Bank Indonesia (BI), which cut its rate by 25 basis points in February and expected to maintain rates today, said the recent pressure on the rupiah "stemmed from concerns over domestic economic moderation," along with overall strength of the dollar against nearly all currencies, but concern over growth were "allayed by a stronger outlook rating for Indonesia issued by S&P."
The rupiah has depreciated against the U.S. dollar since April 2014 and was trading around 13,308 to the dollar today, down 6.5 percent this year and 8.6 percent since the start of 2014. In May, the BI said the rupiah had depreciated by an average of 1.5 percent from April, with the European Central Bank's quantitative easing and Greek negotiations exacerbating the dollar's rise.
Indonesia's inflationary pressures escalated in May due to food price shocks, the BI said, with inflation rising to 7.15 percent from 6.79 percent. Inflation was boosted by bad weather reducing food supply while electricity and airfreight tariffs also rose. However, BI noted that core inflation was under control, with the rate steady at 5.04 percent in the last three months, due to a moderation of the domestic economy and anchored inflation expectations.
Indonesia's Gross Domestic Product shrank by 0.18 percent in the first quarter from the fourth quarter, the second quarter in a row of contraction, with GDP on an annual basis up by 4.71 percent -the lowest rate in more than five years - down from 5.01 percent in the previous quarter.
BI expects growth to remain limited in the second quarter due to weak global growth, low commodity prices, limited growth of investments and slower-than-expected infrastructure spending.
But growth is expected to strengthen as consumption is expected to improve and government investments "surge" in line with the implementation of infrastructure projects.
For 2015, BI forecast growth of 5.0 to 5.4 percent, in line with its governor who in May predicted growth of 5.1 percent, below the previous forecast of 5.4 to 5.8 percent. On May 28 Governor Agus Martowardojo also forecast 5.4-5.8 percent growth in 2016.
BI added that higher government spending will help improve the investment climate and thus have a "crucial role in boosting economic growth in 2015."
Bank Indonesia issued the following statement:
"The BI Board of Governors decided on 18th June 2015 to hold the BI Rate at 7.50%, while maintaining the Deposit Facility and Lending Facility rates at 5.50% and 8.00% respectively. The decision is congruous with efforts to control inflation within the target corridor of 4±1% in 2015 and 2016 as well as manage the current account deficit at a healthier level in the range of 2.5-3.0% of GDP in the medium term. The BI policy mix remains focused on maintaining macroeconomic stability against a backdrop of global economic uncertainty as well as maintaining economic momentum by loosening macroprudential policy. Furthermore, Bank Indonesia continues to strengthen coordination with the Government in order to control inflation and manage the current account deficit as well as to expedite pro-growth fiscal stimuli. To that end, Bank Indonesia supports efforts by central and regional Government to accelerate budget realization, including infrastructure projects and continue various structural policies that bolster the domestic economic outlook.
The global economic growth inclines to be lower than previously projected, accompanied by intense global market risk. Global performance was sluggish due to weaker-than-expected US growth after a downward revision to actual GDP in Q1/2015. Pressures on the US economy stemmed from broad US dollar appreciation, which undermined external sector performance and investment, especially in energy. Such conditions perpetuated widespread uncertainty concerning the Fed Fund Rate (FFR) hike in the United States, both in terms of timing and magnitude. The economy of China also moderated despite a range of looser policies taken to prevent a further downswing. In contrast, Europe’s economy improved in line with effectively looser monetary and financial conditions, although concerns remained over the Greece’s fiscal negotiations (Grexit). Notwithstanding the gradual increase in the global oil price, the sluggish global economy sustained the international commodity price slump. In line with risk from the Grexit and uncertainty due to the FFR escalated global financial market risk, risk in the global financial market remains high, with a potential portfolio capital reversal from emerging markets, including Indonesia.
Indonesia’s economic growth was projected to remain limited for the second quarter but is predicted to rebound in subsequent periods. From Pressures on exports emerged from weak global growth and persistently low commodity prices. Limited investment growth is projected in line with weak imports of capital goods and slower infrastructure development than previously thought. Meanwhile, consumption is expected to improve, based on growing consumer confidence in May 2015. Bank Indonesia predicts economic growth to improve during the second semester as consumption and government investment surge in line with the implementation of infrastructure projects and increased bank lending. Consequently, economic growth is projected in the 5.0-5.4% range for 2015. Consistency to increase government spending, including improvements to the investment climate, will have a crucial role in boosting economic growth in 2015.
The Indonesia trade surplus widened in May 2015 due primarily to a larger non-oil and gas surplus. The trade surplus was recorded at US$0.95 billion, exceeding the US$0.48 billion in the previous period. The non-oil and gas surplus also increased on the previous month due to a greater decline in non-oil and gas imports than non-oil and gas exports. Meanwhile, the oil and gas trade account also improved, with a smaller deficit than previously reported as a result of a deeper decline in oil and gas imports than oil and gas exports. In terms of the financial account, despite pressures on foreign capital inflows due to global uncertainty, the cumulative total of foreign capital flowing to financial markets in Indonesia up to May 2015 was US$3.2 billion. Consequently, foreign exchange reserves amounted to US$110.8 billion, equivalent to 7.1 months of imports or 6.8 months of imports and servicing public external debt, which is well above the international adequacy standard of three months. Bank Indonesia predicts that current account deficit in the second quarter of 2015 will be around 2.5% of GDP, better than the previous year’s second quarter, which was 3.9% of GDP.
The rupiah depreciated as the US dollar gained on nearly all currencies. In May 2015, the rupiah depreciated by an average of 1.5% (mtm) to a level of Rp13,141 per USD. The quantitative easing program of the European Central Bank (ECB) coupled with Grexit negotiations exacerbated US dollar appreciation. Pressures on the rupiah also stemmed from concerns over domestic economic moderation, which were allayed by a stronger outlook rating for Indonesia issued by S&P. Bank Indonesia will continue to maintain exchange rate stability in line with its fundamental value, which will further contribute to macroeconomic and financial system stability.
Inflationary pressures escalated in May 2015 due to food price shocks. CPI inflation was recorded at 0.50% (mtm) or 7.15% (yoy), surpassing the 0.36% (mtm) and 6.79% (yoy) posted previously because of volatile foods. Incremental weather reduced supply, thus compounding volatile food inflation. In addition, inflationary pressures also originated from administered prices, in particular more expensive electricity tariffs and airfreight rates. Nonetheless, core inflation was controlled at the low rate of 0.23% (mtm) in line with domestic economic moderation and anchored inflation expectations. Bank Indonesia will continue to monitor the risks that influence inflation, specifically the global oil price, exchange rates, administered prices, seasonal factors during Ramadan and approaching Eid-ul-Fitr as well as food price shocks linked to the forecasted El Nino episode. Bank Indonesia will also strengthen policy coordination to control inflation with the Government at the central and local levels through National and Regional Inflation Control Teams (TPI and TPID), encompassing strategic measures to control food price pressures by ensuring supply, especially during the holy fasting month and Eid-ul-Fitr. Consequently, Bank Indonesia is confident that the inflation target of 4±1% will be attained in 2015.
Financial system stability remained solid, underpinned by a resilient banking system and stable financial market performance. The banking sector remained resilient with credit, market and liquidity risks well mitigated and the support of a sound capital base. The Capital Adequacy Ratio (CAR) was high in April 2015 at 20.5%, well above the minimum 8% threshold. In addition, non-performing loans (NPL) remained low and stable in the 2.5% range (gross). In terms of the intermediation function, credit growth achieved 10.4% (yoy), down from 11.3% (yoy), while deposits posted growth of 14.2% (yoy), slowing from 16.0% (yoy). Congruous with increasing economic activity and BI efforts to loosen macroprudential policy, credit growth is projected to accelerate. "
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