Will Bank Indonesia (BI) continues with easing of policy rate further?

Bank Indonesia (BI) lowered its policy rate by 25bps to 4.25% in its June monetary policy meeting as a measure to stimulate domestic demand and support economic activity that has restrained by the Covid-19 outbreak. This was its lowest level since 2018 and the third rate cut so far this year. In 2019, BI already lowered its policy rate by a total of 4 times amounting to 100bps. BI noted that it will monitor domestic and global economic development to maintain controlled inflation and support economic growth momentum. Governments and central banks globally have introduced various fiscal and monetary policy stimulus measures to mitigate the risk of economic contraction. We believe BI will possibly continue to lower its policy interest rates going forward in line with low inflationary pressure to maintain external stability and the need to boost economic growth. However, we believe the reduction in policy rate by BI will be gradual from here on, with the possibility of another 25bps cut to 4.00% in 2H20.

Indonesia’s exports decelerated into a sharper contraction of -28.95% yoy in May to US$10.53bn (-7.2% in April). Imports, meanwhile, plummeted for the eleventh consecutive months by -42.2% yoy in May from -18.6% in April. Imports of raw and intermediary materials, that covers for more than 70% of total imports, fell by -43.03% yoy in May. As a result, the country’s trade balance rose to US$2.1bn, from a deficit of US$0.4bn in April. In the first five month of this year, Indonesia recorded a trade surplus of US$4.31bn compared to a deficit of US$2.68bn in the same period last year, due to sharp decline in imports growth relative to exports.

Similarly, Singapore’s non-oil domestic exports (NODX) contracted sharply by 4.5% yoy in May from 9.7% in April. The strong drop in NODX was mainly due to lower exports of non-electronics, which decreased by 8.8% in May (12.8% in April) amid lower demand for petrochemicals, food preparations and non-electric engines and motors. However, exports of electronic products rose by 12.5% yoy in May reversing from -0.6% in April. This was largely due to double digit growth of intergrated circuits, disk drives and disk media products.

Going into 2H20, we believe exports growth in the Asean region to remain weak, albeit an improvement and smaller declines than in 1H20. This was in tandem with the projection of the World Trade Oraganization (WTO) that global trade will contract between 13% - 32% in 2020 as the economic impact of the health crisis remains uncertain. Meanwhile, global supply chain disruptions will also weigh on the region’s export performance and it is expected the recovery is likely to be patchy and slow in 2H20.

Source: Affin Hwang Research - 19 Jun 2020