● Bank Indonesia (BI) official reserve assets continued to expand for a fourth straight month. It increased by USD3.4b or 2.6% MoM to a record high of USD135.1b as at end-July 2020

− Sufficient to finance 9.0 months of retained imports and are 8.6 times the total short-term external debt.

− Mainly attributable to the government’s global bond issuance and loans in part to finance the fiscal stimulus to cushion the economic blow from the COVID-19 pandemic. Meanwhile, the gold assets expanded sharply by 10.9% MoM, followed by foreign currency (2.3%).

● Rupiah weakened in July on monetary easing bias

− The Rupiah ended lower in July against the USD (-2.7% MoM; May: 5.0%). It depreciated more than any other emerging-market currency as BI reaffirmed its dovish stance.

− Regional currencies (monthly average): Similarly, Thai Baht depreciated by 0.9%, while other regional currencies gained led by Philippines Peso (1.3%) followed by Singapore Dollar (0.5%) and Malaysian Ringgit (0.3%).

● Grim growth outlook and downbeat inflation to support another rate cut amid fragile Rupiah

− We believe that BI has ample room to slash its 7-day reverse repo rate further by at least another 25 bps to 3.75% in its upcoming Board of Governor meeting, given that 2Q20 GDP growth have shrunk to -5.32% (1Q20: 3.0%), while inflationary pressure remained subdued (1.54%; Jun: 1.96%), which undershoot BI’s inflation target band of 2.0-4.0%.

Source: Kenanga Research - 10 Aug 2020