ab21 February 2024Global Research and Evidence LabAPAC Economic PerspectivesIndonesia: No surprise as BI holds againThe policy was unchanged at 6% p.a., will likely hold rate until Fed cuts Bank Indonesia kept the policy unchanged at 6.0% p.a., in line with consensus and UBS expectations. There was little change to its policy statement, particularly in terms of language on the rupiah. As noted in its policy statement, BI believes the rupiah will strengthen moving forward. BI also maintained its forecast for 75bp of rate cuts by the Fed in H2 2024. At the media briefing, Governor Warjiyo plainly said that that BI sees room to cut rates in H2, a more direct rendering of its policy intent going forward, compared to the nuanced tone last month. (See our previous meeting takeaways here). Near term, we see some downside risks to the currency Based on the MPS, BI expect rupiah to stabilize and strengthen going forward on the back of 1) sustained foreign capital inflows, 2) BI's stabilisation policy and 3) monetary operations through SRBI, SVBI and SUVBI instruments. However, we see some precarity in rupiah stability. Although the currency has outperformed most other regional currencies recently, rising expectations of a delayed Fed pivot or a high for longer fed funds rate could limit the scope for rupiah appreciation. On top of that, we are cautious on the trajectory for the current account, on the back of lower commodity prices. January's trade balance fell to US$2bn (vs. US$3.9bn in Jan 2023 and US$3.3bn in Dec 2023), due to lower commodity exports. Nevertheless, BI noted the positive portfolio inflows recorded at US$3.1bn year-to-date (vs US$3.0 bn in Q123), due to attractive domestic asset yields. It also highlighted the Jan'24 reserve position remains high at US$145.1bn, equivalent to more than 6 months of imports. UBS EM Strategy continues to remain defensive rupiah and would look to lean against dips in $IDR towards 15,500, targeting a move towards 15,800. BI is relatively sanguine on growth post election BI raised its global growth forecasts for 2024 (from 2.8% to 3%), and maintained it expects the Indonesian economy to grow in the range of 4.7-5.5% in 2024. It forecasts bank lending growth in the range of 10-12% y/y in 2024, compared to 10.4% in 2023. Bank lending accelerated to 11.8% in January. In our post-election note, we highlighted that with assurance of policy continuity, investment could pick up. Going forward, the incoming government will likely face a balancing act between implementing some of its more progressive fiscal policies and maintaining fiscal deficit below the ceiling of 3%. The free lunch and milk program, which is estimated to cover 82.9 million school children, was estimated to cost >Rp400 trillion (or 1.7-2% of GDP). The campaign team for Prabowo-Gibran said that it would be implemented...
