Macro Economic

Indonesia Macro Update - BI7DRR 21 Sep 2023

Fikri C. Permana 21 September 2023

Thursday, 21 September 2023

BI7DRR Maintained at 5.75%: Focus Remains on Rupiah Stabilization

Bank Indonesia (BI) has decided to maintain the Bi7DRR rate at 5.75% (Cons: 5.75%, KBVS 5.75%, Prev: 5.75%). At the same time, the absence of the impact from last year's non-subsidized fuel price hike, coupled with the decrease in the prices of chili peppers and shallots, although offset by an increase in rice prices, is expected to result in a headline inflation rate of 0.05% MoM or 2.13% YoY in Sep '23. Simultaneously, we anticipate inflation approaching 2.64% YoY by the end of 2023. Therefore, we continue to assume that the real yield of SUN 10Y will remain between 300 bps and 350 bps, making them relatively more attractive compared to US Treasury yields, which we estimate will range between 60 bps and 110 bps by late 2023.

Additionally, the budget surplus of APBN through the end of Aug '23, amounting to IDR147.2 Tn or 0.70% of GDP, is expected to signal a possible reduction in government bond issuances in 2023 (target of IDR1,172.53 Tn). However, the potential risk of a 25 bps increase in the Federal Reserve's policy rate on 1 Nov '23, can hopefully be mitigated through interventions in the Rupiah spot and DNDF market, effective implementation of the DHE SDA program, and the continued issuance of SRBI, along with improved demand from key trading partners, especially China and the US. Nevertheless, given the time required for policy effectiveness and economic recovery, alongside the possibility of Indonesia's current account deficit in 3Q23, we expect that Rupiah stability and economic stability will strengthen in early Nov ‘23, potentially creating room for a 25 bps reduction in the BI7DRR rate by the end of 2023.

Fikri C Permana - KBVS Research Team