Money market

ECONOMIC UPDATE - Monetary review - Preferable quantity channel



Maintaining stability

Bank Indonesia (BI) held its benchmark interest rate at 4.0% or unchanged from its previous level since Jul-20. The unchanged rate is in linewith our and consensus expectations. We see keeping the rate unchanged is a move to safeguard the country’s macroeconomic stability amid recessionary risks. Thus, the deposit and lending facility rate stay at 3.25% and 4.75% as well. BI prefers to intervene through quantity channel by providing liquidity to stimulate economic recovery during the pandemic especially to increase state budget realization in 2020. Lower inflation, bigger trade surplus and narrowing current account deficit (CAD) provide BI room to have a rate cut but we believe maintaining the rate unchanged is wise until the demand side is able to respond it better. 


More solid resilience

Indonesia shows better resiliency although the reimplementation of large-scale social restrictions (PSBB) in Sept 14th until now may hit the economy once more. However, we see the PSBB positively as it is not as strict as market initially feared. The external factor showed resiliency reflected by CAD that will get narrower as exports continue to gain momentum coupled with lower imports due to the still-weak domestic demand. BI projects a low CAD below 1.5% of GDP in 2020, reinforcing external sector resilience. In Jul-Aug 2020, the trade balance maintained a USD5.57 bn surplus. In 3Q20, balance of payment (BoP) is expected to record surplus though foreign portfolio investment recorded net outflow of USD1.24 bn before experiencing a net inflow totaling USD0.33 bn on Oct 9th 2020. The position of reserve assets decreased to USD135.2 bn in Sep-20, equivalent to 9.5 months of imports or 9.1 months of imports and servicing government external debt, which is well above the international adequacy standard of 3 months. 


Focus on liquidity

 As of Oct 9th 2020, BI has injected Rp667.6 tn of additional liquidity into the banking system through quantitative easing, primarily in the form of lower reserve requirements totaling Rp155 tn and monetary expansion totaling Rp496.8 tn. The loose liquidity conditions pushed up the ratio of liquid assets to deposits to 31.2%, coupled with a low overnight interbank rate of 3.29% in Sep-20. Furthermore, loose liquidity and BI-7DRRR contributed to lower deposit and lending rates from 5.49% and 9.92% in Aug-20 to 5.18% and 9.88% in Sep-20 respectively. Besides, M1 and M2 growth recorded high to 17.6% YoY and 12.3% YoY respectively in Sep-20, primarily driven by expansive fiscal operations. 


Liquidity channel over rate cut

To stimulate the growth, BI emphasizes its preference on quantitative easing instead of cutting the policy rate to increase the state budget realization. As of Oct 8th 2020, BI had purchased Rp60.2 tn of SBN in the primary market through auction schemes, greenshoe options (GSO) and private placements. The realization of burden sharing for public goods funding currently stands at Rp229.7 tn. Meanwhile, the realization of burden sharing for non-public goods (for MSMEs) funding currently stands at Rp90.9 tn.


Hold the rate unchanged

Related to the previous independency issue on Monetary Board, we see the threat gets benign over the time. Related to the mixed perceptions on burden sharing scheme, BI emphasizes the debt monetization is only being applied this year. However, if the fund realization is under 100% in YE 2020, the fund can be used for the next year. Thus, there is nothing to worry about the burden sharing mechanism and its impact to BI independence. As the monetary policy transmission usually takes around 6 months, we see BI still let the previous rate cut to take effect on 2H20. We still maintain our initial view that BI will keep the rate at 4.0% until YE 2020 without ruling out the possibility of it getting lower in 4Q20as BI may use the rate cut to fuel up the growth in 1H21.