• Bank Indonesia (BI), in its January monetary policy meeting, kept its key policy rate (7-day Reverse Repo Rate) unchanged at 3.75% for the second meeting in a row, downside risks to economic growth remain
• Indonesia’s export growth in December surged by 14.6% yoy in December from 9.4% in November, its second consecutive month of positive growth.
• In Singapore, the non-oil domestic exports (NODX) in December expanded by 6.8% yoy from a decline of 5% in November, its first expansion after two consecutive months of contraction.

Weaker Rupiah Against US Dollar to Likely Remain a Concern for BI

Bank Indonesia (BI), in its January monetary policy meeting, kept its key policy rate (7-day Reverse Repo Rate) unchanged at 3.75% for the second meeting in a row. Since early last year, BI had lowered its key policy rate by a total of 125bps in 2020 in order to support the economy from the negative impact of the pandemic. BI guided that its decision was in line with expectations of low inflation and steady external stability as well as efforts to support domestic economic recovery. Moving forward, we continue to believe that BI may likely cut rates further, but will depend on the country’s economic performance. Indonesia’s export growth in December rose by 14.6% yoy in December from 9.4% in November, its second consecutive month of positive growth. Imports contracted at a slower pace of -0.5% yoy during the month compared to -17.4% in November. As a result, the trade balance remained in surplus of US$2.1bn (US$2.6bn in November), its eighth straight month of trade surplus.

Despite this, we believe that there are still downside risks to economic growth especially as partial lockdown measures remain in place in Jakarta and other parts of the country. In addition, a number of regions in Java and Bali have been imposed with tougher social and business restrictions from 11 January to 25 January 2021. Besides that, low headline inflation will also provide room for BI to lower rates further if necessary. Headline inflation rose slightly to 1.7% yoy in December (1.6% in November) but is still below the central bank’s inflation target of 2-4%. However, we believe that weaker Rupiah, which has depreciated by about 1% against the US Dollar since the start of the year, will continue to be a concern, especially in deciding on the next course of action for policy rates.

In Singapore, the non-oil domestic exports (NODX) in December expanded by 6.8% yoy from a decline of 5% in November, its first expansion after two consecutive months of contraction, supported by both non-electronic and electronic exports. The sustained recovery in China’s economy and global demand for semiconductors will continue to bode well for the country’s NODX performance. However, as several other countries especially top trading partners such as Malaysia, Thailand and Indonesia have reinstated stricter containment measures following a recent surge in Covid-19 cases, we believe this could potentially weigh on Singapore’s NODX performance in the near term. However, Singapore has already begun its vaccination exercise since 30 December 2020. Hence, the continuation of its vaccine administration will bolster domestic demand and support Singapore’s economy going forward.

Source: Affin Hwang Research - 22 Jan 2021