ECONOMIC UPDATE - Monetary review - Breather for rate cut



It’s a wrap for 2019

Bank Indonesia (BI) has decided to hold BI 7-Day Reverse Repo Rate (BI-7DRRR) at 5.00% for YE 2019. After 4 consecutive months of rate cuts totaling 100 bps previously, BI hold the deposit and lending facility rate as well at 4.25% and 5.75%, respectively. It is aligned with our and consensus expectations. Right after the breather of rate cut cycle, Rupiah keeps its appreciation trend to Rp13,988 against USD. The reason of the unchanged rate is because BI expects better macroeconomic indicators coming in 4Q19 ahead such as slight global economic growth recovery, stronger consumption approaching the year end, appreciation trend of the currency and the relatively low inflation.


How good are the better indicators?

For the global condition, US and China has agreed on the phase one of trade deal that will include a rollback of some China tariffs and halts additional levies. This brought rosy prospect for the global economy as it could be a positive indicator of the less intense trade war ahead. The slightly higher growth in 2020, estimated at 5.1% (vs. estimated 5.0% in 2019), can once more boost the demand of exports goods from Indonesia. As the top contributor for Indonesia’s growth, consumption in 4Q19 is expected to get better as the Consumer Confidence Index (CCI) shows an uptrend and it increased by 4.9% from October to Nov-19. From credit side, there was a slight increase on gross non-performing loan (NPL) to 2.73% indeed but the net NPL was 1.25% while BI perceived it as low and manageable. The festive season will also give support for the stronger consumption as in four quarter 2014 to 2018 the consumption grew by 5.06% in average, though it diminished along the way. On the currency, Rupiah strengthened by 0.93% on Nov-19 or appreciated by 2.9% YtD due to the maintained forex supply as the forex reserves were relatively high at USD126.6 bn in Nov-19 or grew 5.4% YtD. On the other hand, the inflation showed relatively low and stable condition as well as it grew 0.14% MoM or 3.00% YoY (vs. 3.13% YoY in Oct-19) in Nov-19. According to BI, the inflation will stand at around 3.1% in 2019. This leads to YE 2019 inflation will be standing under the inflation target at 3.5%±1. To complete, the government has been formulating new policies or programs to foster the economy for 2020 that may increase investor confidence on the domestic economic outlook. As results, the indicators will still be promising.


Accommodative monetary policy

Even though the rate level remained unchanged at 5.00%, BI still resonates the signal of being accommodative towards the potential change in the future. By stopping the rate cut, it does not mean BI will be hawkish in near future, instead, BI has just been ahead the curve. The current rate level brings positive signal to market because it implies that fundamentally, the economy is doing good. Also, we see the unchanged rate level was sensible since a too cheap and liquid loan may lead to economic bubbles. The rate level is aligned with our estimation and for 2020 we still maintain our view that the dovish stance will be maintained but less aggressive. We see the rate cut will begin again in the first half of 2020. The dovish stance remains because the economy still needs booster from monetary side as well as the fiscal supports that will have impact in 2020. Further, it will turn to be more hawkish as the global economy revives. 


Rupiah remains strong

On the other hand, we revise our view that until the YE 2019, the Rupiah will depreciate due to the currency depreciation in the end of the year tends to happen historically. Moreover, the trade war seems get less intense after the phase one trade deal done and the better macroeconomic condition in US remains. Both of it poses the risks of capital outflows for Indonesia and lead the currency depreciation for the rest of Dec-19. Thus, we now forecast that the Rupiah currency will be around Rp14,120 against USD in YE 2019 or in average at Rp14,132 in 2019. It can be under that level, but will not depreciate more.