Bank Indonesia (BI), which cut its rate by 25 basis points in February, said there is a risk that the economy this year will grow slower than expected and expand in the lower end of the targeted 5.4 to 5.8 percent range, with the outcome determined by the realization of government infrastructure projects along with consumption and an expected gradual improvement in exports.
In February the BI forecast growth of 5.4-5.8 percent this year, up from 2014's 5.1 percent.
Liquidity in the banking sector in February was more than sufficient, BI said, noting an acceleration in deposit growth to an annual 15.2 percent from 14.2 percent the previous month and credit growth is expected to increase from the second quarter in line with improved economic activity and adequate banking liquidity.
A more accommodative macroprudential policy will comprise an expansion of the deposit definition by including securities in the liquidity calculation and providing incentives to banks who meet the required lending to small and medium-sized businesses by relaxing the upper threshold for calculating liquidity.
Indonesia's economic growth in the first quarter was "moderate," as investment and exports point to a slowdown while consumption remains strong. But BI expects growth to rebound in the second quarter, helped by growing government expenditure. Exports, however, continue to contract in line with low commodity prices and sluggish global demand, particularly for manufactured products.
Investments have also been stifled but should pick up in the second quarter and government spying on infrastructure projects spikes, BI said.
Consumer price inflation in March rose to 6.38 percent from 6.29 percent due to higher administered prices, and is above the BI's target of 4.0 percent, plus/minus one percentage point.
"Bank Indonesia will continue to monitor inflation risks, particularly the global oil prices, the rupiah depreciation effect, potential administered price corrections and food supply," BI said.
Bank Indonesia issued the following statement:
"Bank Indonesia Board meeting on April 14, 2015 has decided to hold the BI Rate at 7.50%, setting the Deposit Facility rate at 5.50% and Lending Facility rate at 8.00%. This decision is in line with the ongoing efforts to keep inflation within the target of 4±1% for 2015 and 2016, and to control current account deficit towards a healthier level at 2.5-3% of GDP in the medium term. Bank Indonesia will remain vigilant of domestic and external risks; while consistently strengthen the monetary and macroprudential policy mix, which includes stabilising the rupiah to maintain macroeconomic and financial system stability. Furthermore, coordination with the Government will also be strengthened to control inflation and the current account deficit as well as to accelerate structural reforms. To this end, Bank Indonesia supports government-led measures to reinforce macroeconomic stability by continuing a variety of structural reforms, including efforts to improve the current account position and expedite various infrastructure projects to stimulate sustainable growth.
The global economic recovery persisted albeit sluggish, in line with the weaker-than-expected gain in the US economy as the main driver of global economic growth. This development in the US economy was partly due to dollar appreciation, negatively affecting their export demand. In this light, the Fed revised down its macroeconomic projections while pointing towards a smaller-than-previously-projected Fed Fund Rate increase, as well as a later onset. In contrast, stronger consumption and production indicators signalled a turnaround in Europe’s economy.The latest FOMC result and assets purchase by ECB have driven a downturn in yield and improving portfolio investments to emerging markets, including Indonesia. In Asia, Japan’s economy was predicted to moderately improve, while China’s economy continued to slow down as investment declined. International commodity prices remained low despite a rising oil price due to geopolitical dynamics in the Middle East.
From a domestic standpoint, first-quarter growth in Indonesia was moderate, with a rebound forecasted in the second quarter of 2015. Consumption was expected strong in the first quarter, while investment and exports indicated a slow down. A surge in private consumption due to controlled inflation helped maintain a strong consumption. The Government expenditure, expected to accelerate growth, was anticipated to grow, albeit limited, in line with seasonal trends at the beginning of the year and will increase starting the second quarter of 2015. Exports continued to contract, despite early signs of improvement, in line with low commodity prices and sluggish global demand, particularly for manufactured products. Investment growth was stifled but is projected to pick up in the second quarter of 2015 and thereafter as government capital spending on infrastructure projects spikes. This is also in line with the monitoring of construction progress in various infrastructure projects. Looking ahead, there is a risk that the economy in 2015 may grow slower, nearing the lower end of the 5.4-5.8% range. This will be determined by the vast and promptness of Government infrastructure projects realisation, along with resilient consumption and gradually improving exports.
Indonesia’s trade balance was expected to record a surplus in March 2015, primarily bolstered by a non-oil and gas surplus. The trade surplus in March 2015 is projected to be higher than that of the previous month, mainly due to a buoyant non-oil and gas trade surplus. A decrease in oil and gas trade deficit also occured on the January-March 2015 period, as an implication of the Government subsidy reform. Bank Indonesia is assured that the January-March 2015 trade surplus is congruous with the expected shrinking current account deficit in the first quarter of 2015, compared to the fourth quarter of 2014. In terms of the financial account, despite growing uncertainty on global financial markets that pressured foreign capital inflows, cumulative foreign portfolio investment to Indonesia reached US$3.5 billion by March 2015. Consequently, foreign exchange reserves was recorded at US$111.6 billion at the end of March, equivalent to 6.9 months of imports or 6.6 months of imports and servicing the government’s external debt, which is well above the international adequacy standard of three months.
The rupiah depreciated as the US dollar gained on nearly all global currencies. The rupiah slid by an average of 2.37% (mtm) to Rp13,066 per US dollar in March 2015. Point to point, the rupiah closed down 1.14% at Rp13,074 per US dollar. Albeit weakening, depreciation of Rupiah was somewhat limited compared to other emerging market currencies. The FOMC’s dovish statement, coupled with the rupiah stabilisation efforts of Bank Indonesia, has eased pressures on Rupiah, causing it to appreciate from the middle of March.This is also in line with the increase in foreign portfolio investment to Indonesia on April 2015, as a consequence of the FOMC announcement and ECB’s asset-buying. Moving ahead, Bank Indonesia will consistently maintain rupiah stability in line with its fundamental value.
Inflation was controlled in March 2015, thereby supporting the inflation target of 4±1% in 2015. After experiencing deflation during the first two months of 2015, inflation was 0.17% (mtm) or 6.38% (yoy) in March 2015, stemming from administered prices. Nonetheless, volatile food deflation and smaller core inflation helped to keep March inflation under control. Administered prices climbed as the prices of premium and Pertamax petrol, diesel, and 12 kg canisters of LPG increased due to a more expensive international oil price as well as rupiah depreciation. Conversely, volatile food deflation was attributed to growing food supply, including rice as the harvesting season commenced. On the other hand, core inflation dropped from 0.34% (mtm) the previous month to 0.29% (mtm) or 5.04% (yoy) on March 2015 as domestic demand moderated, inflation expectations were anchored and international non-oil commodity prices decreased. Bank Indonesia will continue to monitor inflation risks, particularly the global oil price, the Rupiah depreciation effect, potential administered price corrections and food supply. Furthermore, Bank Indonesia always strengthens policy coordination with the government at the central and local levels in order to control inflation.
Financial system stability remained solid, supported by banking system resilience and stable financial market performance. The banking industry remained resilient, with credit, liquidity and market risks well mitigated and the support of a sound capital base. The Capital Adequacy Ratio (CAR) in February 2015 was 21.3%, well beyond the 8% minimum, while non-performing loans (NPL) remain low and stable at 2.0%. In terms of the intermediation function, credit growth was recorded at 12.2% (yoy), increasing from 11.5% (yoy) the previous month. Moreover, liquidity in the banking sector was more than sufficient, as reflected by an acceleration in deposit growth to 15.2% (yoy), from 14.2% (yoy) the previous month. Bank Indonesia believes that credit growth will increase from second uqarter of 2015 and forth, in line with the increase in economic activities and adequate banking liquidity. Overall, deposit and credit growth in 2015 is expected to increase, reaching the ranges of 14-16% and 15-17% respectively. To achieve this, Bank Indonesia will immediately communicate a more accomodative macroprudential policy. This, amongst which, will be done through (i) expanding the coverage of deposit definition by including securities into the LDR calculation within the GWM-LDR regulation, (ii) providing insentive to banks who managed to meet the required lending to SMEs at an earlier time, by relaxing the LDR’s upper threshold. On the other hand, capital market performance improved, as the IDX Composite continues to rally."
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