towards further resilience Sep Economics towards further resilience DBS Group Research September The Indonesian rupiah has recovered from its Sep bottom and moved back into the lower half of its ascending price channel. Even so, the rupiah continues to rise and fall with global risks and Fed expectations Investor confidence has returned with growth rising back to %, inflation falling back into its official -% target range and a stable current account deficit around % of GDP We have lowered our projected trading range for by about.-.%. is unlikely to rise above this year Our point forecasts the, which reflects the mid-point of the projected bands, is consistent with the average - rates assumed by the latest State Budget for the next two years It is too early to say whether the has reversed its longer-term downtrend. Indonesia s international liquidity position remains a risk in an environment of rising US rates. The s resilience depends on whether new policies attract capital inflows returning into the lower half of its ascending price channel Projected trading range ECB QE CNY deval Fed hike Brexit Fed taper BOJ QQE DBSf Consensus -Aug Q Q Q7 Q7 DBS 9 9 Consensus 7 7 BOJ QQE Projected trading band 9 Ceiling 7 79 97 Floor 9 7 7 Slope.% depreciation a year for US loses AAA Width.% around mid 7 9 Philip Wee () 7- philipwee@dbs.com
towards further resilience Sep more stable on growth recovery Inflation stable in official target range 9 7 CPI inflation (% YoY, left) 9 Real GDP (% YoY, left) 9 7 -% inflation target for 9 has been resilient in spite of global volatility The recovery of the Indonesian rupiah () since the end of Sep can be attributed the improvement in domestic fundamentals. Investor confidence started to return when GDP growth returned to % YoY in Q. Stocks rallied 7% to, close to the all-time high of in Apr. CPI inflation returned into its official -% target range in Nov, permitting four rate cuts in. Foreigners increased holdings of ID government bonds to.% of GDP in H from.% at end-. The current account deficit stabilized at.% of GDP in Q. Despite negative growth, hopes have emerged that the worst may be over for exports. These factors contributed to resilience during periods of global volatility this year. The has been the third-best performing AXJ currency in. Current account deficit has been now more stable Export growth bottomed but still in recession 9 7 9 - - - Current account (% of GDP, left) - 9 7 - - Exports fob - (% YoY, mma, left) 9
towards further resilience Sep vs currencies of major trading partners % change vs USD since Dec Average vs currencies of large economies % change vs USD since Dec Large currencies* * JPY, EUR, CNY, INR 9.% correlated as at -Aug - Jan- Mar- May- Jul- Sep- 9.% correlated as at -Aug - Jan- Mar- May- Jul- Sep- remains aligned with USD trends Despite the feel good factor, held above its psychological level this year. Despite its resilience, the was not immune to global USD trends. For example, after the CNY devaluation scare in Jan, fell back towards in Feb-Mar. It did so again after the Brexit shock in late Jun. Global risks were considered negative for the USD because they pushed the Fed to be patient and cautious in hiking rates. As a high yield currency, outperformed its AXJ peers during these Fed-friendly periods. Conversely, once global risks subsided, the USD would regain its composure from the Fed s desire to resume rate hikes again. rose towards 7 in May when Fed officials talked about a summer hike. This did not materialize because of an unexpectedly bad US jobs report that month. Similarly, the USD has appreciated in the past couple of weeks from the Fed opening the door for one or two rate hikes in Sep-Dec. Even so, the USD s rise ahead is expected to be orderly as long as the Fed remains sensitive to global risks that flatten rate hike expectations. vs Southeast Asian currencies vs Asian NIE currencies % change vs USD since Dec % change vs USD since Dec Southeast Asia* Asian NIEs* * MYR, THB,, PHP, VND * SGD, HKD, KRW, TWD.7% correlated as at -Aug - Jan- Mar- May- Jul- Sep-.% correlated as at -Aug - Jan- Mar- May- Jul- Sep-
towards further resilience Sep External debt widened against foreign reserves USD billion Short-term external liabilities only less unstable USD billion (right) External debt Foreign reserves - Current account (Q rolling sum, left) Short-term external debt 7 9 - - 7 9 7 New policies to further increase resilience Indonesia s international liquidity position is less vulnerable today than in the past but the is still not immune to rising US interest rates. External debt is still rising and foreign reserves need to increase meaningfully. Selling pressures on the can return if short-term external debt and the current deficit deteriorate again. Besides external debt, Indonesia needs to rely less on deficit-financed growth. By law, the budget deficit is constrained to % of GDP. To promote other sources of growth, the government has introduced stimulus packages since Sep. Recently, to encourage inflows and investments, an -month tax amnesty program was launched on Jul to persuade Indonesians to repatriate (a targeted) trn (USD 7bn) worth of funds parked abroad. Apart from providing financing for infrastructure projects, the tax would help shore up government revenue and improve fiscal credibility. The success of these policies will be key to winning an investment grade rating from Standard & Poor s and keep the resilient to global headwinds and eventual increases in US interest rates. Limits to budget deficit to support growth % of GDP % YoY Real GDP (right) 7 Indonesia State Budget proposals 7 Audited Estimate Proposed Fiscal deficit, % of GDP... Tot revenue, trn 7 7 Tot expenditure, trn 7 9 7 GDP growth.79%.%.% Inflation, year-end.%.%.% - - - - Budget balance Statutory limit: % of GDP 7 9 - -, ave 9 M govt Tbill, ave.97%.%.% Oil price, per barrel $9. $ $ Oil lifting, bpd.77 mn. mn.7 mn Gas lifting, boepd.9 mn. mn. mn Announced on Aug
towards further resilience Sep Recent Research SGS: on Fed watch Aug Global growth: redefining strength Aug TW: things you need to know about the Aug aging population SG: risks beneath the GDP figures Aug CN: the risk of keeping status quo 7 Aug CN: why falling private investment growth Aug is a worry ID: tax revenues slipping Aug SG: labour market pain Aug IN: monetary policy in transition Aug FX: DM vs EM - a more balanced story Aug Rates: Global rates roundup / chart-pack Aug IN: Hopes high for GST Jul JP: will the helicopters fly? Jul ID rates: steepening risk Jul IN: more consumption-led growth Jul FX: revisions to GBP & JPY Jul TW & KR: how low can rates go? 7 Jul US: a risky mantra Jul PH: Duterte s game plan Jul EZ: dealing with post-brexit blues Jun SG: Brexit impact limited for now Jun Britain s Great Leap Backward 7 Jun Brexit first impact Jun IN: maturing FCNR (B) deposits a molehill, Jun not a mountain Qtrly: Economics-Markets-Strategy Q 9 Jun HK: cautious outlook 7 May IN: monitoring external fault lines May TH: manufacturing gone cold May SGS: bracing for the Fed May Global: Where lies north? May CN: outbound investments intact May JP: perception gap widens May FX: USD down but not out May Rates: Global rates roundup / chart-pack Apr SG: national vs domestic growth Apr IN: investment cycle slows Apr ID: the new policy rate Apr IN: improving liquidity management Apr SGD: slipping into neutral Apr JP: reflation campaign still has a long way to go Apr CN: what are supply-side structural reforms? 7 Apr CN: root causes and remedies for overcapacity Apr US: what is driving core inflation and Mar when will headline follow? EZ: watching Brexit risks Mar SG budget: balanced and transformative Mar ID: investment eludes Mar Rates: SGS premia compression Mar Disclaimer: The information herein is published by DBS Bank Ltd (the Company ). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.