Download Bank Indonesia Eases - TD Securities Research

Commentary
Rates, FX and Commodities Research
18 February 2016 | TD Securities | London
BANK INDONESIA EASES

BI cut its interest rate corridor by 25bps and its reserve ratio by 100bps on the back of confidence in
greater macro stability in Indonesia and lower inflation.

Indonesian government bonds have performed extremely well in 2016, despite global financial market
volatility; rate cuts and domestic regulatory changes
favour continued solid bond performance which will
support IDR, one of the best performing EM currencies thus far in 2016.
Bank Indonesia elected to cut its interest rate corridor by
25bps via cuts to the deposit facility, lending facility, and
reference rate to 5.00%, 7.50%, and 7.00% respectively.
This was not a clear cut call and the market had a significant bias to expect a hold (as did we). Bank Indonesia also
lowered its reserve ratio by 100bps to 6.50%, a very significant liquidity easing gesture. We had expected that BI
would perhaps be likely to stay its hand given recent financial market volatility, however the significant divergence of
IDR from negative global macro volatility and EM performance, as well as the stability of capital flows to Indonesia,
likely played a role in BI’s comfort in easing.
Bank Indonesia suggested that the move was mainly supported by the country’s solid macroeconomic stability, and
the less intense inflationary pressures foreseen in 2016 .
The central bank sees inflation at the middle of the 4%+/1% range this year.
With inflation no longer a near-term concern, and stability in
the rupiah well maintained, BI appears to be taking advantage of the newfound macro stability and ‘doublingdown’ on the monetary easing impulse in an effort to help
the nascent growth momentum that we see this year build
steam. BI’s GDP forecast is for 5.2%-5.6%Y/Y which compares with the 4.8% Y/Y in 2015.
Bank Indonesia’s easing was also a signal of a more sanguine view on the state of the external accounts. With the
improvement in the current account deficit to 2.1% of GDP
in 2015, BI sees a sustainable deficit of under 3% going
forward. While financial account inflows over recent quarters have weakened on account of lower demand for Indonesian government debt, evidence of an increase in demand in early February should be helped by the view that
Indonesia C/A vs Financial Account, 4Q
rolling (USD bn)
50
Change in reserve assets
40
C/A deficit
Financial Account
30
20
10
0
-10
-20
12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15
Source: Haver, TD Securities
Bank Indonesia Rate Corridor (%)
8.5
Indonesia Financial Acct 4Q roll (USD bn)
8.0
80
7.5
60
7.0
6.5
Reserves
Debt invest (net)
FDI
Other invest
Equity invest (net)
Financial Account
40
6.0
20
5.5
5.0
Overnight
corridor
4.5
4.0
Jibor O/N
Reference Rate
Depo O/N Rate (FASBI)
-20
Lending O/N Rate
3.5
12/11 06/12 12/12 06/13 12/13 06/14
Source: Bloomberg, TD Securities
0
12/14 06/15 12/15
-40
12/09
12/10
12/11
Source: Haver, TD Securities
12/12
12/13
12/14
12/15
Commentary
18 February 2016 | TD Securities | London
Indonesia may ease further, though we currently see the
central bank on hold for the duration of the year.
Also helping the case for the attractiveness of domestic
government debt is the government decision to require
pension funds and insurance companies to hold a minimum
of 20% of government debt in 2016, a requirement that will
rise to 30% in the next year. It is estimated that this could
increase local demand for government bonds by nearly a
quarter of net issuance, which would provide a significant
demand impulse for bonds that should in turn support foreign demand and add to return potential this year.
Should Bank Indonesia continue to signal a bias for easing,
it will favour continued financial inflow and support IDR.
Sacha Tihanyi, +1 212 827 7043
This would plug a ‘hole’ in the balance of payments financial account left by the drop in foreign demand for government debt in Q3 and Q4 of last year, and potentially allow
for further support for IDR , which has been a regional outperformer thus far in 2016. Indeed, Indonesian government
bonds have done extremely well through January as the
curve has shifted lower, with the 5yr down nearly 100bps
and the 10yr down 65bps since the start of the January.
Emerging Markets Team:
Cristian Maggio
Head of Emerging Markets Strategy
[email protected]
+44 20 7786 8436
Sacha Tihanyi
Senior Emerging Markets Strategist
[email protected]
+1 212 827 7043
Paul Fage
Senior Emerging Markets Strategist
[email protected]
+44 20 7786 8424
Global Disclaimer: https://goo.gl/Fa25VD
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