• Bank Indonesia (BI) official reserve assetscontinued to expand forthe fifthstraight month. Itgrewby USD2.0b or1.5% MoM to a new high of USD137.0b as at end-August 2020
  • Sufficient to finance 9.4 months of retained imports and are 9.0 times the total short-term external debt.
  • Mainly attributable to the government's foreign loan withdrawal as well as tax revenues and oil & gas exports receipts. Meanwhile, a broad-based growth slowdown was registered by its main components, led by foreign currency (1.5% MoM; Jul: 2.3%), and followed by gold (0.4%; Jul: 10.9%).
• Rupiah was the regional worst performer in August
  • On average, Rupiah depreciated by 1.0% to 14,725 against the greenback in August partlydue to worsethan expected 2Q20 GDP growth and weaker retail sales performance. The downside, however, was partially capped following the rate pause by BI and its upbeat tone on the economic recovery as well as the US Fed announcement on policy shift.
  • Regional currencies (monthly average): bucking the trend, most of the regional currencies strengthened in August, led by the Malaysian Ringgit (1.8%), followed by Philippines Peso (1.3%), Singapore Dollar (1.2%), and Thai Baht (0.7%).
• Ample room for another rate cut, but Rupiah's stability remains a concern
  • While we believe BI has more space to slash its 7-day reverse repo rate further by at least another 25 bps to 3.75% in a bid to support its sagging economy, the probability of doing so is diminishing given that BI apparently sees quantitative easing (QE) as more effective than rate cuts in reviving the economy.
  • Recently, the Rupiah weakened to near 14,800 levels against the USD following talksof potential changes to the central bank law, which among others, allowing government ministers to have voting rights at monetary policy meetings. Nonetheless, Finance Minister reiterated the government's stance that BI to remain independent. Given the need to maintain Rupiah's stability amid domestic and global market uncertainties, we expect BI to keep rates on hold for the rest of the year

Source: Kenanga Research - 8 Sept 2020