Bahana Macrosight: BI rate hold amid risk-on environment
· BI7DRRR steady at 3.75%, as expected
· BI sees 2021 growth in the range of 4.8-5.8%
Bank Indonesia starts 2021 with rate hold
Bank Indonesia held its January monetary meeting and decided to leave the 7-day reverse repo rate (BI7DRRR) unchanged at 3.75%, as expected by most analysts. Central bank governor Perry Warjiyo retains his accommodative policy stance, pledging that monetary policy would remain supportive of growth as he seeks a 2021 GDP in the range of 4.8-5.8% y-y. We think BI still has room to cut rates by 25-bps to 3.5%, probably in 1Q21, as the central bank continues to sustain the recovery momentum. IDR risks remain minimal, in our view, assuming: 1) a lower trend of the Current Account Deficit (CAD) given the recent surge in demand – and value – of commodities, 2) a downward trend of the USD index as the Fed continues its quantitative easing, and 3) an upward trend in foreign inflows to emerging market assets. Furthermore, another cut in the benchmark interest rate will result in lower government borrowing costs amidst its surging debt after the pandemic.
Credit growth remains gloomy
In December, year-on-year credit growth stood at -2.4% from -1.4% a month earlier, while deposit growth stood at 11.1% y-y from 11.5%. We think the weak credit growth will translate into lower-than-expected core inflation, despite the recent uptick in volatile food prices. Our headline inflation assumption this year is 3.5-4%, in line with the central bank’s target of 2-4%. In our scenario, a potential uptick in inflation may come in 2H21 with an economic recovery and a widespread vaccination program leading to a pick-up in credit growth, increased demand for goods and services, and a rise in industrial capacity. BI’s latest banking survey projects 7.3% y-y credit growth for 2021 even though it assumes many banks will maintain their conservative stance. Meanwhile, money supply growth stood at 12.3% y-y in November, with BI’s ownership of government bonds (19.6% of total outstanding) boosted by the burden-sharing program. On the other hand, BI also pledged to continue supporting digitalization and the mobile payment system as digital transactions grew 30.4% y-y while the digital banking transaction value rose 13.9% y-y to IDR2,774tn due to the pandemic.
2020 recap: financial system flush with BI’s liquidity injection
In 2020, BI carried out unprecedented actions to ensure sufficient liquidity in the economy. The central bank injected IDR726.57tn of liquidity into the banking sector, with IDR155tn from the 200-bps cut in reserves requirement ratio (higher than its initial estimate of IDR102tn) and IDR555.77tn from monetary expansion (term repo, FX swap, and bond buying in the secondary market). Under the burden-sharing scheme’s first agreement, signed in April 2020, BI bought IDR75.86tn of government bonds as it entered the primary market as a non-competitive bidder. Under the second agreement, signed in July 2020, the central bank’s private placement in the burden-sharing program (IDR397.56tn in a scheme that covers full interest payment and IDR177.03tn that covers half interest payment) caused a jump in BI’s ownership of government bonds to IDR874.88tn (22.6% of total bonds) in 2020 from IDR273.21tn (9.93%) in the previous year. In 2021, BI has maintained its presence as a standby buyer in the primary market and has so far bought IDR13.66tn bonds in January – IDR9.18tn through regular auctions and IDR4.48tn via the green-shoe option.