Decision may be due to expectation that US Fed to cut rate in September

Bank Indonesia (BI) cut its policy rate by 25bps for the second consecutive meeting to 5.50%, surprising the market which expected the benchmark policy interest rate to be left unchanged (based on Blommberg consensus). The central bank’s governor guided that the cut was a pre-emptive move to boost economic growth, which has recently slowed. This was reflected in the country’s real GDP growth in 2Q19, which slowed to a two-year low of 5% yoy (5.1% in 1Q19), while trade balance also returned to a deficit in July of US$63.5mn (US$297.3mn in June) after two months of surpluses. We believe the latest decision by BI to cut its policy rate may also be due to expectation that the US Federal Reserve (US Fed) may lower its Fed Funds rate further next month.

Going forward BI guided that it will maintain an accommodative monetary policy. In view of further easing by US Fed, we believe there is more room for BI to cut its benchmark interest rate further as inflation remains tepid and the target range of 2.5-4.5% (3.3% in July). However, we also believe that BI will likely monitor the movement of the Rupiah when deciding on future monetary policy decisions.

Recently, President Joko Widodo announced the proposed 2020 state budget, where five main aspects will be focused on human resource development, infrastructure improvement, reinforcement of social protection, regional autonomy and anticipation of global uncertainty. The country’s budget deficit has a target of 307.2trn rupiah, which is 3.8% higher than the previous year. However, as a % of GDP, fiscal deficit will remain at 1.76% of GDP for 2020 (1.8% of GDP in 2019). In addition, the Government targets GDP growth for 2019 and 2020 at 5.3%, respectively (5.2% in 2018) with consumer spending and investments as the main drivers of growth.

Separately, in Thailand, GDP growth slowed for the second consecutive quarter to 2.3% yoy in 2Q19 from 2.8% in 1Q19, its weakest expansion since 3Q14. This was weighed by exports, which contracted by 6.1% yoy (-6.1% in 1Q19) while on the supply side, manufacturing sector contracted by 0.2% yoy (+0.6% in 1Q19), its first decline since 2Q15. The National Economic and Social Development Council (NESDC) lowered its 2019 growth forecast to 2.7-3.2% from 3.3-3.8% previously, as it now projects a decline in exports. In the same week, export growth in July rebounded to 4.3% yoy from -2.1% after four consecutive months of declines. Imports also rose by 1.7% yoy (-9.4% in June) while the trade surplus narrowed to US$0.1bn (US$3.2bn in June). However, the rise in export growth may be short-lived due to external headwinds such as the unresolved trade tensions on global economy.

Source: Affin Hwang Research - 23 Aug 2019