As expected, Bank Indonesia (BI) left the policy rate at 4.25% while revising its forecast for 2017 GDP to 5.1%, near the lower end of its previous range of 5.0% – 5.4%, which falls in line with our projection. BI expects the current account deficit for 2017 to be less than 2% of GDP and headline inflation to be between 3.0% and 3.5% end-2017.

We believe BI’s hopes in registering double-digit credit growth in 2017 have faded since it grew below 8% for the second straight month in October and is lower than BI’s already lowered credit expansion estimate for 2017 of 8% – 10% which may be out of reach. We feel the low credit demand is in line with the GDP growth while banks are trying to reduce non-performing loans and manage asset quality.

• After the ratio of banks’ non-performing loans (NPLs) dropped to as low as 1.8% in December 2013, it steadily rose to more than 3% but is expected to drop below 2% in 2018.

• While it still gives the policymakers reason to continue easing, they cannot ignore a depreciating currency as the US Fed proceeds with its rate hikes. The room for further policy loosening is diminishing. However, rate cuts cannot be ruled out in 1Q2018 if inflation remains low and growth continues to disappoint.

• As expected, Bank Indonesia (BI) left the policy rate at 4.25%. Meanwhile, BI revised its forecast for 2017 GDP to 5.1%, near the lower end of its previous range of 5.0% – 5.4%, which falls in line with our projection. Also the central bank expects the current account deficit for 2017 to be less than 2% of GDP and headline inflation to be between 3.0% and 3.5% end-2017.

• We believe BI’s hopes of registering double-digit credit growth in 2017 have faded. This seems to post a strong concern on the policy to stimulate the economy in the face of rising global interest rates. Despite eight interest rate cuts since the start of 2016, including back-to-back reductions in August and September, loan demand remains weak and GDP growth continues to disappoint. Loan growth dipped below 8% for the second straight month in October. BI, which had already lowered its estimate for credit expansion for 2017 to 8% –10% from 12%, feels the new target may not be achieved.

• We feel the demand for credit is relatively low, which is in line with the growth of the economy. It is also due to the fact that many banks are trying to reduce non-performing loans and manage asset quality. After the ratio of banks’ non-performing loans (NPLs) dropped to as low as 1.8% in December 2013, it steadily rose to more than 3% but is expected to drop below 2% in 2018.

• While it still gives the policymakers reason to continue easing, they cannot ignore a depreciating currency as the US Fed proceeds with its rate hikes. The room for further policy loosening is diminishing. However, rate cuts cannot be ruled out in 1Q2018 if inflation remains low and growth continues to disappoint.

Source: AmInvest Research - 17 Nov 2017