Indonesia Macro Update - BI7DRR 19 Jan 2023

The 25bps increase of BI7DRRR is in line with the market consensus and our expectation. This is aligned with the pro-stability stance adopted by BI to maintain the stability of the Rupiah, through an interest rate differential of 125bps with the Fed Rate along with the implementation of foreign currency term deposit instruments as placement instruments for Domestic and Foreign Exchange (DHE) in banking system and BI. This is also a form of forward-looking measure by BI in anticipation of global recession risks, which is indicated by the 30bps downward revision on global economic growth to +2.3% (yoy) in 2023 although moderated by the gradual reopening of China's economy, as well as a potential further increase in the Fed Rate on 1 Feb '23. From a domestic fundamental perspective, BI expects core CPI inflation to remain within its target range (3%, ±1%) in the -1H23, while CPI inflation in the 2H23 is anticipated to be in the same range. On the other hand, with total deposits (DPK) growing +9.02% (yoy) as of Dec'22, liquidity in the domestic market remains ample, even though loan growth reached 11.35% (yoy) in Dec'22 and is anticipated to grow between 10% and 12% during 2023. Furthermore, with ample liquidity, the risk of increasing deposit and credit rates are expected to be kept in check, thanks to the macroprudential incentives provided by the BI to 46 inclusive priority sectors and the push for the implementation of digitalization in the banking system. Therefore, simultaneously, BI forecasts that the consumer and investment sectors will remain strong and support economic growth in the range of 4.5% and 5.3% (yoy) during 2023. At the same time, we saw the BI becoming increasingly aware of the need to keep export earnings (DHE) in the country by issuing foreign currency term-deposit instruments with 1 and 3 months tenors, on top of tax and macroprudential (GWM and RIM) incentives. Especially referring to the fact that 2022 trade surplus was reaching USD54.45 bn in- but foreign exchange reserves were down by USD7.67 bn and the Current Account Surplus was only 0.4% to 1.2% of GDP. It is expected that this will drive Rupiah stability and financial markets, in addition to reducing the risk of imported inflation in the future. Going forward, we anticipate BI will maintain its pro-stability stance by maintaining an interest rate differential of 100 to 125 bps with the Fed Rate, to maintain the attractiveness of domestic portfolio assets, and we expect monetary stance pivot will occur in 3Q23

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