Macro Strategy

The Growth & Liquidity Buffer


  • Contractionary BI monetary policies pose further risk to liquidity. Usage of the excess budget could address growth risk and maintain stability.
  • Rate cuts remain on the table, with major central banks signaling imminent rate cuts. We expect more moderate cross-currency volatility.
  • China’s ultra bond introduction is expected to revive investment and offset soft domestic consumption, a key positive for Indonesia’s trade.

Caution to Liquidity Trend.  The monetary stance seems to be becoming more contractionary, as evidenced by the record weekly high results of SRBI auctions, which could potentially further reduce system liquidity (Exh.10). This comes at a time when fiscal space is already limited due to weak revenue collection and front-loaded spending activity. While BI continues to emphasize caution regarding the proliferation of crowding out, ongoing liquidity tightening would undoubtedly raise Indonesia's growth risk going forward. If the government spends 100% of the budget, the deficit might rise to as high as 2.9%, assuming revenue continues to decline by 4.1% y-y as seen in 1Q24. If not mitigated, this could create supply risks, threaten stability, and induce further outflows in the bond market. IDR stabilization would be hampered, and yields could return to higher levels. Against this backdrop, the government could look into its Excess Budget (SAL), a retained form of unused financing, which has already accumulated c.IDR400tn over the years (Exh.11). This opens up fiscal room to support growth while maintaining stability. While the deficit could be wider than the baseline, funding through debt wouldn’t increase, thus meaning no supply risk for INDOGB yields. The use of SAL would provide an opportune win-win solution where growth (through government spending) and stability (through reduced bond issuances) can coexist concurrently. The use of SAL is on the cards in 2H24, subject to approval from parliament. To offset the decline in revenue, SAL usage could be as much as IDR 150tn, or a third of the current amount outstanding, which would still leave the remaining balance above the last ten-year’s average of IDR 250 tn.


Rate Cut Proposition Remains. The recent weakening of the DXY is mainly driven by increased expectations of a rate cut later this year, partly due to moderation of the US CPI print. However, recent statements from FOMC members indicate a prevailing reluctance to hastily change the rate trajectory as they prefer to manage expectations regarding the timing of any rate cut (Exh. 14). With inflation remaining above 3% and inflation expectations rising for the first time in five months, the Fed is likely to keep rates intact for the time being, aligning with market expectations for a Sept rate cut. In the coming months, we may see divergent rate trajectories among advanced economies, particularly the six major currencies within the DXY basket. Switzerland’s central bank initiated a rate cut in March, followed by Sweden, and the UK and Eurozone may follow suit in June. An ECB rate cut could cause the Euro to depreciate against the USD, impacting other currencies due to the EUR/USD's status as the world's most traded currency pair. While this would result in prolonged cross-currency volatility, we anticipate lesser impact on the IDR. With rate cuts in other major currencies, the US would likely face pressure from a stronger USD given that in the current global slowdown, a widening trade deficit would pose further risks to the US economy through widening of the trade deficit, and hence, reinforcing the likelihood of a rate cut later this year. This scenario would result in reduced volatility in the DXY and more stable and conducive IDR environment, in our view.


China’s Growth Stimulus. The Chinese government is addressing its economic challenges with demand-side stimulus measures. Recently, China introduced an ultra-long bond worth CNY 1 trillion (USD 138 billion). This bond is notable from a fiscal perspective as it will not be included in the deficit but will be managed through a special fund's balance sheet. The bond's funds will primarily be used to revive the current investment trend, to compensate for ailing domestic consumption and lay the foundations for long-term, high-quality growth. If the bond's goals are achieved, they could be beneficial for China, especially given the extensive efforts by the US and Europe to limit its economic influence. China has relied on its export markets to absorb increased domestic production, and these bonds aim to redirect that production towards domestic use. According to a World Bank report, increases in China’s consumption and investment growth should positively impact Indonesia, given China’s dominant position as a key trading partner. However, we remain cautious on Indonesia’s medium term growth catalysts. 


Capital Market – Despite Stronger IDR, Foreign Inflow Remain Subdued.

With moderation in CPI print, the yield on the US Treasury 10-year note decreased by 8 bps, to 4.42% (17th May), while the 2-year UST yield declined by 4bps to 4.83%. Consequently, the 10-year Indonesian Government Bonds (INDOGB) yield also fell on similar fashion, down 3 bps, settling at 6.93%. On the currency front, IDR finally moved away from the 16k level, mainly underpinned by a weaker Dollar Index (DXY) post US inflation report. The DXY depreciated by 0.52% w-w led to the Indonesian Rupiah 0.56% weekly appreciation, closing at IDR 15,955 per USD. Indonesia's 5-year Credit Default Swap (CDS) also decreased by 2 bps to 70.


Fixed Income Flows - Foreign ownership in domestic Government Securities (SBN) continued to see a weekly outflow of IDR 6.32 trillion, reducing total ownership to IDR 791.62 trillion as of May 15. However, on a month-to-date basis, there was a foreign inflow of IDR 1.75 trillion. With the IDR strengthening towards the end of last week, foreign inflows are expected to improve. In 2024, foreign investors have consistently recorded monthly outflows, but with a more favorable currency outlook, May could mark the first month of foreign inflow. With lower yield, the banking sector saw weekly outflow of IDR 71.44tn with MTD outflow have now reached DR142.46tn. In our view, tighter system liquidity is one of the primary reasons for banks to reduce their positions while increasing their liquidity. Similarly, both Mutual funds and Insurance & pension fund also experience weekly outflow of IDR5.09tn and IDR6.35tn, respectively. On the other hand, Bank Indonesia (excluding repo transactions) recorded weekly inflow of IDR25.86tn with MTD inflow reached IDR98.09tn.


Equity Flows - Foreign outflows in the 3rd week of May 2024 amounted to IDR 503bn, while the JCI rose 3.2% week-on-week, mainly underpinned by domestic buying activity. Despite solid foreign inflow post Feb’s election, YTD 2024 outflows in the regular market have now surged to IDR6.6tn, mainly dragged by MTD outflows of IDR6.7tn. TPIA, PGAS, ADRO, BREN, AMMN, EXCL, MIKA, and GOTO consistently remained among the top inflows, with UNVR recently joined the top inflow list after recording outflows for three consecutive months. Conversely, the Big-4 Banks, TLKM, UNTR, and ANTM continued to be among the top outflows with ASII now topped the outflow list.


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