● Bank Indonesia (BI) official reserve assets edged down in September after five precedingmonthsof expansion. It fell by 1.4% MoM or USD1.9b to USD135.2b as at end-September 2020

- Sufficient to finance 9.5 months of retained imports and are 9.1 times the total short-term external debt.

- The decline was mainly due to the government's external debt payments and a stable rupiah exchange rate amid heightened global financial market uncertainty. By component, the reduction was led by a decline in foreign currency (-1.3% MoM; Aug: 1.5%) and gold (-3.9%; Aug: 0.4%).

● Rupiah remained the region’s worst performer for the third straight month

- On average, Rupiah depreciated by 0.8% to 14,848 against the greenback in September due to weak economic indicators and concerns over the central bank’s independence and lockdown measures in Jakarta. The downside, however, was partially capped following BI’s rate pause decision.

- Regional currencies (monthly average): In a similar trend, the Thai Baht depreciated by 0.6%, while most of the regional currencies appreciated in September, led by the Malaysian Ringgit (0.9%), followed by Philippines Peso (0.7%), and Singapore Dollar (0.2%).

● BI to keep interest rate steady amid fragile Rupiah

- Given the elevated global financial market uncertainty brought by the COVID-19 jitters and the upcoming US presidential election, we expect the Rupiah to face continued pressures in the near term. This may prompt BI to hold rates steady for the rest of the year to support the local note.

- Nonetheless, we believe BI still has more space to cut its 7-day reverse repo rate further by at least another 25 bps to 3.75% to bolster the domestic economy going forward.

Source: Kenanga Research - 8 Oct 2020