BI’s First Rate Cut Since Sept 2017 Due to Slower Economic Momentum

Bank Indonesia (BI), in its latest monetary policy meeting in July, cut its benchmark policy rate (7 days reverse repo rate) by 25bps to 5.75%, in line with market expectations. This was BI’s first rate cut since September 2017. In its statement, BI guided that its decision was in line with the need to bolster domestic economic growth momentum amid uncertainties in the declining global financial market and its expectations of sustained low inflation. We believe that BI’s decision was also a pre-emptive move before the US Fed cut rates in the coming months. Governor Warjiyo also guided in a press conference after the meeting that there may be more rate cuts by BI going forward, suggesting the start of an easing cycle. This was partly due to steady inflation where in 1H19 has remained low at 2.9% yoy (3.1% in 2H18) and also within the central bank’s target of 2.5-4.5%. However, we believe that further rate cuts by BI will also be taking into consideration the country’s recent soft trade data, which is still a concern for BI, as this may lead to a larger current account deficit, currently at 2.6% of GDP as at 1Q19 (-3.6% of GDP in 4Q18). In June, exports declined by 9% yoy compared to a fall of 8.5% in May. Imports, meanwhile, registered a positive growth of 2.8% yoy from -17.3% in May, following five consecutive months of contractions. As a result, trade surplus narrowed to US$196mn in June from US$218.5mn in the previous month. Therefore, we do not expect BI to carry out many rate cuts until the current account deficit manages to stay within its target of 2.5-3% of GDP for the full-year. Besides that, BI will also monitor the performance of the Rupiah before making further rate cuts going forward. In the first six months of 2019, the Rupiah has strengthened by 1.9% against the US Dollar.

Separately, Singapore’s non-oil domestic exports (NODX) declined further in June by 17.3% yoy from a fall of 16.3% in May. This was the fourth consecutive month of double-digit contractions and its steepest drop since February 2013. Further decline in NODX was due to larger contractions of electronic products and non-electronic products of -31.9% yoy and -12.4%, respectively (-31.6% and -11.1%, respectively in May). We believe Singapore’s trade performance may continue to be weak in the coming months following the recent slowdown in China’s economy to a 27-year low of 6.2% yoy in 2Q19 (demand from China has the largest share at 16.6% of total NODX). Besides that, the cyclical downturn of the global electronics cycle is also a downside risk. In the advanced estimates of Singapore’s GDP growth released last week, the Ministry of Trade and Industry (MTI) guided that the economy had slowed sharply to a ten-year low of 0.1% yoy in 2Q19 (1.1% in 1Q19). As a result, if GDP does slow further, we believe there is a possibility of policy easing by Monetary Authority of Singapore (MAS). The last time MAS eased its monetary policy was in 2015.

Source: Affin Hwang Research - 19 Jul 2019