.5 percent, plus/minus 1 percentage point.
       As many other currencies, Indonesia’s rupiah depreciated in October due to a rise in the U.S. dollar and was trading at 13,526 today, down 0.2 percent this year.


  
      Bank Indonesia issued the following statement:

“The BI Board of Governors agreed on 15th and 16th November 2017 to hold the BI 7-day Reverse Repo Rate at 4.25%, while maintaining the Deposit Facility (DF) and Lending Facility (LF) rates at 3.50% and 5.00% respectively, effective 17th November 2017. The decision was consistent with efforts to maintain macroeconomic and financial system stability as well as build economic recovery momentum, while paying due consideration to global and domestic economic dynamics. Bank Indonesia believes the current policy rate is adequate to control inflation within the target corridor and maintain a healthy current account deficit. Furthermore, the domestic economy has continued to grow, with a more equitable and balanced structure. Nonetheless, Bank Indonesia shall remain vigilant of the risks, including the global risks linked to the plans to tighten monetary policy in several advanced countries, as well as domestic risks, such as the limited growth in household consumption and banking intermediary. Bank Indonesia will continue to coordinate with the Government to reinforce the policy mix in order to maintain macroeconomic stability and financial system stability as well as to enhance structural reforms to strengthen fundamentals of Indonesia’s economy.
The global economy has continued to expand. The global economy is predicted to accelerate by 3.6% on 2017 and 2018 on the back of growth in China, Japan and Europe that has beaten previous expectations, coupled with solid economic gains in the United States. Strong exports and domestic demand are driving China’s economy and restoring consumer confidence. Furthermore, Japan’s economic outlook has been upgraded in line with the ongoing export recovery. In Europe, the economic growth projection has also been revised upwards on export performance, supported by improving world trade and domestic economic recovery. Meanwhile, tenacious consumption and increasing investment contributed to the US economic gains. Congruent with the improving world economic outlook, world trade volume (WTV) and international commodity prices are both expected to surpass the previous projections. Moving forward, Bank Indonesia shall continue to monitor the global risks, including potentially tighter monetary policy in advanced countries as well as geopolitical factors.
The national economy gained momentum in the third quarter of 2017, with more balanced growth. Domestic economic growth stood at 5.06% (yoy) in the reporting period, up from a stable 5.01% (yoy) over the past two periods. Furthermore, stronger economic growth in the third quarter of 2017 was accompanied by a more balanced structure after exports along with government and private investment performance improved. Exports were buoyed by rising commodity prices, such as crude palm oil (CPO) and coal, combined with stronger global economic growth. Furthermore, investment has posted its highest level since the second quarter of 2013, supported by building and non-building investment. On the other hand, government consumption has also increased in line with greater spending, while household consumption remains limited. By sector, the main driver of growth was the manufacturing sector and the trade, hotels and restaurants (THR) sector, as two dominant contributors to GDP and large labour absorber. Spatially, economic growth in Sumatra, Java, Bali-Nusa Tenggara, Kalimantan and Sulawesi accelerated on the back of the construction sector and manufacturing industry. In contrast, the economies of Maluku and Papua experienced a slowdown due, amongst others, to limited mining production. Consequently, Bank Indonesia predicts national economic growth in 2017 at 5.1%, improving thereafter to 5.1%-5.5% in 2018.
Indonesia’s balance of payments (BOP) increased significantly in the third quarter of 2017 after the current account deficit narrowed and the capital and financial account surplus expanded. The current account deficit stood at 1.65% of GDP in the reporting period, improving from 1.91% of GDP in the previous quarter. Stronger export performance, in terms of value and volume, helped to reduce the current account deficit despite a corresponding surge of imports to meet rising domestic demand. On the other hand, the capital and financial account enjoyed sharp gains in the third quarter of 2017 due to an influx of non-resident capital in the form of direct investment in line with investor optimism concerning the promising domestic economic outlook. Cumulatively, as of October 2017, the trade surplus had reached a total of USD11.78 billion, up from USD7.65 billion in the same period one year ago. Moreover, the position of official reserve assets at the end of October 2017 stood at USD126.5 billion, adequate to offset 8.6 months of imports or 8.3 months of imports and servicing government external debt, which is well above international adequacy standards of around three months. Throughout 2017, the balance of payments is expected to remain positive on the back of capital and financial account surplus, with current account deficit maintained at below 2% of GDP.
The Rupiah on average depreciated in October 2017, due to external factors. The rupiah depreciated by an average of 1.63% to Rp13,528 per USD in October 2017. The depreciation was in line with prevailing trends for most other global currencies against the US dollar. The US dollar appreciated globally as an impact of the financial market’s response to the nomination of The Federal Reserve Governor as well as its monetary policy stance normalisation, growing expectations of a further FFR hike and US plans for tax reform. Nevertheless, Bank Indonesia continues to stabilise the rupiah in line with its fundamental value, while maintaining market mechanisms.
Low headline inflation was maintained. Consumer Price Index (CPI) inflation in October 2017 stood at 0.01% (mtm) or 3.58% (yoy), below the October average for the past three years at 0.18% (mtm). Consequently, inflation as of October 2017 was recorded at 2.67% (ytd). Lower core inflation helped to control headline inflation in line with anchored expectations, low import prices and limited domestic demand. Furthermore, volatile foods (VF) also recorded low inflation, supported by supply-side improvements and the favourable impact of various government policies. Meanwhile, inflation of administered prices (AP) was kept under control. End of year inflation in 2017 is expected to remain low at 3.0%-3.5%, within the lower end of the 4.0±1% target range. Looking ahead, Bank Indonesia shall constantly strengthen policy coordination with the Central Government and Regional Administrations to control inflation within the target corridor, namely 3.5±1% in 2018.
Financial system stability remained stable, amid limited banking intermediation. The maintained financial system stability was reflected in the Capital Adequacy Ratio (CAR) in the banking industry which remained high at 23.0%, with a liquidity ratio of 22.6% in September 2017. At the same time, non-performing loans (NPL) were recorded at 2.9% (gross) or 1.3% (net). Meanwhile, the banking industry acknowledged slower credit growth, decelerating from 8.3% (yoy) to 7.9% (yoy). In contrast, deposit growth accelerated from 9.6% (yoy) to 11.7% (yoy) in the same period. For 2017, deposit growth is estimated at 10% while credit growth, at around 8%, is lower than expected. Considering the limited credit growth, Bank Indonesia decides to maintain the Countercyclical Capital Buffer (CCB) at 0%, to encourage the improvement of banking intermediation function. In conjunction with the relevant authorities, Bank Indonesia shall coordinate to maintain financial system stability and support economic recovery momentum.”