Current Account Deficit Continues to be BI’s Concern

Bank Indonesia (BI) kept its benchmark interest rate unchanged at 6% for the seventh consecutive meeting in the latest monetary policy meeting. In its MPC statement, BI guided that it “constantly monitors global financial market dynamics and the external stability of the national economy”. The latest wordings on the economic outlook remains cautious, where it highlighted that “recent escalation of trade tensions is impacting global economic dynamics,” adding also on the domestic economy that “a general softening of national economic growth has occurred during the second quarter of 2019 as a corollary of declining export performance.”

However, while there are some market expectations that BI may cut policy rate, we believe the current account deficit continues to be BI’s concern. In 1Q19, the current account deficit narrowed to 2.6% of GDP (3.6% in 4Q18) but if trade tensions continue amid a global growth slowdown, this could cause BI to miss its current account deficit target of 2.5-3% of GDP in 2019. On the inflation front, in the first five months of 2019, inflation has averaged 2.8% which is in the lower end of the BI’s target corridor of 2.5-4.5%. We continue to believe that BI has room to cut policy rates amid low inflation and steady Rupiah against the USD towards 2H19. However, we believe BI will likely continue to monitor its current account deficit and any negative impact of the trade war before it makes rate cuts decision.

In the Philippines, Bangko Sentral ng Pilipinas (BSP) also kept its policy rate unchanged at 4.5% in its June policy meeting, after cutting it by 25bps from 4.75% in the previous meeting in May. Although the central bank’s decision follows the recent acceleration of headline inflation in May to 3.2% yoy from 3% in April, the higher inflation was mainly due to the impact of El Nino, and we believe likely to be temporary. Therefore, unless inflation rate continues to trend higher in the coming months, we do not discount the possibility of a rate cut by BSP, especially if GDP growth eases further from its four-year low of 5.6% in 1Q19 (6.3% in 4Q18).

Separately, Singapore’s non-oil domestic exports (NODX) in May registered its third consecutive month of double-digit decline of 15.9% yoy from -10% in April. This was its largest fall since March 2016, due to decline in exports of electronic products of 31.4% yoy from -16.3% in April, its sixth consecutive month of decline and steepest fall since January 2009. Slower export growth has also been registered in the rest of ASEAN-5 region between January and April like in Indonesia (-9.5%), Malaysia (-0.4%), Philippines (-2%), Thailand (-1.8%) partly due to trade tensions as the region’s exports to US and China account for 10.6% and 12.9% of total exports, respectively.

Source: Affin Hwang Research - 21 Jun 2019