The Concern Remains on the Depreciating Rupiah Against US$

Bank Indonesia (BI) raised its policy rate (i.e. 7-day reverse repo rate) for the fourth time this year by 25bps to 5.5% at its August monetary policy meeting. BI also hiked the deposit facility and lending facility rates by 25 bps to 4.75% and 6.25%, respectively. The country’s policy interest rate has been hiked by a total of 125bps so far this year. BI guided that “the decision is consistent with ongoing efforts to maintain the attractiveness of the domestic financial markets and manage the current account deficit within an acceptable threshold”. Indonesia’s current account deficit has widened notably from 2.2% of GDP in 1Q18 to 3.0% of GDP in 2Q18, its largest deficit since 3Q14, attributed to the increase in import of raw materials, capital goods and consumer goods on the back of higher domestic economic activity. We believe the larger current account deficit will add pressure on the depreciating Rupiah, which has weakened against the US Dollar by 7.5% year-to-date.

On the trade front, Indonesia’s exports in July rose for the fourth straight month to a nine-month high of 19.3% yoy (11.3% in June). This was also its third consecutive month of double-digit growth. Imports had rebounded to 31.6% yoy in July from 12.8% in June, making this its largest increase since April 2018. In view of the larger increase in imports relative to exports, the trade balance returned to a deficit of USD2.0bn compared to a surplus of USD1.7bn in June, its largest trade deficit since July 2013. Improvement in exports were supported by stronger demand for manufacturing and mining products while rise in imports were driven by both non-oil and gas and oil products. Despite stronger exports, BI had lowered Indonesia’s 2018 real GDP growth projection to 5.0-5.4% from 5.1-5.5% previously. The real GDP growth expanded sharply to its fastest growth level since 4Q13 at 5.3% yoy in 2Q18 (5.1% in 1Q18). We believe further rate hikes by BI may be likely as the Rupiah continues to be pressured by a strong greenback amid global uncertainties as well as further US Fed rate hikes.

Separately, Singapore’s economy slowed to 3.9% yoy in 2Q18, its slowest growth since 4Q17, following the shortly-lived rebound of 4.5% in 1Q18. On a cumulative basis, real GDP growth in 1H18 was slower at 4.2% yoy, compared to 4.6% in 2H17. Softer growth was attributed to manufacturing (10.2%), construction (4.6%), wholesale and retail trade (1.5%), transportation and storage (1.3%), information and communications (5.2%) and finance and insurance (6.7%) However, the Ministry of Trade and Industry (MTI) maintained its 2018 GDP growth forecast of 2.5-3.5% (3.6% in 2017) but anticipates Singapore’s economy to continue slowing down in 2H18 due to the rise in uncertainties and downside risks in the global economy. Despite a dimmer outlook, MTI also expects support to economic growth will still arise from the outward-oriented sectors such as the manufacturing sector, while expansion in domestically-oriented sectors will stem from retail and food services as well as the information and communications sector.

Source: Affin Hwang Research - 17 Aug 2018