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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FX Reserves: Steady buffers for tighter conditions
Executive Summary:
Indonesia’s FX reserves increased by USD 0.7 Bn last month, bringing it up to USD 137.1 Bn. This was driven by government debt issuance as well as a surge of capital inflows in June.
Markets however, have since remained in a holding position as they await further details on the Fed’s tapering timeline.
Unfortunately, these tighter global monetary conditions coincide with potentially higher financing needs for the Indonesian government as the Covid crisis continues.
All these, as well as higher oil prices, would present several risks for the Rupiah going forward.
Indonesia’s FX reserves increased by USD 0.7 Bn last month, bringing it up to USD 137.1 Bn. This was driven by the issuance of some government debt, as well as a surge of capital inflows in June (Chart 1).
These inflows reflect the remarkable resilience of the market, which did not unduly shed most of its prior gains even after the Fed gave its first verbal hints of tapering in June. It increasingly appears that so long as the Fed maintains clear and consistent messaging, markets may react more gracefully to the eventual tightening of monetary conditions relative to its tantrum eight years ago.
This is not to say however, that markets have wholly insulated themselves from fears of tapering. The difference between now and 2013 is more a matter of magnitude and shock, the underlying risk aversion to a looming taper still remains. Indeed, inflows came to a halt and slightly reversed after the Fed’s meeting (Chart 1), signaling that markets remain in a holding position as they anticipate further news on tapering. Some turbulence may already be on its way with regards to this. Several Fed officials have already accelerated their timeline for tapering in the face of continued inflation and recovery. Markets, no doubt, will likely be anticipating the Fed’s upcoming Jackson Hole conference at the end of August, where some market turbulence may well follow a clearer overview of the Fed’s tapering timeline.
All of this coincides with the worsening Covid situation in Indonesia, with a recent surge in cases fuelled by the more virulent Delta strain. We mentioned in our previous report (see “Inflation: A higher floor and a lower ceiling for growth”) that the emergence of newer Covid variants, coupled with Indonesia’s relatively sluggish vaccine rollout, would likely prolong
Indonesia’s economic malaise. This has implications for the government’s fiscal deficit.
For now, the government has merely shifted its allocation of several budgetary items in response to the current surge in cases. We cannot rule out however, the possibility of a future increase in the budget, or at least that the deficit may not be pared down too much in the following year, given the aforementioned obstacles to longer term recovery. The planned budget for 2022 expects a fiscal deficit of 4.51-4.85% of GDP, slightly lower than this year’s projected deficit of 5.7% but still far higher than the pre-pandemic norm of under 3%.
This presents a few conundrums for government financing, which is set to potentially increase even as global monetary conditions begin to tighten. We already see attempts, such as the government’s recent issuance of a significant amount of bonds, to preempt this potential increase in borrowing costs.
Exacerbating all this is the turmoil currently unfolding in oil markets, where prices have been steadily climbing since March (Chart 2). The key variable here of course, is the recovery of global demand, particularly in the US and China. This is further complicated however, by recent OPEC politics. A standoff between Saudi Arabia and the UAE eventually escalated into a failure to pass previously agreed upon increases in oil production, threatening to further tighten supply at a time when demand continues to recover.
All in all then, more expensive oil imports, tightening global monetary conditions, as well as the need for continued financing, present challenges for the Rupiah in the coming months. Some relief exists in the form of the government’s robust FX buffers, as well as a large trade surplus. Nonetheless, monetary authorities, and global markets too for that matter, are likely to tread carefully in the coming months.
Monthly Economic & Finance Briefing
Economic, Banking & Industry Research of BCA Group
Note issued: July 8th, 2021
I N D O N E S I A E C O N O M I C U P D A T E
PT Bank Central Asia Tbk 20th Grand Indonesia, BCA Tower Jl. M.H Thamrin No. 1 Jakarta, Indonesia Ph : (62-21) 2358-8000
Chart 1. Capital inflows surged in early June before coming to a halt after the Fed’s first hints of tapering in its FOMC meeting on June
Chart 2. The recent spike in oil prices is largely being driven by recovering global demand, leading to a shortage in oil supplies
14,545
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: 08 Jul 2021)
Source: Bloomberg (last update: 08 Jul 2021) Source: Bloomberg (last update: 08 Jul 2021) Source: Bloomberg (last update: 08 Jul 2021)
-1,766
-2,832
FOMC Meeting
81.09%
-25.00%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
-150.00%
-100.00%
-50.00%
0.00%
50.00%
100.00%
150.00%
Oil Balance* (rhs) Brent Price (lhs)
YoY YoY
*Global oil supply growth rate subtracted by that of demand
Source: Bloomberg
0.25%
8 J U L Y 2 0 2 1
I N D O N E S I A E C O N O M I C U P D A T E
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 PM I, > 50 indicates economic expansion, < 50 indicates contraction Key Policy Rates Rate (%) Last
Change Real Rate
(%) Trade &
Commodities 7-Jul -1 mth Chg (%)
US 0.25 Mar-20 -4.75 Baltic Dry Index 3,241.0 2,438.0 32.9
UK 0.10 Mar-20 -2.00 S&P GSCI Index 523.8 533.7 -1.9
EU 0.00 Mar-16 -1.90 Oil (Brent, $/brl) 73.4 71.9 2.1
Japan -0.10 Jan-16 0.00 Coal ($/MT) 130.3 107.5 21.2
China (lending) 4.35 Oct-15 3.05 Gas ($/MMBtu) 3.59 2.97 20.9
Korea 0.50 May-20 -1.90 Gold ($/oz.) 1,803.6 1,891.6 -4.7
India 4.00 May-20 -2.30 Copper ($/MT) 9,422.3 9,939.5 -5.2
Indonesia 3.50 Feb-21 2.17 Nickel ($/MT) 18,289.0 17,993.3 1.6
CPO ($/MT) 942.7 1,027.3 -8.2
Rubber ($/kg) 1.62 1.65 -1.8
SPN (1M) 3.47 2.66 80.7
SUN (10Y) 6.54 6.41 12.8
INDONIA (O/N, Rp) 2.79 2.79 -0.1 Export ($ bn) #N/A 16.60 #N/A
JIBOR 1M (Rp) 3.56 3.56 0.1 Import ($ bn) #N/A 14.23 #N/A
Trade bal. ($ bn) #N/A 2.36 #N/A
Lending (WC) 9.08 9.12 -3.94
Deposit 1M 3.68 3.74 -6.64
Savings 0.80 0.83 -2.82
Currency/USD 7-Jul -1 mth Chg (%) Consumer confidence
index (CCI) 107.4 104.4 101.5
UK Pound 0.725 0.706 -2.51
Euro 0.848 0.822 -3.10
Japanese Yen 110.7 109.5 -1.03
Chinese RMB 6.473 6.395 -1.20
Indonesia Rupiah 14,483 14,295 -1.30 Capital Mkt 7-Jul -1 mth Chg (%)
JCI 6,044.0 6,065.2 -0.35
DJIA 34,681.8 34,756.4 -0.21
FTSE 7,151.0 7,069.0 1.16 USA 60.6 61.2 -60
Nikkei 225 28,367.0 28,941.5 -1.99 Eurozone 63.4 63.1 30
Hang Seng 27,960.6 28,918.1 -3.31 Japan 52.4 53.0 -60
China 51.3 52.0 -70
Korea 53.9 53.7 20
Stock 1,893.1 1,892.8 0.34 Indonesia 53.5 55.3 -180
Govt. Bond 977.4 957.5 19.95
Corp. Bond 26.6 27.5 -0.96
May Apr
Jun
Motorcycle sales (%YoY)
May Chg (%)
Central bank reserves ($
bn) 137.1 136.4 0.51
Jun
#N/A 1,443.6 902.9
#N/A 1,065.7
Foreign portfolio
ownership (Rp Tn) Jun May Chg (Rp Tn)
External Sector
Prompt Indicators
Car sales (%YoY)
Manufacturing PMI Cement sales (%YoY) Money Mkt Rates 7-Jul -1 mth Chg
(bps)
Bank Rates (Rp) Apr Mar Chg (bps)
282.0
#N/A #N/A 8.3
Chg (bps) May
Jun
8 J U L Y 2 0 2 1
I N D O N E S I A E C O N O M I C U P D A T E
4 Indonesia – Economic Indicators Projection
** Estimation of Rupiah’s fundamental ex change 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
3.1 3.50 14.460
15.0 -1.3
PT Bank Central Asia Tbk
Economic, Banking & Industry Research of BCA Group 20th Grand Indonesia, M enara 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 Econom ist [email protected] +6221 2358 8000 Ex t: 1051352
Agus Salim Hardjodinoto Barra Kukuh Mamia Victor George Petrus Matindas
Indust r y Analyst Econom ist / Analyst Indust r y Analyst
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Gabriella Yolivia Derrick Gozal Livia Angelica Thamsir
Econom ist / Analyst Econom ist / Analyst Econom ist / Analyst
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Ahmad Aprilian Rizki Arief Darmawan
Resear ch Assist ant Resear ch Assist ant
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