Rupiah gained some ground. Rupiah strengthened against the Dollar by 2.6% from its weakest point to 16,500 during the dividend repatriation season in 2Q. Foreign inflow into the bond market continued, while equity outflows began to slow, supported by a sharp improvement in government spending in March. From a valuation perspective, we believe the Rupiah remains undervalued, leaving room for further appreciation. While we expect a wider CAD this year at 1.5% of GDP, it s only slightly above BI s target of 0.5 1.3%.
Supportive global factors. Amid uncertainty over Trump s tariffs, the Yuan, which has a strong positive correlation with the Rupiah due to solid trade ties between the two countries, has appreciated against the Dollar. In this context, the Dollar remains weak, with U.S. Treasury yields staying low despite recent upticks. Markets continue to expect a total of 75bp in Fed rate cuts this year, starting in July. Central banks globally, including the ECB, BOE, PBOC, RBI, BOT and BSP have also continued or initiated their policy rate cutting cycle.
Weak domestic demand. Indonesia s GDP growth slowed to 4.87% in 1Q from 5.02% in 4Q, confirming weakness in domestic demand, which we believe reflects the impact of significant budget cuts (see GDP Review: Sluggish Domestic Demand Slows GDP Growth in 1Q). Loan growth also moderated further to 9.2% from 10.3% in February, well below BI s target of 11-13%. The Manufacturing PMI fell sharply to 46.7 in April, the lowest since August 2021, indicating that weak GDP growth could persist in 2Q. We forecast a sharp slowdown in GDP growth to 4.8% this year from 5% last year, at the lower end of BI s 4.7% 5.5% forecast range.
Still-restrictive real policy rate. The real policy rate at 3.8% remains well above its long-term trend of ~1.7% despite recent drop due to inflation normalization post electricity-tariff discount. This suggests a still-restrictive BI monetary policy stance. Inflation remained persistently low at 1.9% in April, lower than the midpoint of BI’s 1.5-3.5% target. Core inflation held steady at 2.5%, maintaining a medium-term upward trend since February, but mainly driven by low base effects and higher gold prices.
Liquidity continues to improve. BI has continued to support liquidity despite delivering only a single 25bp policy rate cut so far (see Policy Update: Base Money Growth Dropped in April as Lebaran Effect Fades). SRBI rates have come down by 49bp year-to-date, exceeding policy rate cut in January. This is in line with lower SRBI outstanding, falling to IDR882tn from IDR924tn in December which we think will continue given the large matured SRBI in 2H. Banks liquid asset to deposit ratio rose to 26.2% in March from 25% in December, suggesting liquidity improvement. Consistently high FX reserves averaging USD155bn ytd, suggesting strong BI s first line of defense to cushion Rupiah depreciation.
Higher likelihood of an earlier BI Rate cut in 2Q. We continue to expect BI to cut its policy rate by a total of 50bp for the remainder of the year to 5.25%. In terms of timing, we bring forward our 25bp BI rate cut forecast to 2Q from 3Q previously, mainly reflecting the stronger Rupiah against the Dollar and persistent weakness in domestic demand. We believe BI will use this window to reinforce its pro-growth stance while maintaining its stability mandate to manage Rupiah volatility. Indeed, at the latest MPC meeting, Governor Perry reiterated that there is room for further rate cuts (see Policy Rate Update: BI Stays Patient Amid Weaker Growth Outlook).
Mandiri Sekuritas Research
