MONETARY AND BANKING REVIEW
Macroprudential Policy in Action
The policy rate maintained
Bank Indonesia (BI) retained its policy rate at 4.25% in the beginning of 2018. The central bank also maintained deposit facility at 3.50% and lending facility at 5.00%. Current policy rate is believed to be sufficient to keep the inflation and CAD within target and also support domestic macroeconomic recovery. BI sees narrowing window for further rate cuts.
New macroprudential policy to improve bank’s intermediation
BI decided to accelerate the implementation of new macroprudential policy after assessing weak domestic banking intermediation and procyclicality behavior. There are two main policies: 1) Macroprudential Intermediation Ratio (RIM) which is the new Financing to Funding Ratio - FFR (replace Loan to Funding Ratio) and 2) Macroprudential Liquidity Buffer (PLM) which is the required reserve ratio (GWM) averaging. The new FFR will include corporate bonds ownership to bank’s financing position or the numerator of the ratio, and is capped at the same range with the old LFR at 80-92%. We expect the impact to big four banks is rather limited as we expect their FFR ratio is still within the desired range (see exhibit 3). However there are some banks with high LDR ratio like BNGA, BDMN, and BBTN, whose FFR could become higher than the current LFR level. Meanwhile the banks with plenty liquidity such as BBCA, could gain advantage as their FFR ratio should move higher and closer to 80% level. We believe the smaller banks in the BUKU I to BUKU II category should be more affected by the new FFR regulation as their loan to deposit is far lower compared to the BUKU III to BUKU IV banks (see exhibit 4). These small banks could be more flexible to increase the intermediation ratio not only through giving loans but also buying companies’ securities.
The new GWM averaging actually has been implemented since July 2017 but BI gave another boost by cutting fixed required reserve ratio to 4.5% (from 5.0%) and increase averaging required reserve ratio to 2.0% (from 1.5%). More averaging ratio means more flexibility for banks to channel its liquidity and reduce interest rates volatility in money market. BI also expands the GWM averaging rule for sharia banks (3% fixed and 2% average) and foreign currency (6% fixed and 2% average). It is hoped that the new macroprudential policy will make banks behavior to be more countercyclical and increase the aggressiveness of banks in managing their liquidity to either loans or other financing instruments in order to help domestic economic recovery momentum.
BI macro guidance
There are some interesting guidances that central bank gave during the latest BoG meeting. BI stated that it prefers to let the Rupiah is fully determined by market with optional intervention if needed. The statement showed that there is less room for stronger Rupiah in this year and central bank will not significantly intervene if Rupiah does not deviate from its target at Rp13,400/USD to Rp 13,700/USD. Economic growth is seen stronger in 2018 at 5.1% - 5.5% from 5.1% in 2017. However, export growth is seen to be lower in 2018 bringing CAD to widen at 2.0% - 2.5% of GDP. Bank Indonesia also mentioned that higher inflation will not always be responded by policy rate increase, especially if the rising component is volatile food.
Global monetary tightening pressure started in 1Q18, policy rate to be maintained
We see that global monetary pressure will be started in the end of 1Q18 since the Fed will start to increase the FFR and also awakening expectation of ECB tightening trend. The Fed is widely predicted to increase FFR 3 times even though some of its officials started to argue more than 3 hikes as the inflation has met 2% target. On the other side, ECB is predicted to stop its quantitative easing by 2H18 and will start to enter tightening trend by 2019. We see that global monetary tightening trend will give some pressures to Rupiah and Indonesia bonds market while high foreign reserve, stable domestic inflation and manageable CAD will maintain domestic stability. We maintain our assumption of average Rupiah in 2017 at around Rp 13,500/USD with tendency of depreciating to Rp 13,600/USD in the end of this year. We see central bank will maintain its policy rate at 4.25% in the rest of 2018.