Bank Indonesia (BI) decided to relaxes the macro-prudential intermediation and loan to value (LTV) ratios to strengthening banking intermediary function -Photo: Special

JAKARTA (TheInsiderStories) – International research firm, Fitch Solutions, forecast Bank Indonesia (BI) will cut its benchmark 7-day reverse repo rate (BI 7DRRR) by 50 basis points (bps) to 4.5 percent next year. It will support Southeast Asia’s biggest economy to spur gross domestic product (GDP) and credit growth.

The predicts come after on Thursday the central bank maintained its policy rate at 5 percent, consistent with an effort to anchor inflation and support GDP growth. The lending and the deposit facility rates were also held unchanged at 5.75 percent and 4.25 percent respectively.

“Looking ahead, we forecast BI to undertake two 25 bps rate cuts over the course of 2020 in order to support economic activity and credit growth,” Fitch Solutions said in a report, adding it in line with the inflation expectation, external stability and the effort to maintain domestic economic growth amid the slowdown of global economic growth

The continued weakness in domestic demand is likely to motivate further rate cuts in 2020. We expect growth to average 5.1 percent in 2019 as a whole and then to pick-up to 5.2 percent in 2020, the report adds. Loan growth also slowed to 6.53 percent year-on-year (YoY) in October, the slowest in more than three years and well below BI’s loan growth target of between 8 percent and 10 percent in 2019.

Indonesia’s economic growth also was the weakest in more than two years at 5.02 percent in the third quarter amid a significant decline in investment. Robust household spending and positive net exports – albeit achieved by a greater decline in imports compared to exports – helped anchor growth.

Investment, which contributed around 30 percent to GDP, grew 4.21 percent in the third quarter, slower compared to the 6.96 percent growth booked over the same period last year. The decline in investment could be attributed to uncertainties surrounding the presidential and legislative elections in April and the unveiling of the new government in October as businesses were in wait-and-see mode to gain clarity over the Cabinet in President Joko Widodo’s second term, Fitch Solutions said.

For 2020, the inflation is in the range of 3.5 percent, higher than this year’s 3 percent. The agency expects price pressures to be slightly higher due to the duties on tobacco products increased by 23 percent. However, most tobacco-related price pressures are likely to be offset by the continued weakening in global commodity prices, it said.

Fitch Solutions also forecast that Indonesia will continue to face trade-related headwind despite the “phase one” trade deal recently struck between China and the United States (US) due to its recent policy to ban nickel ore exports starting January 2020.

The headwind, coupled with an expected increase of imports in capital goods due to the resumption of public projects and mild appreciation of the US dollar next year, could increase depreciatory pressure on the rupiah in 2020, the agency said.

Fitch Solutions also estimates the average price of crude oil will reach US$62 per barrel in 2020, down from $64 per barrel currently. Clearly, the agency noted, oil importers in Indonesia would benefit from lower import prices.

Nevertheless, the rupiah is also predicted to be more vulnerable in 2020, due to external constraints and Indonesia is still dependent on foreign funds to finance fiscal deficits and the current account where 39 percent of government bonds are controlled by foreign investors.

Therefore, Fitch Solutions suggested the central bank be more careful in deciding the policy.

“In 2019 we expect the country to record a current account deficit of 2.9 percent and a fiscal deficit of 2.0 percent of GDP. While in 2020 it will narrow to 2.8 percent and 1.8 percent, respectively,” the agency has forecast.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com