Indonesia

More rate hikes on the plate

As expected, BI raised its benchmark interest rate for the fifth time since mid-May by 25 basis points (bps) to 5.75% just a few hours after the US Fed hiked rates by 25bps for the third time in 2018. With the continued tightening cycle by BI, it now takes the increase in the benchmark rate to 150bps since mid-May. We believe the tightening cycle still has legs. We expect more rate hikes in the future as BI will want to maintain the stability of the rupiah. BI also introduced an instrument to encourage foreign investors to hedge their currencies onshore by allowing domestic non-deliverable forward transactions of the rupiah against a number of currencies. It is to boost its onshore market instead of offshore NDFs where future USD/IDR rates are weaker than the onshore forward market as well as stabilize the rupiah and accelerate forex market deepening. Should BI be successful in bringing overseas hedging onshore, it would boost forex liquidity in the domestic market. Liquidity is expected to be tight in 2018 with growth in savings seen below 9.4% due to slower savings in foreign currencies while credit growth is predicted to reach 10%–12%.

• Bank Indonesia (BI) raised its benchmark interest rate for the fifth time since mid-May on Thursday that was in line with our and market’s expectation. The benchmark rate was pushed up by 25 basis points (bps) to 5.75% just a few hours after the US Fed raised rates by 25bps for the third time in 2018.

• With the continued tightening cycle by BI, it now takes the increase in the benchmark rate to 150bps since mid-May, when the economy suffered capital outflows as US Treasury yields rose, and investors worried about its trade and current account deficits.

• We believe the tightening cycle still has legs. We expect more rate hikes in the future as BI will want to maintain the stability of the rupiah. The rupiah has dropped by around 9% thus far in 2018 against the USD, the weakest levels since the 1997-98 Asian financial crisis.

• At the same time, BI introduced an instrument to encourage foreign investors to hedge their currencies onshore. BI now allows domestic non-deliverable forward transactions of rupiah against a number of currencies. It is to provide an alternative hedging product for both foreign investors and local corporations with forex needs with the aim to boost onshore market instead of offshore NDFs where future USD/IDR rates are weaker than the onshore forward market. Also, it is to stabilize the rupiah and accelerate forex market deepening.

• We hope the domestic NDF market will pick up as soon as possible. Should BI be successful in bringing overseas hedging onshore, it is expected to boost forex liquidity in the domestic market. Liquidity is expected to be tight in 2018 with growth in savings seen coming in below 9.4% — mostly because of slower growth in savings in foreign currencies — while credit growth is predicted to reach 10% - 12%. BI left 2018 and 2019 GDP unchanged at 5.0%–5.4% and 5.1%– 5.5%, respectively which falls within our projection of 5.2% and 5.3% for the respective years.

Philippines

Expect to raise rates again

As expected, the central bank raised its benchmark interest rate by 50bps to 4.50% in a move to address rising inflation which is expected to exceed its target for 2018 and 2019 of 2%–4%. It has now raised rates by 150bps since May, its most aggressive tightening since 2000. We are not ruling out for another 50bps rate hike by BSP during the November’s meeting and two more 25bps hikes in 2019 owing to continued inflationary pressure. We expect inflation to average around 5.1% and 4.2% in 2018 and 2019, slightly lower than the central bank’s projection of 5.2% and 4.3% for the respective year. Besides, the peso has lost about 8% against the USD since the start of 2018 to become one of the worst performing currencies.

• In line with our expectations and the market’s, the central bank raised its benchmark interest rate by 50bps to 4.50% in a move to address rising inflation which is expected to exceed its target for 2018 and 2019 of 2%–4%. Hence, Bangko Sentral ng Pilipinas (BSP) has now raised rates by 150bps since May, its most aggressive tightening since 2000.

• We are not ruling out for another 50bps rate hike by BSP during the November’s meeting. We expect two more 25bps hikes in 2019. The reason being inflation remains a huge concern. Domestic demand continued to stay firm while the recent disaster from typhoon Mangkut will add pressure on inflation coming from the supply side of the equation.

• We expect inflation to average around 5.1% and 4.2% in 2018 and 2019, slightly lower than the central bank’s projection of 5.2% and 4.3% for the respective year. Besides, the peso has lost about 8% against the USD since the start of 2018 to become one of the worst performing currencies. Reserves is at US$77.8bil as at end-August.

Source: AmInvest Research - 28 Sept 2018