PT Bank Central Asia Tbk 20th Grand Indonesia, BCA Tower Jl. M.H Thamrin No. 1 Jakarta, Indonesia Ph : (62-21) 2358-8000
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BI policy: A narrow bridge over troubled global waters
Executive Summary:
Bank Indonesia (BI) held the 7-Day Reverse Repo Rate at 3.50% as markets enter a peculiarly jittery phase.
The current crisis gripping Evergrande Group in China, as well as concerns over the end of fiscal stimulus and tapering by the Fed in the US, combined to create the current storm in market sentiment.
While seemingly coincidental, a closer look reveals that these developments suggest a red-hot recovery already running into its ceiling, at least in the likes of US and China.
While high commodity prices and solid inflows over the past few months have been of great benefit to Indonesia, the possibility of a cooling recovery and its attendant risks of market pessimism and lower commodity prices means that BI may have to tread more carefully in the coming months.
In line with the expectations of most analysts, Bank Indonesia (BI) continued its months-long holding action as it maintained the 7-Day Reverse Repo Rate at 3.50%.
BI’s decision comes as markets enter a peculiarly jittery phase. Indeed, markets have been reeling over the past few days as an unfortunate confluence of risk events continue to pile up. The biggest of these is perhaps the current liquidity crisis gripping Evergrande Group, China’s second largest property developer, with nearly USD 300 Bn worth of liabilities at risk.
Exacerbating the sense of panic is the giant question mark hanging over whether the Chinese government will step in to stanch the bleeding. Indeed, the Chinese government’s tolerance for bad debt has shrunk significantly over the past year, and investors used to counting on generous state bailouts have been forced to play a guessing game as the walls continue to collapse around Evergrande.
As China grapples with its long-standing problem of accumulating debt, risk factors have emerged in the US as well. A looming political showdown over the fiscal debt ceiling, and the question this raises over the repayment of maturing US debt, has cast a cloud over markets. Corollary to this is the possibility of the unwinding of fiscal stimulus. With most of the US’ Covid relief measures coming to an end this year, the market’s eyes are increasingly trained on the Democratic party’s USD 3.5 Tn spending plan. The chances of such a bill passing however, are far from guaranteed. Indeed, with the worst of the Covid shock already past, political momentum may already be on the side of those opposed to another stimulus bill.
All this of course, is taking place against the backdrop of a looming deadline for tapering by the Fed, with markets
expecting some form of announcement pertaining to this in this week’s FOMC. Small surprise then, that the unfortunate convergence of so much ill news would rattle markets so. Despite the seemingly coincidental nature of this convergence however, a closer look reveals that all these developments belie a similar trend: of the spectacular recovery of the past few months perhaps running into its ceiling.
The case is straightforward enough with regards to the US. With its robust economic recovery over the past few months, the case for a continued deluge of fiscal and monetary support has weakened. The continued drumroll of the Fed’s looming tapering schedule, as well as the political resistance to a fourth stimulus bill, encapsulate these concerns perfectly.
In China on the other hand, we see its credit-driven model of stimulus running into its own limits. We glimpsed a preview of the current Evergrande crisis with the financial distress of Huarong Asset Management a few months ago. With the government increasingly unwilling to trade lower credit risks for extra growth, the prospects of further stimulus in China have grown uncertain.
The particular series of events that tanked markets this week may very well prove to be temporary (Chart 2).
The political fight over the US debt ceiling may eventually resolve itself, and China’s government may step in to rescue Evergrande. Nonetheless, the fundamental trend driving them – that of a recovery reaching its high water mark, and the growing obstacles to further stimulus – is here to stay.
Conditions have been relatively favorable for Indonesia over the past few months: capital inflows have been
Monthly Economic & Finance Briefing
Economic, Banking & Industry Research of BCA Group
Note issued: September 22nd, 2021
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2 robust, and high commodity prices continue to prop up
historic trade surpluses (Chart 1). With markets growing increasingly jittery, and China’s economic headwinds posing a threat to commodity prices however, there is a risk that these buffers may soon erode. These
are risks that BI will have to keep in mind going forward as it seeks to navigate a monetary environment increasingly dominated by a singular question: how long can rates remain low?
s
Chart 1. Indonesia enjoyed robust capital flows over the past few months, with the current market turmoil only manifesting as minor outflows…
Chart 2. …something that is reflected in several risk indicators as well, although it remains too early to tell whether the panic has run its course or will further
intensify
14243
12500 13000 13500 14000 14500 15000 15500 16000 16500 17000
-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0
Cumulative foreign flows from 02-Mar-2020 (USD Bn)
Equities (lhs) Bonds (lhs) USD-IDR (rhs) Source: Bloomberg (last update: 22 Sep 2021)
-1.1 -2.3
24.4 93.2
85 87 89 91 93 95 97 99 101 103 105
0 10 20 30 40 50 60 70 80 90
VIX Index (lhs) Dollar Index (rhs)
Source: Bloomberg (last update: 22 Sep 2021)
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3
Selected Recent Economic Indicators
Source: Bloomberg, BI, BPS Notes:
*Previous data
**For change in currency: Black indicates appreciation against USD, Red indicates depreciation
***For PMI, > 50 indicates economic expansion, < 50 indicates contraction
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Indonesia – Economic Indicators Projection
** Estimation of Rupiah’s fundamental exchange rate
2016 2017 2018 2019 2020 2021E
Gross Domestic Product (% YoY) GDP per Capita (US$)
Consumer Price Index Inflation (% YoY) BI 7 day Repo Rate (%)
USD/IDR Exchange Rate (end of year)**
Trade Balance (US$ billion) Current Account Balance (% GDP)
5.0 3605
3.0 4.75 13,473
8.8 -1.8
5.1 3877
3.6 4.25 13,433
11.8 -1.6
5.2 3927
3.1 6.00 14,390
-8.5 -3.0
5.0 4175
2.7 5.00 13,866
-3.2 -2.7
-2.1 3912
1.7 3.75 14.050
21.7 -0.4
3.6 4055
2.3 3.50 14.460
27.2 -0.7
PT Bank Central Asia Tbk
Economic, Banking & Industry Research of BCA Group 20th Grand Indonesia, Menara BCA
Jl. M.H Thamrin No. 1, Jakarta 10310, Indonesia Ph : (62-21) 2358-8000 Fax : (62-21) 2358-8343
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Economic, Banking & Industry Research Team
David E. Sumual Chief Economist [email protected] +6221 2358 8000 Ext: 1051352
Agus Salim Hardjodinoto Barra Kukuh Mamia Victor George Petrus Matindas
Industry Analyst Economist / Analyst Industry Analyst
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Gabriella Yolivia Derrick Gozal Livia Angelica Thamsir
Economist / Analyst Economist / Analyst Economist / Analyst
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Ahmad Aprilian Rizki Arief Darmawan
Research Assistant Research Assistant
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