The policy cut was a preemptive move to support Indonesia’s economy

At its latest monetary policy meeting in September, Bank Indonesia (BI) cut its benchmark policy rate (7-day repurchase rate) by 25bps for the third consecutive meeting to 5.25%, a move that was in line with market expectations. The benchmark policy rate was last seen at this level in July 2018. BI’s move possibly comes after the US Fed cut its Fed Funds Rate by 25bps to 1.75-2.0%. So far this year, BI had cut rates by a total of 75bps. In its statement, BI guided that the move was a “pre-emptive step to support the momentum of domestic economic growth amid slowing global economic conditions.” We believe there is still room for BI to ease policy rates as inflation remains within the bank’s target range of 2.5-4.5% in 2019. In August, inflation rose by 3.5% yoy (3.3% in July), its highest level since December 2017. However, Bank Indonesia expects inflation to remain manageable in the months ahead.

Nevertheless, we believe the country’s current account deficit will remain a concern for BI in deciding on future rate cuts, as its current account deficit widened to 3% of GDP in 2Q19 after narrowing to -2.6% of GDP in 1Q19, which is now on the higher end of its deficit target of 2.5-3% of GDP. Furthermore, although trade balance in August rebounded to a surplus of US$85.1mn from a deficit of US$64.3mn in July, this was mainly due to a sharper drop in imports compared to exports. Exports contracted for the tenth consecutive month by 10% yoy in August from -5.1% in July, its sharpest drop since February 2019. Meanwhile, imports declined further for the second straight month by 15.6% yoy from -15.2% in July.

Separately, Singapore’s non-oil domestic exports (NODX) contracted at a slower pace for the second consecutive month by 8.9% yoy in August compared to -11.4% in July, making this its slowest decline so far this year after five straight months of double-digit declines. Trade balance in August widened to S$4.2bn compared to S$3.4bn in July. Lower decline in NODX was supported by the smaller drop in exports of non-electronic products of 2.2% yoy (-6.7% in July). Going forward, we believe the prolonged trade tensions between US and China will remain as one the headwinds for the country’s trade performance. As China is also Singapore’s largest export partner accounting for 21.4% of total NODX, a continued slowdown in China’s economy will also pose as a downside risk towards Singapore’s NODX growth. Recall in 2Q19, real GDP growth slowed to a ten-year low of 0.1% yoy (1.1% in 1Q19). Therefore, we believe this could possibly prompt Monetary Authority of Singapore (MAS) to ease its monetary policy, by adjusting its trade-weighted exchange rate index.

Source: Affin Hwang Research - 20 Sept 2019