Macro Strategy

Insights from Monetary and Fiscal Policies

 

  • BI’s key message signals greater stability ahead, with the intermediary function staying robust. Rising SRBI yields led to higher foreign inflows.
  • Insights into next year’s fiscal posture: rising budget for priority spending, higher fiscal deficit posture and higher INDOGB yields.
  • The return of foreign inflows on a more stable macro landscape, with May on the way to being the first month with bond inflows this year.

More favorable macro milieu. In its latest meeting, Bank Indonesia (BI) outlined four key points indicating greater stability ahead:

  1. 1. BI's decision to maintain the interest rate at 6.25% was expected. BI emphasized that the recent rate hike was preemptive, aimed at mitigating potential risks given that a Federal Reserve rate cut is unlikely this year. As these risks start to diminish, a move to the baseline scenario (25 bps FFR cut) would signal a more favorable environment in 2H24.
  2. BI further elaborated that the current benchmark rate is adequate to stabilize the IDR and keep inflation within the targeted range. This assurance reduces the risk of further rate hikes, potentially leading to a lower yield trend and stronger foreign inflows to the INDOGB.
  3. The intermediary function remains strong, with BI sharing positive statistics on loan and third-party funds (TPF) growth. In Apr24, loans grew by 13.1% y-y, the highest growth rate in five years, with corporate loans growing by over 20%. Additionally, TPF growth accelerated to 8.2% y-y, its highest level in over a year.
  4. The recent rise in the prevalence of SRBI has not caused any crowding-out effect, as the rising SRBI yield has successfully attracted foreign inflows. As of May 21, foreign holdings of SRBI reached IDR142tn, double the previous month’s figure.

With a growing consensus of a European Central Bank rate cut in June and the possibility of the Bank of England following suit, the Dollar Index might see some upside due to a weaker EUR and GBP, given that the Federal Reserve's rate cut is only expected later in September. While this may lead to another episode of cross-currency volatility, the impact on the IDR is expected to be relatively moderate.

 

Insights into 2025 fiscal design. The fiscal planning for 2025 offers insights into the next government’s initial reforms and fiscal strategy. The process has already begun, with the Minister of Finance presenting the 2025 State Budget Macroeconomic Framework to the House of Representatives. Here are five key points indicating a potential rise in the outlook for the deficit and yields: 1. Priority spending on infrastructure, social protection, health, and education is set to reach IDR1,906tn, 7.5% higher y-y; 2. To fund this spending, the government anticipates a fiscal deficit of 2.45-2.82%, higher than this year’s baseline of 2.3% and the expected new baseline of 2.5%; 3. GDP growth target of 5.1-5.5% with IDR range of 15.3-16k/USD offer insight into growth trajectory expectation; 4. The Debt-to-GDP ratio is projected to remain below 40%. While these figures are historically stable, they still pose supply risks that need to be managed; and 5. The 10-year INDOGB yield is projected to be 6.9-7.3% (compared to the current 6.9%), indicating a prolonged period of higher domestic interest rates and a moderation of foreign inflows due to the rising fiscal deficit.

Overall, while the current budget framework may undergo some changes, the primary risk remains the tight fiscal space, which could lead to a further escalation of the deficit. This year, the potential for widening fiscal deficits might be mitigated by the use of the Budget Surplus Account (SAL), but next year’s SAL balance could decrease more than this year’s due to maturing bonds, necessitating a more balanced approach to fiscal planning.

 

Capital Market Flow – The Return of Foreign Flows Signals

The yield on the US 10-year Treasury rose by 4 basis points (bps) to 4.46% last Friday, while similarly, the 2-year UST yield increased by 10 bps over the week, reaching 4.93%. In contrast, the yield on the 10-year Indonesian Government Bonds (INDOGB) decreased by 7 bps to 6.91% (22nd May), mainly driven by stronger foreign inflow on more stable domestic macro condition. While the dollar index increased by 0.37% w-w, the Indonesian Rupiah (IDR) continues to show strength, appreciated by 0.22%, and closed at IDR15,993/USD, still below the critical threshold of 16k level. Further Indonesia’s 5-year Credit Default Swap (CDS) remained stable at 70 bps.

 

Fixed Income Flow – Driven by more favorable domestic macro condition, foreign ownership in domestic Government Securities (SBN) finally saw considerable inflow of IDR6.94tn last week, with overall foreign outstanding position rising to IDR803.43tn (21st May). Month-to-date (MTD) inflow has now reached IDR13.56 tn, positioning May to be the first month this year with a positive foreign inflow.

 

On the contrary, the banking sector further saw weekly outflow of IDR 20.48tn with overall MTD outflow has now reached IDR 129.30tn, in a bid to raise more liquidity. Bank Indonesia (excluding Repo transactions) recorded weekly outflow of IDR23.82tn, but still registered MTD inflow of IDR85.60tn, with BI now secured the largest position of INDOGB, ahead of Banking’s. Mutual funds and insurance & pension funds reported outflow of IDR4.17tn and IDR 2.91tn, respectively.

 

Equity Flows – Despite a solid inflow to fixed income market, equity continue to saw protraction of foreign outflow in the 4th week of May 2024, with another Rp1.8tr weekly outflow. Hence, YTD 2024 outflow in the regular market now amounted to Rp8.4tr.

 

On a weekly basis, TPIA, MBMA, ADRO, EXCL, BREN, GOTO, MIKA, and AMMN continued to rank among the top inflows with TLKM finally joined the list after experiencing seven consecutive of weekly outflows. INCO, MDKA, ASII, ADMR, MAPA, and CPIN were also among the top inflows. On the contrary several large caps such as BMRI, BBRI, BRIS, MEDC, and SMGR consistently remained among the top outflows. Furthermore BBCA and BBNI recorded net outflows after experiencing inflows the previous week, resulting in share price decreases of 0.8% and 5.3% week-on-week, respectively.

 

Government Bond (SUN) Auction: May 28, 2024

The government will conduct an auction for Government Securities (SUN) on 28th May with the series to be offered include SPN03240828 (New Issuance), SPN12250529 (New Issuance), FR0101, FRSDG001, FR0100, FR0098, FR0097, and FR0102. The government aims to raise IDR22tn from this auction, with a maximum target of IDR33tn. The government bond auction on 14th May received total bids of IDR49.42tn, slightly lower than the IDR50.20tn from the previous auction. The series FR0100 attracted the highest bids, totaling IDR17.43tn, with a yield range of 6.99% to 7.25%. This was followed by series FR0101 and SPN12250502, which received bids of IDR12.44tn and IDR5.10tn, respectively. The yield range for FR0101 was 6.94% to 7.20%, while SPN12250502 had a yield range of 6.76% to 6.96%. The amount awarded at this auction was IDR21.36tn, falling short of the government’s target of IDR22tn and the previous auction’s awarded amount of IDR21.50tn. This resulted in a bid-to-cover ratio of 2.31x.

 

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