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ECONOMIC UPDATE - Monetary Review BI unexpectedly hikes rate amid global uncertainty

BI increases BI-rate by 25 bps to 6.25%

Bank Indonesia (BI) raised its benchmark rate (BI-rate) by 25 bps to 6.25% in April 2024, defying our and consensus projections for a hold as it looks to support a tumbling rupiah. Correspondingly, the deposit and lending facility rates also increased to 5.50% and 7.00%, respectively. This rate hike aims to bolster the strategy of stabilizing the Rupiah exchange rate amidst increasing global uncertainty. It serves as a proactive measure to counter the potential impact of this uncertainty on imported inflation and to maintain inflation within the target range of and 2.5%±1% for 2024. Additionally, BI will persist in stabilizing the Rupiah exchange rate through interventions in the foreign exchange market, including spot transactions and Domestic Non-Deliverable Forward (DNDF) transactions. Furthermore, BI intends to issue Indonesian Rupiah Securities (SRBI), Foreign Exchange Securities of Bank Indonesia (SVBI), and Foreign Exchange Sukuk of Bank Indonesia (SUVBI) as pro-market monetary instruments to enhance the money market and attract portfolio inflows. The Dollar Index (DXY) against major currencies rose by 4.30% YTD to 105.7 as of 23/04, signaling a strong dollar. The Rupiah depreciated by -5.3% YTD, reaching Rp16,220/USD. Notably, this depreciation is comparatively modest compared to other Asian currencies, with the Japanese Yen, Thai Baht, and South Korean Won experiencing depreciations of -8.91% YTD, -7.88% YTD, and -6.55% YTD, respectively. We believe that the current interest rate level has peaked to maintain Rupiah stability. However, we anticipate BI will reduce its rate by 25 bps, following the Federal Funds Rate (FFR) in the 2H24. Currently, we forecast the BI rate to reach 6.00% in the YE24.


Mitigating rate hikes with loose macroprudential policies

In anticipation of the potential impact of rising interest rates on economic growth, BI is reinforcing loose macroprudential policies. This involves effectively implementing the Macroprudential Liquidity Incentive Policy (KLM) to encourage increased bank lending and financing to priority sectors. These sectors include downstream industries (such as mining, agriculture, plantations, and fisheries), housing, tourism, the creative economy, micro, small, and medium-sized enterprises (UMKM), People's Business Credit (KUR), and green financing. Additionally, BI maintains Countercyclical Capital Buffer (CCyB) ratio of 0%, Macroprudential Intermediation Ratio (RIM) in the range of 84-94%, Macroprudential Liquidity Buffer Ratio (PLM) of 5% with repo flexibility of 5%, and Sharia PLM ratio of 3.5% with repo flexibility of 3.5%. Furthermore, we anticipate that these macroprudential incentive policies will contribute to economic growth amid the upward trend of interest rates. We currently forecast economic growth of 5.1% YoY this year, in line with BI's forecast of 4.7-5.5% YoY.


Global uncertainty sparks capital outflows

The trade balance remained in surplus during 1Q24, amounting to USD 7.34 bn. However, increasing uncertainty in global financial markets and escalating geopolitical tensions in the Middle East led to capital outflows in the form of portfolio investments, totaling USD 0.4 bn in the 1Q24. This pressure on capital flows continued into the 2Q24, with net outflows reaching USD 1.9 bn as of (22/04). Meanwhile, the Bank of Indonesia (BI) reported foreign exchange (forex) reserves of USD 140.4 bn in Mar-24, down from USD 144.0 bn in Feb-24, marking the lowest level since Nov-23. This decline in forex reserves can be attributed to factors such as government external debt payments and the need to stabilize the value of the Rupiah. Additionally, the current forex reserve position is sufficient to cover 6.4 months of imports or 6.2 months of imports and government external debt payments, exceeding the international adequacy standard of 3 months of imports. We believe that the existing level of forex reserves is adequate to maintain relative stability in the Rupiah throughout 2024. However, we also anticipate a further decrease in forex reserves this month due to government interventions aimed at preserving Rupiah stability amidst potential capital outflows.