BI’s Stance on Monetary Policy Remains Hawkish

Bank Indonesia (BI) kept its 7-day reverse repo rate unchanged at 5.75% at its latest Monetary Policy Committee (MPC) meeting in October, after lifting the policy rate by 25bps in the last three consecutive meetings. So far, in 2018, BI has raised policy rates five times by a total of 150bps since May 2018. The central bank reassured that this decision was in line with its ongoing efforts to reduce the country’s current account deficit, which has widened to 3% of GDP in 2Q18 from 2.2% of 1Q18, its largest deficit since 3Q14. The Indonesian Rupiah has depreciated by 12.1% against the US Dollar year-to-date.

Going forward, BI expects the current account deficit in 2019 to narrow to 2.5% of GDP, in line with the Government’s recent measures to stimulate exports and reduce imports, such as raising import tax up to 10% on more than 1,000 goods from the previous range of 2.5-7.5%, as well as reducing energy imports by enforcing a mandatory use of biodiesel blended fuels for all vehicles and heavy machinery from September 1st 2018. In order to stabilise the Rupiah, the government is also looking to reduce the foreign ownership of its government bonds in 5 years in order to protects its assets from external shocks. However, we believe the latest monetary policy decision may be a temporary pause, where the possibility of the Rupiah being weighed down by US Fed’s interest hikes anticipated later this year and into 2019, could see BI raising policy rate further.

Separately, growth in Thailand’s exports, as measured in USD terms, declined unexpectedly by 5.2% yoy in September. This was the lowest level since July 2016, and significantly lower than market expectations of 5.6% expansion. The weak growth was reflected across the board. In particular, exports of principle manufactured goods, which has the largest share of about 80% from the total exports, fell sharply by 6.7% yoy in September (5.8% yoy in August), and followed by agro industrial products which contracted by 1.6% in the same month. Similarly, imports also slowed by 9.9% yoy in September (22.8% in August), led by lower imports of capital goods. Nonetheless, trade balance remained in surplus, amounted at US$0.5bn in the month.

On average, Thailand’s exports already grew by 8.1% yoy in Jan-Sep period. Thai’s Ministry of Commerce is projecting exports growth to expand by 8% this year (9.9% in 2017). Despite escalating trade war between US and China, the Government continued to remain optimistic on trade front, as according to the director general of the Department of International Trade Promotion, plans and strategies will be implemented to expand the country’s goods to potential and new markets in existing and new destinations in order to boost exports further in future.

Source: Affin Hwang Research - 26 Oct 2018