Bank Indonesia reported is studying possible hike of benchmark policy rate to deal with inflation

Bank Indonesia (BI) reported is studying possible hike of benchmark policy rate to deal with inflation according to Bisnis Indonesia end of last week. BI governor, Darmin Nasution, said that the central bank will be very careful in hiking the rate, however, if it is necessary BI will not be hesitate to increase it.

Comment: We still see BI rate to stay unchanged at 5.75% this year.

This is due to: First, the current inflationary pressure (5.9% yoy in Mar13) is still mostly driven by the supply shock (volatile food). Meanwhile, demand gauge inflation (core inflation) is relatively stable at 4.2% yoy. The previous chili-driven inflation in 2011 shows that the impacts tends to temporary and normalize after the government boost up the supply through imports. We expect the same trend will happen to the current garlic and onion price after government allow imports; Second, the economic growth momentum is currently easing that will require more accommodative bias monetary policy.

Nevertheless, the prolonged food price normalization that could transpire to core inflation and the delay of fuel subsidy reduction policy could risk on unnecessary monetary policy tightening. The delay in implementing the firm policy to reduce fuel consumption will lead to further pressure on the currency, as the oil and gas trade imbalance will continue to drag down overall trade performance.

Until now, the central bank manages to sustain the equilibrium by strengthening its macro-prudential measure and intervening in FX market. However, it would have to tighten further should the external financing position deteriorating and no improvement in significant improvement.

Bank Indonesia eased foreign exchange intervention

BI eased foreign exchange intervention

As indicated by the BI’s Net Foreign Asset position (consists central bank’s holding of gold, securities asset, IMF special drawing rights, and reserve fund), the degree of its reserve decline has eased compared with the Feb13 position. Based on our estimate, the FX reserves may have dropped US$0.4bn to US$104.7bn at the end of third week of Mar13, lower than the US$3.6bn decline in Feb13. This suggests that BI may have started to scale down its FX intervention especially to SOEs. Note that the decline in the reserves has included higher USD absorption through its term deposit instrument, which has increased by US$0.8bn during Mar 13.

News For March 27 2013 in brief

The second electricity tariff increase to be effective 1 April 2013

The electricity tariff for household and industry will be raised by another 5% starting 1 Apr13 as part of 15% increase for the whole 2013. The raise will affect above 1,300VA subscribers. (Bisnis Indonesia)

BII right issue

Bank Internasional Indonesia (Not rated) – will conduct a 1-for-12 rights issue at Rp320 to strengthen its capital base. A maximum total of 4.69bn new shares, representing 7.67% of the enlarged capital, will be issued to raise Rp1.5tr which will lift its total CAR to around 14.5% from 12.9% in December 2012. Maybank as the major shareholder (97.29%) will exercise their rights. Ex-date for the rights issue will be on 13 May with the rights tradable between 17 May to 23 May 2013. (Bisnis Indonesia)

BNI to sell life insurance

Bank BNI is reported to sell up to 40% of BNI Life Insurance and they expect the valuation of up to US$2bn for the life insurance business (US$800m for 40%), a level that is far too high for a company with Rp2.6tr assets as of December 2012. For Indonesia Market Summaries, in addition to the sale of its life insurance business, they also plan to seek shareholders’ approval to conduct a Rp4.5tr haircut on bad debts, starting 2013, that is made possible since the constitutional court cleared the way for the state banks to restructure or sell their NPLs late last year.  (Jakarta Post)

Agus Martowardjojo has been chosen as governor of Bank Indonesia

The parliament finally approved Agus Martowardjojo as Governor of Bank Indonesia (BI) for 2013-2018 with a voting mechanism. 46 member voted Agus as BI Governor from total 54 votes. 7 votes rejected Agus Marto whereas 1 was abstained. (Bisnis Indonesia)