Monitoring the latest
economic conditions in Indonesia, especially in terms of the COVID-19 impact,
Bank Indonesia Governor, Perry Warjiyo, announced two recent developments on
Thursday (28/5) concerning the latest economic indicators and policy measures
instituted by Bank Indonesia as follows:
A.
Latest Economic Indicators
1.
Inflation remains low and under control within
the 3.0%±1% target corridor
Based on the latest Price Monitoring Survey released in the
fourth week of May 2020, inflation in May is estimated at 0.09% (mtm) or 2.21%
(yoy), lower than the rate recorded in the same period last year. Furthermore, very mild inflationary pressures
were experienced during the holy fasting month of Ramadan and Eid-ul-Fitr
festive period, contained by:
a.
compressed public demand due to the COVID-19
pandemic, including private income.
b.
Low international commodity prices (imported
inflation).
c.
Maintained exchange rate stability.
d. Anchored inflation expectations, reflecting close
coordination between Bank Indonesia and the central and local governments to
control prices as well as safeguard the supply of goods and services.
Therefore,
Bank Indonesia remains confident that inflation in 2020 will remain low and
under control, within the 3.0%±1% target.
2. The current account deficit narrowed in the
first quarter of 2020, therefore maintaining external resilience.
The current account deficit stood at USD3.9 billion (1.4%
of GDP) in the first quarter of 2020, down significantly from USD8.1 billion
(2.8% of GDP) in the previous period. Several
factors led to a significantly narrower current account deficit as follows:
a. A larger goods trade surplus as imports
continued to decline on weaker domestic demand, thereby minimising the impact
of falling exports due to the global economic contraction.
b. A smaller services trade deficit in line with a
narrower transportation services trade deficit as imports continued to decline,
while fewer international travellers to Indonesia eroded the travel services
trade surplus.
c.
A decline in the primary income account deficit
in line with lower interest and dividend payments induced by capital outflows.
3.
Foreign capital inflows have returned.
Foreign capital recorded a Rp6.15 trillion inflow to
tradeable government securities (SBN) in the second week of May 2020, up from
Rp2.97 trillion in the previous week.
The recent influx of foreign capital points to less global panic and
effective COVID-19 containment measures taken in Indonesia. On the other hand, however, the stock market
recorded another outflow in the second week of May 2020, totalling Rp2.72 trillion,
triggered by unconducive global stock market dynamics.
4.
Lower benchmark 10-year SBN yield.
SBN yields traded in the secondary market are decreasing as
confidence and inflows increase. Prior
to the COVID-19 pandemic, the benchmark SBN yield stood at 8%, falling to 7.76%
on 15th May 2020 and then to 7.22% on 26th May 2020. A wide yield spread of 6.7% between the
benchmark 10-year SBN yield and UST bonds has been particularly attractive to
investors.
5.
The rupiah remains stable and continues to
strengthen towards the currency's fundamental value.
The exchange rate closed yesterday (27/5) at Rp14,670 per
US dollar, regaining another Rp60 of lost value, before trading stable at a
level of Rp14,700 today (28/5). Such
developments reinforce confidence that the rupiah continues to strengthen
towards its fundamental value in line with:
a.
Low and controlled inflation within the 3.0%±1%
target corridor
b.
A narrow current account deficit.
c.
Foreign capital inflows
d.
Attractive yields in line with a high yield
spread
The rupiah
remains undervalued and is yet to strengthen to the currency's fundamental
value due to risk premium factors triggered by global financial market
uncertainty. Prior to the COVID-19
pandemic, credit default swaps (CDS)
in Indonesia, as a measure of risk premium, stood at 66, before peaking at 245in
the second and third weeks of March 2020.
Nonetheless, CDS in Indonesia has declined to 160 in response to less
global financial market panic and COVID-19 containment measures. Furthermore, the risk premium is expected to
continue decreasing moving forward.
6.
Reserve Assets
The
position of reserve assets in Indonesia at the end of April 2020 was recorded
at USD127.9 billion, up from USD121.0 billion at the end of March 2020. Furthermore, the position of reserve assets
is expected to increase again at the end of May 2020.
B.
Policy Coordination concerning the National
Economic Recovery
The COVID-19 containment
measures include various essential protocols, including large-scale social
restrictions, which have severely curbed economic activity. The Government, Bank Indonesia, Indonesian
Financial Services Authority (OJK), Deposit Insurance Corporation (LPS),
banking industry and business community are coordinating to catalyse the
national economic recovery. Under the
auspices of the Financial System Stability Committee, coordination is handled
in line with the jurisdiction of each respective institution. Bank Indonesia has five policies to support
the national economic recovery, namely maintaining rupiah stability, lowering
the BI 7-Day (Reverse) Repo Rate, providing liquidity through SBN repo
transactions and lower reserve requirements, maintaining accommodative
macroprudential policy and ensuring uninterrupted payment systems, both cash
and cashless.
1. Policy coordination between the Government,
Bank Indonesia, OJK and LPS towards economic recovery
Bank Indonesia has injected liquidity into the banking
industry totalling around Rp583.5 trillion, consisting of tradeable government
securities (SBN) purchased in the secondary market, providing a term-repurchase
agreement (repo) mechanism, lowering reserve requirements, FX swaps, and
exempting additional reserve requirements for banks failing to meet the
Macroprudential Intermediation Ratio (MIR).
The National Economic Recovery requires fiscal stimulus
support from the Government. This is
achieved by increasing the state budget deficit to fund social spending,
subsidies, business incentives and so on, which demand financing support in
relation to the larger state budget deficit.
In accordance with Act No. 2 of 2020 (previously Government Regulation
in Lieu of Law No. 1 of 2020), Bank Indonesia can purchase SBN in the primary
market to support the additional demand for financing.
Deteriorating business conditions necessitate support from
the banking industry to help the National Economic Recovery. To that end, OJK has regulated loan
restructuring by the banking industry to shore up businesses, including micro,
small and medium enterprises (MSME). Such measures require adequate liquidity
in the banking system. Bank Indonesia
has provided liquidity support through a repo mechanism for SBN, amongst
others. Here, it is important to
underscore that economic recovery funds for loan restructuring in the banking
industry cannot directly be met through short-term liquidity loan/financing
facilities (PLJP/S). Such facilities represent the final phase of four, after
all other stages of liquidity provision by Bank Indonesia to the banking
industry for loan restructuring have been exhausted.
The mechanism for Bank Indonesia to provide liquidity to
support fiscal deficit financing and loan restructuring is regulated as
follows:
2.
Financing Mechanism for the National Economic
Recovery Program
a.
Mechanism for Bank Indonesia to purchase SBN in
the primary market to finance the State Revenue and Expenditure Budget (APBN) –
Above the Line.
In accordance
with the joint decree issued by the Minister of Finance and Bank Indonesia
Governor, SUN/SBSN purchases by Bank Indonesia in the primary market are based
on general practices through transparent market mechanisms to maintain good
governance. The mechanism for Bank
Indonesia to purchase SUN/SBSN in the primary market is divided into three
stages as follows:
(i) Phase I: As a non-competitive bidder, Bank
Indonesia can purchase SUN/SBSN in the primary market based on the following
provisions:
·
Yield commensurate with the weighted average
yield of the auction on the same day.
· Maximum SUN bid of up to 25% of the target
auction maximum and maximum bid on SBSN > 1 year of up to 30% of the target
auction maximum.
(ii)
Phase II: A greenshoe option based on the
following provisions:
·
Yield commensurate with the weighted average
yield of the auction on the previous day.
·
If the incoming bid is lower than the auction
target, the maximum offer is the same as the previous offer.
(iii)
Phase III: Private placements based on the
following provisions:
·
Refer to the latest market price published by
the Indonesia Bond Pricing Agency (IBPA).
·
Private placements are implemented if the Government
seeks additional financing based on the agreed terms and conditions.
Bank
Indonesia provide interest remuneration on the government account as a form of
burden sharing to reduce the state budget burden.
SBN purchases
by Bank Indonesia in the primary market as a follow-up action to Act No. 2 of
2020 currently stand at Rp23.98 trillion, with Rp166.21 trillion purchased in
the secondary market for stabilisation purposes. Consequently, BI holdings of SBN were
recorded at Rp443.48 trillion on 26th May 2020.
b.
National Economic Recovery and state budget
financing mechanism – Below the Line.
Bank
Indonesia is providing liquidity to the banking industry through a repo mechanism
for SBN in order to fund loan restructuring as part of the national economic
recovery. If SBN purchases are
insufficient, banks can apply to the government for fund placements, funded
through SBN purchases by Bank Indonesia (below the line).
In accordance
with Government Regulation No. 23 of 2020, government fund placements will only
occur at participating banks if SBN available for repo to Bank Indonesia are
insufficient, provided the participating bank is healthy based on a soundness
assessment conducted by OJK and is holding tradeable government securities
(SBN), Bank Indonesia certificates of deposit (CD), Bank Indonesia Certificates
(SBI), Bank Indonesia Sukuk (SukBI) and Islamic Bank Indonesia certificates
(SBIS) that have not been repo totalling more than 6% of third party funds.
Liquidity
from Bank Indonesia to the banking industry for loan restructuring is provided
through the following mechanisms:
(i)
Phase I: SBN Repo
Total SBN held by the banking industry as of 14th
May 2020 was recorded at Rp886.0 trillion. After meeting the Macroprudential
Liquidity Buffer (MPLB) requirements for the banking industry, approximately
Rp563.6 trillion must be repo to Bank Indonesia prior to applying for
government fund placements. The current
position of repo SBN to Bank Indonesia stands at Rp43.9 trillion.
(ii) Phase II: Government fund placements in
accordance with Government Regulation No. 23 of 2020.
(iii)
Phase III: Repo SBN - Macroprudential Liquidity
Buffer (MPLB)
· Pursuant to Bank Indonesia regulations
(Macroprudential Liquidity Buffer - MPLB), banks are required to maintain
minimum SBN totalling 6% of deposits (Rp330 trillion) for liquidity
management in addition to the 3.5% reserve requirements.
· All SBN, totalling Rp300 trillion, can be
repo through monetary operations in accordance with the Bank Indonesia Act
before applying for short-term liquidity loan/financing facilities (PLJP/S).
(iv)
Phase IV: Short-term liquidity loan/financing
facilities (PLJP/S)in accordance with Act No. 2 of 2020
Banks
can apply for the short-term liquidity loan/financing facilities (PLJP/S)if the
SBN already repoed are nearly depleted. Pursuant to Act No. 2 of 2020, short-term
liquidity loan/financing facilities (PLJP/S) are only available to solvent and
healthy banks based on OJK requirements and assessments, with adequate
repayment capacity and guaranteed by current loans registered at Bank Indonesia.
Bank Indonesia will
continue to strengthen coordination with the Government and Indonesian
Financial Services Authority (OJK) to carefully monitor the dynamics of
COVID-19 transmission and the economic impact on Indonesia over time, including
the coordinated policy measures required to maintain macroeconomic and
financial system stability, as well as support solid and resilient economic
growth.
Head
of Communication Department
Onny
Widjanarko
Executive
Director
Informasi about
Bank Indonesia
CDS or credit default swaps are used as an indicator
of risk in a country.
