Indonesia’s easing interest rates possible antidote to slowing growth
KUALA LUMPUR: RAM Ratings believes that Indonesia’s 2 consecutive 25-bp interest-rate cuts in August and September this year are appropriate given that its recent economic growth is below its trend growth of 5.5 per cent.
The agency in a statement said rate adjustments represent Indonesia’s first monetary policy actions since September 2016, and support the view that the republic’s authorities are aware of the heightened risk of a prolonged moderation of its economic growth.
“Meanwhile, the Indonesian government’s ongoing economic reforms since 2015 support the country’s longer-term growth,” it added in the statement. “Indonesia’s economic growth in 1H 2017, while steady, still bore the effects of the sudden slump in global commodity prices in 2015.
“Notably, household expenditure remains relatively weak, with stagnant motorcycle sales in 8M 2017 and a deterioration of retail sales index for household appliances by four per cent.”
Similarly, the mining sector’s non-performing-loan ratio stayed elevated at 7.5 per cent. In light of these prevailing economic stresses, the aforesaid interestrate adjustments are a step in the right direction vis-à-vis staving off a protracted slowdown.
Inflation clocked in at a benign 3.8 per cent in the first seven months of 2017, despite upward adjustments in electricity tariffs throughout the year.
This reflects slower domestic demand and provides room for Bank Indonesia to cut interest rates, particularly as loan growth since 2015 has been underperforming its historical trend.
“That said, the risk of volatile capital flight amid unexpected rate changes is relatively high, due to the significant foreign ownership of Indonesian government bonds,” RAM added.
“This may have adverse implications on the exchange rate and macroeconomic performance given the country’s high dependence on external sources of financing and persistent current-account deficits.”
Nonetheless, the rupiah has remained relatively stable despite the interest-rate changes, reflecting still-healthy investor appetite for Indonesian securities and the slower-than-expected pace of monetary policy tightening in the advanced economies.
“Although the effects of these rate cuts will only be manifested over the medium term, Indonesia’s economy is expected to gain traction in 2H 2017, as the government is envisaged to roll out large infrastructure projects.
“Notably, the government has only spent 28.3 per cent of its budgeted annual capital expenditure in the first seven months of 2017.
“A deceleration in economic performance in the interim, related to weak household or fiscal expenditure, would necessitate additional interest-rate cuts. Indonesia carries respective gBBB2(pi)/stable/P2(pi) and seaAA3(pi)/stable/P1(pi) ratings by RAM the global and ASEAN