MacroInsight : Forging stability in tempestuous market
Forging stability in tempestuous market
7DRRR unchanged at 5.75% after Oct18 meeting.
Increasing domestic market volatility recently, part of dynamism.
BI predicts economic growth and CAD to slightly weaken against 2Q.
Financial market stability to remain developed going forward.
7DRRR stays at current level. Bank Indonesia’s policy rate 7DRRR stays at 5.75%, after regular board of governors meeting concluded. There has been recent increase in domestic market volatility for the past few weeks but no added pressure, as we believe tempestuous market driven by back-and-forth capital flows has been priced in; which should back BI’s decision for its October’s meeting. Decision has been well accepted by market participants as consensus earlier formed accordingly. BI also projects a diminishing economic growth in 3Q18 and slightly weakening current account deficits (CAD), thus vowing to remain prioritising stability going forward. We take into account one more and the final rate increase this year to potentially take place next month.
Turbulent market. Domestic market had indeed become more turbulent the weeks prior to meeting, but safe to assume it was well taken into account given the year’s pattern of volatility. Indonesian 10-year bond yield rose by 55bps throughout Oct18 as funds fleeing off the country recorded Rp-830bn (+235bps, Rp13.9tn ytd, Fig. 1), among the widest in EMs but hardly the worst. BI’s pre-emptive measure is appreciated and outflow situation is likely to be reversed once market assumes most currency depreciation had well taken place earlier in the year (-12% ytd, Fig. 2) and takes into account sound fundamentals and expanding economy. Bid-to-auction activity for sovereign bonds has gradually testified against this, with improving ratio of 2.2x in Aug-Oct18 (vs 1.8x in 2Q18, Fig. 3) and increased incoming bids of about 71% to c. Rp120tn in the period.
Weakening growth and CAD projection. BI foresees nowcast for 3Q18’s economic growth and current account deficit to be weaker than 2Q18, providing no official figures yet, but data to launch early in November. On the back of weaker growth and widening CAD are recorded goods deficits impacted from slowing export growth and tension from import – all of which have invited a series of policy revision. There is good hope for the success of trade balance management as we believe policy intervention should be the driver behind import growth’s inflection point, which demonstrated 13% mom reduction last month. Despite trade deficits, we view 3Q’s CAD to be slightly better at 2.95% of GDP as we incorporated improvement in the service trade.
Maintained preference for financial market stability. Going forward, BI prefers to keep up with financial market stability and must arguably so, given external headwinds from global tightening and FFR balance sheet normalisation. That said, there is an expected further 25bps increase this year to potentially take time in November, as pressure should mount with the FFR’s Dec18 potential rate rise and pressing need for foreign currency in year ends. Domestic policy rate’s elasticity against FFR increase is approximated at 1.8: we think next year should see around 125-150bps addition to the policy rate, flagging FY19 rate at 7.25%.
