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ECONOMIC UPDATE - Monetary elixir for COVID-19



Responding to the outbreak

Due to the COVID-19 outbreak, Bank Indonesia (BI) decided to cut its BI 7-Day Reverse Repo Rate (BI-7DRRR) by 25 bps from 5.0% to 4.75% or aligned with our and consensus expectations. BI also cut the deposit and lending facility rate as well by 25 bps to 4.0% and 5.5%, respectively. It is important to give monetary relief on economy since there the impacts of the outbreak to our economy are transmitted through at least three channels: trade, investment and tourism.The lower rate is taken alongside with BI’s revised down estimation on economic growth in 2020 from 5.1-5.5% to 5.0-5.4%. Governor of BI, Perry Warjiyo, believes that the outbreak will have a V-shaped form, meaning that the impact towards economy will diminish until 2Q20 where in 3Q20 we will go up eventually. Thus, in 2021, BI predicts the growth will be at 5.2%-5.6% YoY.


Resilient rupiah 

In Jan-20, rupiah strengthened by 2.13% MoM where until this report is released it still appreciates at 1.54% YtD. Amid the outbreak, rupiah is relatively stable although the accumulated net capital inflow is decreasing by 0.36% YtD. In addition, the relatively high foreign exchange (forex) reserves at USD131.7 bn in Jan-20 support the stronger rupiah as well. It remained sufficiently high as it was equivalent to finance 7.8 months of imports and 7.5 months of imports and servicing government's external debt yet it was well above the international standard of reserve adequacy of 3 months of imports. To prevent the unavoidable impact of the outbreak, the government increased the spending through regional transfer. The government changed the scheme of the distribution of regional transfer from 20%-40%-40% to the bigger in the first quarter at 40%-40%-20%. The aggregate price is seen to increase in medium run despite the low inflation in Jan-20 at 0.39% MoM (2.68% YoY) due to deflation on administered price in form of price cut on some fuels and the back-to-normal public transportation tariff. 


Keep accommodative

BI keeps on emphasizing that they will be accommodative as possible to cope up with the economic downturn amid the COVID-19. However, monetary policy has limited impact on the real sector impacted by the outbreak. Especially, monetary impact will take effect on medium to long run meanwhile the outbreak has short run impact and will end soon. We predict the outbreak will have minimum impact towards the economy until the end of 2Q20. Above all, we need to keep in mind that Indonesia is relatively insulated from the outbreak itself so far. Thus, the practical thing that BI can do is keeping eyes on the credit growth that they had just revised down from 10-12% YoY to 9-11% YoY in the end of 2020. 


Prevention is better than cure

Initially, we predict that the first rate cut in 2020 will be taken in Mar-20 because the outbreak has just taken place in the beginning of 2020. Still with the wait-and-see approach, if the Fed cut rate Mar-20 FOMC, then we see BI will have another cut in 1Q20. Thus, if BI wants to have another rate cut, it is very possible because the rate cut will slow down the rupiah appreciation. Maintaining the stable rupiah is important indeed since the uncontrollable rupiah appreciation rally may bring disadvantage for domestic exporters. Thus, we still maintain our view that BI will have another rate cut by 25 bps in Mar-20 to give the monetary elixir since prevention (of the further impact of COVID-19) is better than cure.