No. 22/22/DKom
The BI Board of Governors agreed on 18th and 19th March 2020 to lower the BI 7-day Reverse Repo Rate by 25 bps to 4,50%, Deposit Facility (DF) rates lowered 25 bps to 3,75% and Lending Facility (LF) rates lowered 25 bps to 5,25%. Monetary policy remains accommodative and is consistent with controlled inflation in the target corridor, while serving as a pre-emptive measure to maintain domestic economic growth momentum. In addition, following on from the policy stimuli announced at the previous Board of Governors monthly (RDG) meeting on 18-19th February 2020 and 2nd March 2020, Bank Indonesia has reinforced its policy mix towards mitigating the risk of COVID-19 transmission, while maintaining money market and financial system stability and catalysing economic growth momentum through the following policy measures:
Strengthening the intensity of triple intervention policy to maintain rupiah exchange rate stability in line with the currency's fundamental value and market mechanisms, including the spot and DNDF markets as well as purchasing SBN in the secondary market.
Extending the SBN repo tenor to 12 months and providing daily auctions to loosen rupiah liquidity in the banking industry, effective from 20th March 2020.
Increasing the frequency of FX swap auctions for 1, 3, 6 and 12-month tenors from three times per week to daily auctions in order to ensure adequate liquidity, effective from 19th March 2020.
Strengthening foreign currency term deposit instruments in order to enhance foreign currency liquidity management in the domestic market, while encouraging the banks to utilise the foreign currency reserve requirements lowered by Bank Indonesia for domestic purposes.
Expediting the enforcement of domestic vostro rupiah accounts for foreign investors as underlying transactions for Domestic Non-Deliverable Forwards (DNDF), thus increasing hedging alternatives against rupiah holdings in Indonesia, which has been brought forward from 1st April 2020 to no later than 23rd March 2020.
Expanding the incentive of a 50bps daily rupiah reserve requirement beyond banks that are engaged in export-import financing to include the financing of MSMEs and other priority sectors, effective from 1st April 2020.
Strengthening payment system policy to support COVID-19 mitigation efforts by:
- providing hygienic currency fit for circulation, alternative cash and backup services, and urging the public to prioritise non-cash payment transactions;
- encouraging the use of non-cash payment channels by reducing the cost of the National Clearing System (SKNBI) from the banking industry to Bank Indonesia from Rp600 to Rp1 and from customers to the banking industry from a maximum of Rp3,500 to Rp2,900, effective from 1st April 2020 until 31st December 2020; and
- supporting non-cash disbursements for government programs, such as the Family Hope Program (PKH) and Noncash Food Assistance Program (BPNT), Pre-Employment Card and College Smart Indonesia Card.
The various policy measures recapitulated above are being taken by Bank Indonesia in close coordination with the Government and Indonesian Financial Services Authority (OJK) to mitigate the COVID-19 impact and maintain macroeconomic and financial system stability, while sustaining economic growth momentum. The Government has already introduced fiscal and economic stimuli to ease the household and corporate burden induced by COVID-19, while maintaining economic activity. In addition, OJK has also introduced measures to maintain the health of the banking industry and non-bank financial institutions as well as the capital market. The authorities will continue to strengthen coordination by carefully monitoring the dynamics of COVID-19 transmission and its impact on Indonesia over time, as well as the coordinated follow-up policies of the Government, Bank Indonesia and OJK required to maintain macroeconomic and financial system stability, while preserving economic growth momentum.
The rapid spread of COVID-19 to numerous countries outside China has triggered intense pressures in the global economy. As of 18th March 2020, COVID-19 had spread to 159 countries, not only in Asia but also affecting Europe and the United States. Recent developments have heightened economic uncertainty and severely eroded global financial market performance, while inducing currency pressures and capital flight to safe-haven assets. Disruptions in the global supply chain have undermined the world economic growth outlook along with compressed global demand and retreating economic confidence. Data from February 2020 has demonstrated precipitous falls in the latest global indicators, including economic confidence, the Purchasing Managers Index (PMI) as well as consumption and electricity production. Against a backdrop of large downside risks, Bank Indonesia projects lower global economic growth in 2020 at 2.5%, down from 2.9% in 2019 and downgraded from the 3.0% projected previously. Nevertheless, global economic growth is expected to rebound to 3.7% in 2021 after COVID-19 has passed, compared with the 3.4% projected previously.
COVID-19 is challenging the efforts to stimulate domestic economic growth momentum. Global economic moderation has undermined the outlook for Indonesian exports, despite gains recorded in February 2020 driven by coal, crude palm oil (CPO) and manufacturing products. Services exports, dominated by tourism, are also expected to decline as cross-border mobility is restricted to mitigate the spread of COVID-19. Non-building investment is also at risk of slower growth in line with goods and services exports and disruptions in the production chain. Bank Indonesia appreciates the fiscal stimuli introduced by the Government to minimise the impact of COVID-19, which, along with the planned local elections, will bolster the domestic economic growth outlook. Consequently, Bank Indonesia has revised down its domestic economic growth projection for 2020 from 5.0-5.4% to 4.2-4.6%. Notwithstanding, Bank Indonesia predicts domestic economic growth to rebound in 2021 to 5.2-5.6% after COVID-19 has passed, stimulated by improvements in the investment climate through the Omnibus Bill on Job Creation and Taxation. Furthermore, Bank Indonesia will continue to strengthen coordination with the Government and Indonesian Financial Services Authority (OJK) to carefully monitor COVID-19 dynamics and the impact on Indonesia over time, as well as the coordinated follow-up policy measures required to maintain macroeconomic and financial system stability, while supporting robust and resilient economic growth in Indonesia.
Indonesia's balance of payments remained solid in the first quarter of 2020 despite declining foreign capital flows stoked by uncertainty surrounding the COVID-19 fallout. Solid BOP performance was supported by a potentially narrower current account deficit boosted by the trade balance, which recorded a USD2.34 billion surplus in February 2020 to improve considerably from the USD0.64 billion deficit one month earlier. Meanwhile, portfolio investment inflows were maintained until January 2020 before reversing as a corollary of global uncertainty due to the COVID-19 outbreak. In net terms, portfolio investment inflows stood at USD5.1 billion as of February 2020 before declining significantly to USD365 million as of 17th March 2020, compared to USD6.59 billion in the fourth quarter of 2019. Nevertheless, a high position of reserve assets was maintained at the end of February 2020, totalling USD130.4 billion, equivalent to 7.7 months of imports or 7.4 months of imports and servicing government external debt, which is well above the international adequacy standard of three months. Moving forward, Bank Indonesia projects a manageable current account deficit in 2020 and 2021 at around 2.5-3.0% of GDP.
The rebalancing of foreign capital inflows to domestic financial markets after the COVID-19 outbreak has amplified exchange rate pressures on the rupiah since the middle of February 2020. Foreign capital inflows have ebbed due to increasing global financial market uncertainty, which has exacerbated exchange rate pressures on the rupiah, leading to depreciation since the middle of February 2020. As of 18th March 2020, the rupiah had depreciated by an average of 5.18% compared to the average level in February 2020 and by 5.72% (ptp). Compared to the level recorded at the end of 2019, therefore, the rupiah has depreciated by around 8.77% in line with weaker currencies in other emerging markets. Bank Indonesia will continue to strengthen rupiah exchange rate stabilisation policy in line with the currency's fundamental value and market mechanisms. To that end, Bank Indonesia will increase the intensity of stabilisation policy in the DNDF and spot markets, while purchasing SBN in the secondary market. To support exchange rate policy effectiveness, Bank Indonesia will continue to optimise monetary operations in order to ensure market mechanisms and adequate liquidity in the money and foreign exchange markets.
Inflation remains low, thus supporting economic stability. CPI inflation in February 2020 was recorded at 0.28% (mtm), down from 0.39% (mtm) the month earlier, influenced by low core inflation, another period of administered prices (AP) deflation and slower rising volatile food inflation. Core inflation has remained under control in line with policy consistency by Bank Indonesia to anchor rational inflation expectations, including maintaining rupiah exchange rates in line with the currency's fundamental value. The current trend of AP deflation continued due to lower airfares and special fuel prices. Volatile food inflation experienced a slower increase in the reporting period due to a price correction affecting shallots as well as milder inflationary pressures on various chili varieties and rice despite rising prices of garlic and purebred chicken meat. Consequently, low annual CPI inflation was maintained at 2.98% (yoy), up slightly from 2.68% (yoy) in January 2020, however. Going forward, Bank Indonesia will consistently maintain price stability and strengthen policy coordination with the Central and Local Government to control low and stable inflation in the 3.0%±1% range in 2020 and 2021.
Effective transmission of the accommodative monetary policy stance has been strengthened by adequate liquidity maintained in the banking industry. Liquidity in the money market and banking industry remains adequate, as reflected by a high average daily transaction value in the interbank money market during February 2020 at Rp14.05 trillion, together with a high ratio of liquid assets to deposits of 21.47% recorded in January 2020. Monetary policy transmission through the interest rate channel to the money market remains effective, as reflected by a further 126bps decline in the overnight interbank rate to 4.58% and a 141bps decrease in the 1-week JIBOR to a level of 4.83% since the end of June 2019, prior to the policy rate (BI7DRR) reductions initiated in July 2019. Meanwhile, transmission of lower interest rates to the banking industry continues, with the weighted average deposit rate recorded at 6.16% in February 2020, falling 67bps since the end of June 2019, and the average lending rate on working capital loans decreasing 36bps to 10.07% over the same period. Growth of narrow money (M1) and broad money (M2) in January 2020 mirrored the current economic growth trend at 7.76% (yoy) and 7.09% (yoy) respectively. Bank Indonesia will continue to ensure adequate liquidity and enhance money market efficiency, while strengthening transmission of the accommodative policy mix.
Financial system stability has been maintained despite the bank intermediation function still requiring attention. Financial system stability was reflected by a high Capital Adequacy Ratio (CAR) of 22.74% in January 2020, coupled with a low level of non-performing loans (NPL) at 2.77% (gross) or 1.08% (nett). Meanwhile, credit growth requires attention, remaining low at 6.10% (yoy) in January 2020 despite increasing from 6.08% (yoy) in December 2019. On the other hand, deposit growth has begun to pick up from 6.54% (yoy) in December 2019 to 6.80% (yoy) in January 2020. Looking ahead, Bank Indonesia will continue to stimulate the bank intermediation function in order to shore up economic growth momentum. Bank Indonesia projects growth of outstanding loans disbursed by the banking industry in 2020 in the 6-8% range in line with the revised economic growth projection for 2020, with credit growth in 2021 predicted to increase in the 9-11% range, driven by stronger economic growth. Congruently, Bank Indonesia projects deposit growth in 2020 and 2021 at 6-8% and 8-10% respectively. Bank Indonesia will maintain an accommodative macroprudential policy stance and strengthen coordination with other relevant authorities in order to maintain financial system stability and catalyse the bank intermediation function.
Payment system availability, both cash and non-cash, remains uninterrupted. The position of currency in circulation expanded 5.44% (yoy) in February 2020, while non-cash payment transactions using ATM/debit cards, credit cards and electronic money declined 1.02% (yoy) in the same period. E-money transactions continued to flourish, with growth hitting 145.47% (yoy), evidencing greater public uptake of digital currency. Looking forward, Bank Indonesia will continue to strengthen payment system policy, encompassing efforts to mitigate the impact of COVID-19 by ensuring the full and orderly function of the payment system and rupiah currency management through a reliable and uninterrupted payment system. To that end, Bank Indonesia will continue to promote non-cash payments and support government programs to disburse non-cash social aid (bansos) program funds.
Jakarta, 19th March 2020
COMMUNICATION DEPARTMENT
Onny Widjanarko
Executive Director
