W

e recently had a conference call with Perry Warjiyo, Bank Indonesia’s director of economic research and monetary policy, on the central bank’s monetary policy. The salient points from the call and our views are as follows:

1) In line with our and consensus expectations, Bank Indonesia (BI) underlined its neutral monetary policy stance by holding the BI rate at 5.75 percent. Looking ahead, we expect inflationary outlook will remain subdued on decelerated global economic recoveries that in turn will weaken commodity/energy prices.

Although the government is likely to raise electricity prices by 15 percent next year, we believe 2013 inflation will remain manageable at 4.8 percent year-on-year (y-y). Thus, we believe BI will hold its benchmark rate at 5.75 percent throughout next year to maintain solid domestic demand (figure 1).

2) BI expects that Indonesia will regain a surplus in third quarter 2012 (3Q12) balance of payments, propelled by a narrowing deficit in the trade balance and higher surplus coming from both foreign direct investments (FDI) and portfolios. As a result, September foreign exchange reserves reached US$110.2 billion, equal to 6.1 times imports and government’s foreign debt payments, higher than June’s position of $106.5 billion (figure 2).

However, BI sees that continued improvement in investment will raise import demand for capital goods and raw materials, applying pressure on the rupiah. Nevertheless, BI expects that strong FDI could help stabilize the rupiah and at the same time support the country’s economic fundamentals, particularly in the medium and long run.

3) In line with the government’s view, BI believes that Indonesia’s 3Q12 GDP will remain relatively solid at 6.3 percent y-y, translating to 2012 GDP growth estimate of 6.1 percent-6.5 percent amid sluggish global economic recoveries. Furthermore, with support from resilient domestic consumption and strong investment realizations, BI expects 2013 GDP to reach 6.3 to 6.7 percent.

However, in our view, slowing exports will continue to be a drag on GDP growth acceleration. Although Indonesia managed a trade surplus in August due to slowing imports during the long Idul Fitri holiday (figure 3), we believe our external trades will remain in deficit ahead, deteriorating the balance of payments (figure 4). At this stage, we expect 2012 GDP to decline to 6.1 percent before rising to 6.4 percent next year.