Goldman Sachs On IDR and BI

The US bank weighs in on the most recent BI 25bps hike and sees the central bank increasing sensitive to FX developments.

"The IDR has underperformed NJA peers over the past month and past week, as higher US rates prompted bond outflows, equity flows have been tepid, and the current account outlook has deteriorated, in part due to higher oil prices and lower coal exports. Given this, we had noted that the Bank of Indonesia was squarely focused on FX stability and this was being implemented through non-rate policy tools. In this context, the 25bp hike to policy rates on Thursday was a hawkish surprise to expectations. The governor noted that the hike is 'pre-emptive and forward-looking' to keep imported inflation in check by stabilizing the currency and to ensure inflation remains within the central bank target band. There were no changes to BI macroeconomic forecasts for 2023 with real GDP expected to remain in a 4.5%-5.3% forecast range, and headline inflation within a 2%-4% this year and 1.5%-3.5% next year, which is within the target range."

"BI also introduced Bank Indonesia FX bills, which will be denominated in foreign currency and collateralized against BI’s existing foreign currency securities (for example, US Treasury bonds that are part of their FX reserves). These notes will be short-term instruments (1M, 3M, 6M, 9M and 12M), issued via auctions and tradable in the secondary market. The objective of this new instrument is to deepen the domestic money market by providing foreign currency denominated instruments. Looking forward, the hike is an important signal of the increasing pressure that foreign jurisdictions are facing as a result of the combination of elevated US rates and weak inflows (bond and equities). Such a backdrop should keep the currency under pressure, although BI has shown an increased sensitivity to FX developments and will likely stem the pace of depreciation through their multiple intervention tools."