Indonesia Macro Update - INF 01 Nov 2024
KBVS MACRO UPDATE
Friday, 1 November 2024
Risk-Off Sentiment Dampens the Appeal of Real Yields
In Oct ‘24, inflation was recorded at 0.08% MoM and 1.71% YoY (Cons: 0.03% MoM, 1.66% YoY; KBVS: 0.00% MoM, 1.63% YoY; Prev: -0.12% MoM, 1.84% YoY). Meanwhile, the Nikkei Manufacturing PMI for Indonesia in Oct ‘24 remained at 49.2 (Prev: 49.2), marking the fourth consecutive month of contraction in factory activity.
With BI rate cut of 25 bps in Sep ‘24 and expectations of further reductions, domestic funding costs and inflation within the financial sector are expected to remain subdued. In the real sector, while La Nina challenges and potential restrictions on subsidized fuel purchases pose risks of driving domestic inflation higher, we anticipate that inflation will remain near the lower end of BI’s midpoint target (2.5% ± 1%).
Additionally, geopolitical tensions involving Israel-Iran and Russia-Ukraine, Indonesia's possible entry into BRICS, and the upcoming US presidential election are likely to continue fueling global market caution and a risk-off sentiment. This outlook, combined with a real yield on Indonesia’s 10-year government bonds (SUN10Y) currently at 506.00 bps, compared to 190 bps in the US, indicates limited foreign interest in SBN, alongside ongoing challenges in stabilizing the Rupiah. Given these conditions, we expect Bank Indonesia to proceed with cautious rate cuts, closely following the Federal Reserve’s rate adjustments in the near term.
Regards,
KBVS Research Team