| Bank of Indonesia, the central bank of Indonesia, will cut its rate today, according to Natixis's analysts. The researchers that white the Fed is positioning itself for a 25bps hike in December, Bank Indonesia (BI) is preparing for a rate cut today. The case for monetary easing is strong – BI has the will, pressures and arguments to pull the trigger. As Indonesia is one of the more fiscally prudent countries in the region, lower revenue gives no plot for a public-investment led story. Thus the burden to support growth rests on monetary policy. |  |
external factors could not have been more supportive, especially in the short term. Indonesia needs external funding, as its lives beyond its means, and capital has become cheaper thanks to NIRP and lower interest rates. And with headline inflation falling much lower than the policy rate, BI has all the right argument to cut rates.
Thus, despite disappointing news on the fiscal front, Indonesia is still growing more than most and still offers enough yield to attract vital funding. And that is not a bad place to be, for now.
Markets are still digesting news of Bank of Japan regime shift and the aftermath of Fed September decisions. Bank Indonesia (BI), however, will likely move swiftly today to cut rates by 25bps. While the Fed is positioning itself for a 25bps hike in December, its pause coupled with a sizeable spread between Indonesia and other sovereign’s rates, means that the central bank has room to realize its desire. And we think BI will opt to lower rates, making it the last of the easing cycle. Thus, the case for monetary easing is strong – BI has the will, pressures and arguments to pull the trigger.
Thus, despite disappointing news on the fiscal front, Indonesia is still growing more than most and still offers enough yield to attract vital funding. And that is not a bad place to be, for now.
Markets are still digesting news of Bank of Japan regime shift and the aftermath of Fed September decisions. Bank Indonesia (BI), however, will likely move swiftly today to cut rates by 25bps. While the Fed is positioning itself for a 25bps hike in December, its pause coupled with a sizeable spread between Indonesia and other sovereign’s rates, means that the central bank has room to realize its desire. And we think BI will opt to lower rates, making it the last of the easing cycle. Thus, the case for monetary easing is strong – BI has the will, pressures and arguments to pull the trigger.
At the beginning of the year, government officials were very optimistic – a subdued commodity market and slowing credit cycle are not an issue as fiscal policy will lift growth. But as the year wears on, revenue collection continues to disappoint, and the budget had to be revised to reflect more sobering spending and revenue. Even the key revenue boosting initiative such as the Amnesty Tax has turned out to be rather disappointing, forcing the government to drop the target from the website. And given that Indonesia is one of the more fiscally prudent countries in the region – its fiscal debt (and private) is the lowest in the region, lower revenue gives no plot for a public-investment led story. The government revised the deficit target to -2.7% this year, just shy of the -3% constitutional limit.
While domestic conditions are subdued, external factors could not have been better, especially in the short term. Indonesia imports capital and capital has become cheaper thanks to NIRP and lower interest rates (think Korea) – thus, investors are very motivated to fund a still relatively fast growing and high yielding country such as Indonesia. The sovereign remains a solid credit – only S&P denies it of a IG rating. And Indonesia and India are the two highest yielding sovereigns in emerging Asia. Table 1 shows Asia Pacific and the US generic government yield curve, from policy rate to the 10-yr. Obviously, JGBs are still the lowest yielding by a long shot. And most emerging Asian countries’ rates have become low due to a slowing growth cycle and excess savings (think Taiwan, Singapore, South Korea and now China). Thus, Indonesia stands out in a below zero and increasingly lower for longer world.
Why do we think this is the last rate cut? Well, inflation will gradually rise, albeit slowly. And the central bank wants low interest rates but still a gap between inflation and the policy rate. And with the Fed hiking rate in December, Bank Indonesia will likely pause after this cut to allow the rate cuts thus far to transmit to the economy. Thus, for Indonesia, despite disappointing news on the fiscal front, it is still growing more than most and still offers enough yield to attract vital funding. And that is not a bad place to be, for now.
Source: Natixis
While domestic conditions are subdued, external factors could not have been better, especially in the short term. Indonesia imports capital and capital has become cheaper thanks to NIRP and lower interest rates (think Korea) – thus, investors are very motivated to fund a still relatively fast growing and high yielding country such as Indonesia. The sovereign remains a solid credit – only S&P denies it of a IG rating. And Indonesia and India are the two highest yielding sovereigns in emerging Asia. Table 1 shows Asia Pacific and the US generic government yield curve, from policy rate to the 10-yr. Obviously, JGBs are still the lowest yielding by a long shot. And most emerging Asian countries’ rates have become low due to a slowing growth cycle and excess savings (think Taiwan, Singapore, South Korea and now China). Thus, Indonesia stands out in a below zero and increasingly lower for longer world.
Why do we think this is the last rate cut? Well, inflation will gradually rise, albeit slowly. And the central bank wants low interest rates but still a gap between inflation and the policy rate. And with the Fed hiking rate in December, Bank Indonesia will likely pause after this cut to allow the rate cuts thus far to transmit to the economy. Thus, for Indonesia, despite disappointing news on the fiscal front, it is still growing more than most and still offers enough yield to attract vital funding. And that is not a bad place to be, for now.
Source: Natixis
RSS Feed
