Bank Indonesia on hold, with an eye on US policy shifts
- Bank Indonesia left rates on hold
- US Fed’s policy manoeuvres will be watched closely
- Front-loading of US rate hikes will prod the BI to reconsider its dovishness
- Fiscal stance has turned less expansionary
- Implications for markets: We note more tailwinds for 2022 borrowings and bonds
Bank Indonesia monitors Fed’s manoeuvres
Bank Indonesia held the benchmark rate at a record low at 3.5% on Thursday, extending the prolonged pause in place since Mar21. A non-threatening inflation backdrop, stability in the financial markets - IDR, sovereign bonds are amongst the regional outperformers – and the need to protect recovery prospects, have lowered the urgency to normalize policy in the near-term.
Economic assessment: Official forecasts were left unchanged, with growth expected to improve in 4Q vs a soft 3Q due to strict mobility curbs (Indonesia: Growth to end 2021 on a firmer note) and inflation to remain within the target range of 2-4% this year and the next. Banks’ credit growth has continued to improve, registering 3.2% YoY rise in Oct21 vs -1.9% in 1H21, also benefiting from base effects and pushed for further downward adjustment in lending rates. The projection is for a small current account deficit this year and next. Supportive macroprudential policy measures i.e., relaxed downpayment requirements for property and auto loans, stand extended to 2023. The BI has bought over IDR143trn (0.9% of GDP) worth bonds from the primary market yet far this year.
Outlook: Into 2022, the BI will be keen to preserve this year’s rupiah stability and bond outperformance, just as the US Fed begins to taper its asset purchases and tighten rates thereafter on firm inflation prints. The IDR has depreciated 1.3% vs the US dollar YTD, compared to weaker Asian peers including, Thai Baht (-8.2%) and Malaysian Ringgit (-3.8%).
Indonesian authorities have more policy headroom given the positive outlook on external balances (we expect a current account surplus this year) thanks to the commodity buffer alongside direct official support for the borrowing program, next year. The US Fed’s policy manoeuvres will be watched closely, with signs of frontloading of hikes into 2022 likely to convince the BI to revisit its policy path to mitigate downside pressures on the currency due to narrowing rate differentials. The change in policy stance might also be driven by a likely acceleration in domestic inflation on supply-side drivers and demand revival.
Fiscal policy: More tailwinds for 2022 borrowings/ financing needs
In a sign of the comfortable financing situation, the government cancelled its scheduled debt/ sukuk auctions for rest of the year - worth 54.8trn (IDR26trn raised in Oct off the IDR80.75trn planned for 4Q) for Nov-Dec21, aided by slower pace of spending and better revenue growth. On top of this year’s bond market outperformance, we had noted evolving tailwinds for 2022 domestic borrowings and IDR Rates in “Burden-sharing” a positive for IndoGB and Indonesia: Tax measures and strong trade add to resilience.
Adding to these is a recent ruling will allow the Finance Ministry to use accumulated cash surplus (referred to as SAL) from the state budget to stabilize the bond market if needed, through secondary market purchases and conduct liquidity operations such as reverse repurchase transactions. We see this as an additional measure to support the domestic borrowings program next year and by extension contain volatility in the debt markets, just as global conditions get less conducive. The US Fed is expected to unwind bond purchases by mid-next year before considering rate hikes, whilst may other developed market peers have started to either taper or set the ground for policy normalisation. Secondly, domestic investors have consistently increased their ownership footprint. This is led by commercial banks, insurance cos and pension funds, apart from the central bank, which have cumulatively minimized the impact of foreign debt outflows (share of outstanding has fallen to 21.2% in Oct-21 from 38.6% in Dec-19), leading to a net bond outperformance on YTD basis.
At the other end, sizeable excess funds also imply that fiscal spending is progressing at a more moderate pace than budgeted, lowering a potential boost to growth. In first 10 months of 2021, the budget deficit has reached 3.3% of GDP at IDR549trn, vs full year budgeted 5.7%. Total spending is at 75% of the budgeted scale, with 65% of the national recovery plan (PEN) disbursed by Oct21. This included injections worth IDR71.2trn vs budgeted IDR37.4trn into state owned enterprises and is pegged at IDR38.5trn into seven SOEs next year, to a combination of infra, constriction, housing finance corporations, amongst others.
Revenues is up 18% YoY in Jan-Oct21, fueled by higher tax and non-tax collections. Notably, higher commodity prices have lifted proceeds from natural resources, which make a third of non-tax receipts. As of September, non-tax collections have exceeded budgeted estimates, providing a fillip to the overall revenue math, and thereby helping to reign in the fiscal slippage. Non-tax collections have exceeded budgeted estimates, providing a fillip to the overall revenue math, and thereby helping to reign in the fiscal slippage.
Year-to-date fiscal developments reinforce our expectation that the 2021 fiscal deficit will be narrower at 5% of GDP vs the budgeted 5.7% and government’s recent estimate of 5.25%. In addition, for 2022, we expect the deficit to be narrower at 4.5% of GDP vs 4.85%, banking on revenue buoyancy on upcoming tax increases and moderate pace of spending.
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