● Bank Indonesia (BI) official reserve assetscontinued to expand for the third straight month. It increased by USD1.2b or 0.9% MoM to USD131.7b as at end-June 2020

- The reserve assets remained high and sufficient to finance 8.4 months of retained imports and are 8.1 times the total shortterm external debt.

- According to BI, the increase in foreign exchange reserves in June was driven by the government’s global Sukuk issuance. Meanwhile, the gold assets expanded by 3.0% MoM, followed by IMF reserve position (1.0%) and SDRs (1.0%).

● Rupiah strengthened in June on risk-on sentiment

- The Rupiah ended higher in June against the USD. It strengthened by 2.4% MoM (May: 1.9%). Following the trend, Thai Baht (THB) appreciated by 2.9%, followed by PHP (1.6%), MYR (1.4%), and SGD (1.2%).

- The local note, however, was under pressure by fears of virus resurgence following the recent spike of COVID-19 cases. It weakened by 1.2% to 14,440 as of 7 July from a level recorded as of the end of June.

● BI may cut its benchmark interest rate again this month to support growth amid fragile Rupiah

- While the local note is facing pressure on risk-off mode sentiment given that COVID-19 cases continue to rise domestically, we expect BI to continue its monetary easing cycle at its next Board of Governor meeting on 16 July.

- We believe that BI has ample room to slash its 7-day reverse repo rate further, given that inflationary pressure remained subdued as reflected in June’s headline inflation of 1.96% (May: 2.19%), which undershot BI’s inflation target band of 2.0- 4.0%.

- In its last policy review, BI has hinted of potentially more rate cuts to aid economic recovery after it revised its GDP growth outlook to 0.9-1.9% from 2.3% previously, its third revision for this year

Source: Kenanga Research - 8 Jul 2020