Macro Strategy

Finding The Inflection Points

 

  • Recent developments seem to ease risks from the Trifecta of Challenges, offering potential improvements in DXY, yields, and liquidity.
  • BI's rate cut led to declines in INDOGB yields and SRBI awarded yields, reflecting the policy shift, providing a base for growth momentum.
  • Recent global events indicate a de-escalation of tensions, easing reflation risks and trade concerns, though challenges persist.

 

The Inflection Points. Recent developments appear to reduce risks tied to the “Trifecta of Challenges”, presenting opportunities for improvements in the DXY, yields, and liquidity.  Despite mounting external risks, Bank Indonesia's recent rate cut signals a move toward growth-oriented policies, offering a new catalyst for a more sustained market recovery. Although a 25bps reduction may be insufficient and monetary policy transmission typically lags, we maintain our view that easing measures are essential to supporting domestic recovery and bolstering investor confidence. BI’s recognition of this need could attract foreign inflows and enhance IDR stability under favorable conditions, as evidenced by the previous rate-cut episodes in 2016, 2017, 2020, and 2024. BI’s recent view contrasts with its stance in Nov-24, which focused on stabilizing the IDR amidst significant depreciation pressures caused by external shocks, particularly capital outflows following Trump’s election victory. While we acknowledged these challenges, we argued that prioritizing a pro-growth approach was critical to addressing economic fragility. As noted in our report “Stability vs Growth: What’s at the Fore“ (published on 18 Nov-24), we have consistently emphasized the necessity of such interventions, given persistently weak household consumption (averaging 4.8% y-y over the past four quarters) and subdued inflation (1.61% y-y average in 4Q24), both of which require accommodative policy support.

 

The Litany of Positive Progression. The BI rate cut triggered declines in 1-year and 10-year INDOGB yields, which fell by 22 and 14 basis points, respectively, to 6.92% & 7.14%. This shift was mirrored in the SRBI market, where the average awarded yield post-cut dropped by 24bps compared to the previous auction held before BI's policy adjustment. The declining yields could enhance banks' intermediary roles, potentially encouraging increased lending activity.

 

In our view, there are 2 crucial points on the SRBI trend going forward: 1. Re-investment risk on lower yield cycle. In the 2Q and 3Q25, IDR478tn of SRBI, with yields exceeding 7%, are set to mature, including IDR226tn yielding over 7.4%. With SRBI yields now below 7%, upon maturity, banks may be incentivized to redirect the unlocked liquidity into higher yielding assets such as loans & corporate bonds; and 2. Moderation in economic activity could pose a hindrance to loan growth due to its association with rising asset quality risk. As such, a portion of the funds may still flow into SBN given its risk-free nature, in our view. BI data shows loan growth decelerated to 10.4% y-y in Dec-24, down from a peak of 12.3% in Apr-24. This slowdown was largely attributed to working capital loans—the largest loan category—where growth dropped significantly from 12.4% y-y in Apr-24 to 8.4% y-y in Dec-24.

 

While the rate cut could pose some risks to IDR stability, it is a critical step in balancing depreciation pressures with the need to stimulate domestic economic growth. On the fiscal side, declining yields could provide some relief in managing the expected widening of the fiscal deficit and the accompanying rise in debt issuance, offering a measure of fiscal flexibility.

 

De-escalation of Global Tensions. Recent global events seem to have taken an unexpected turn, easing the risk of further reflation, while Trump’s potential shift toward a more moderate stance on China could help alleviate trade tensions. Nonetheless, the risks are not totally alleviated as several development could still impede progress:

 

  1. Geopolitics Risk Moderation in Middle East. Israel and Hamas agreed to a ceasefire just hours after Bank Indonesia’s rate cut and the release of softer-than-expected US CPI data. The ceasefire deal was reached 15 Jan-25 to end 15 months of fighting in the Gaza Strip, has temporarily eased geopolitical tensions, reducing supply risks linked to the conflict in the Middle East. Such move followed, similar deal between Israel and the Lebanese armed group Hezbollah, which has taken effect by end of Nov-24. However, the US-imposed Russian oil export ban set to take effect at the end of Feb-25 could counterbalance the Middle East geopolitics tension. This ban has already pushed crude oil prices to around USD80/bbl, comparable to levels observed in Jan-24.

In the US, the fading deflationary impact of lower gasoline prices contributed significantly to December’s CPI, and if this trend continues, it could further accelerate overall inflation.

 

  1. For Indonesia, rising global oil prices may push the ICP for January and February 2025 closer to the government’s fiscal assumption of USD82/bbl. Historically, such sharp increases in oil prices often lead to frontloading of oil imports to anticipate further hikes. Encouragingly, this scenario is unlikely to pose an immediate threat to domestic subsidized fuel prices or inflation levels.

 

  1. The media have been reporting renewed communication between Donald Trump and Chinese President Xi Jinping, signaling potential shifts in US-China relations. On 17th Jan-25, the two leaders held a phone call to discuss critical issues, including trade, fentanyl trafficking, and TikTok's status. Following the discussion, Trump expressed optimism about resolving shared challenges collaboratively. As a diplomatic gesture, China announced that Vice President Han Zheng would attend Trump's 20th Jan inauguration as President Xi's special representative, marking a rare high-level Chinese presence at such an event. Additionally, Trump has expressed interest in visiting China early in his second term, potentially within the first 100 days, with discussions of a reciprocal visit by Xi to the US also under consideration.

The de-escalation of US-China trade tensions could potentially alleviate risks to the CNY, a key factor contributing to the IDR weakening trend in recent weeks.

 

Capital Market - Lower overall yields but IDR level remains elevated

The 10-year US Treasury yield dropped by 16 basis points (bps) to 4.61% last week, while the 2-year yield declined by 13 bps to 4.27%. Similarly, the 10-year Indonesian Government Bond (INDOGB) yield fell by 5 bps to 7.14%. While the US Dollar Index decreased by 0.53% week-over-week, the Indonesian Rupiah still weakened by 1.11%, closing at IDR 16,365 per US Dollar, mainly driven by BI’s surprise rate cut. Indonesia's 5-year Credit Default Swap (CDS) narrowed by 5 bps during the week, reaching 77 bps.

 

Fixed Income – Yield Movement Spark Outflow. Data from the Ministry of Finance (MoF) as of 16th Jan (Thursday last week) revealed that foreign ownership in domestic Government Securities (SBN) experienced a weekly outflow of IDR4.41tn, bringing total ownership down to IDR876tn. Month-to-date (MTD) foreign outflows from SBN, however, remain relatively low at IDR 0.59 tn. In contrast to aggressive addition on SBN in the early Jan-25, banking sector saw significant weekly outflows of IDR 52.46tn but still recorded MTD inflows of IDR46.65tn. In contrast, Bank Indonesia (excluding repo transactions) registered weekly inflows of IDR56.37tn, while MTD outflows reached IDR 40 trillion. Meanwhile, the mutual fund sector reported inflows of IDR0.59tn, and the insurance and pension fund sector recorded inflows of IDR 2.93tn over the same period.

 

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