• Bank Indonesia lowered its policy rate by 25bps to 4.00% in its July monetary policy meeting as a measure to stimulate domestic demand and support economic activity
• Indonesia recorded a trade surplus of US$5.5bn 1H20 compared to a deficit of US$1.87bn 1H19, due to sharp decline in imports growth (-14.28% yoy) relative to exports (-5.49% yoy).
• Separately, Singapore’s real GDP growth contracted by -12.6% yoy in 2Q20 from -2.2% in 1Q20 due to Circuit Breaker measures during the quarter.

BI likely to lower its policy rate further in 2H20 with inflation remaining low

Bank Indonesia (BI) lowered its policy rate by 25bps to 4.00% in its July monetary policy meeting as a measure to stimulate domestic demand and support economic activity that has been dragged by the Covid-19 outbreak. This was its lowest level since 2016 and the fourth rate cut amounting to 100bps so far this year. In 2019, BI had also lowered its policy rate by a total of 4 times amounting to 100bps. The lending and deposit facility rates were also reduced by 25bps to 4.75% and 3.25%, respectively. BI noted that this decision was consistent with low inflation forecasts, and its efforts to maintain external stability and a further step to stimulate economic recovery due to Covid-19 pandemic. The global economy continues to slow sharply and recovery takes longer than previously estimated (amid rising geopolitical tension between US and China), where financial market uncertainty has also increased as a result. The Governor guided that easing monetary policy and quantitative easing measures would be more effective with government spending also accelerated. BI noted that further rate cuts would depend on the inflation rate going forward. However, we believe BI will likely continue to lower its policy rate as long as inflation remains low and if domestic economic growth slows more than expected. There is a possibility for the country’s expected recovery in 2H20 to be derailed due to the rising number of new cases in Indonesia, which could potentially lead to a reimposition of a lockdown after restrictions were gradually lifted since early June. The country’s GDP growth is expected to contract by 3.8% in 2Q20 (+3.0% in 1Q20) according to the Finance Minister. On the trade front, Indonesia’s exports rebounded into a positive growth of 2.28% yoy in June from -28.9% in May. Imports, meanwhile, plummeted for the twelfth consecutive month by -6.4% yoy in June from -42.2% in May. Trade surplus rose to US$1.27bn, signalling an increase of economic activity of the country and its trading partners as restrictions have been lifted.

Separately, in Singapore, advanced estimates of Singapore showed real GDP growth continued to contract by -12.6% yoy in 2Q20 from -0.3% in 1Q20. The negative growth was due to the Circuit Breaker measures implemented between 7 April to 1 June, which involved the suspension of non-essential services and closure of most workplace premises. Construction sector contracted by 54.7% yoy (-1.1% in 1Q20) dragged by the stoppage of construction activities in addition to manpower disruptions. The services producing industries contracted 13.6% pulled down by tourism related sectors as accommodation and the air transport, which were severely impacted by the global and domestic travel restrictions. The Ministry of Trade and Industry maintained its full-year GDP growth forecast of -7% to -4% for 2020. The Trade and Industry Minister guided that the recovery is expected to be slow and uneven as external demand continues to be weak.

Source: Affin Hwang Research - 17 Jul 2020