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MARKET MAKER : IHSG - 26 Juni 2018
June 26, 2018 08:35 WIB

Kinerja Indeks Harga Saham Gabungan (IHSG) cenderung melemah untuk menguji kisaran level support 5.800. Download artikel selengkapnya(577.88 Kb)

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Danareksa Equity Snapshot - Strategy : Panacea Polices
August 16, 2018 16:03 WIB


Policy Panacea


The government and central bank have made a synchronized move to combat the rising CAD and currency volatility. While the central bank maintained its tightening policy by hiking the 7-D RR rate by 25 bps to 5.5%, the government will limit imports and provide incentives for exports. The former, in our view, could affect economic growth although populist policies in the form of social spending should help to support consumption.



Policy remedies – on dual fronts

A twin deficit has always been the main spectre overshadowing Indonesia’s investment story, especially in relation to its currency. While the windfall income on rising oil prices is enough to increase energy subsidies, thus leading to stable inflation given no hikes in administered prices this year, the growing current account deficit is now taking center stage, creating further IDR volatility. As we highlighted in our recent report Widening CAD in 2Q18, BOP in deficit (13 Aug 2018), there are 3 primary reasons why the CAD widened in 2Q18: 1. A lower trade surplus in 2Q18; 2. A widening deficit on services accounts of USD1.8b vs USD1.6b in 1Q18 and 3. A USD8.2b Primary Income deficit arising from dividends outflow and coupon payments on debt instruments, inline with seasonality. The first two matters will need to be addressed promptly to prevent the rupiah from coming under more pressure, with responses needed from both the government and central bank.


First measure: Hiking rates

With the Balance of Payments in deficit YTD depleting the country’s forex reserves, monetary market operations to support the currency are less desirable, with BI opting to continue its tightening monetary policy by hiking the 7-day Reverse Repo Rate by another 25 bps to 5.5%, culminating in a total of 125 bps rate hikes so far this year. The central bank’s focus has shifted toward the short-term priority of stabilising the currency, hiking rates to widen the yield gap in a bid to encourage inflows back into Indonesia. The gap between the 10 year Indo bond over the US Treasury now stands at 513bps vs 390bps at the beginning of the year.


Second measure: Limit imports – a temporary measure

As a temporary measure, the government will seek to limit imports, mainly of 500 consumer goods. The government will also temporarily stop importing government and SOE-controlled capital goods, including by PT Pertamina and PT PLN, as well as provide incentives to exporting companies. The government will issue this regulation in due course and also implement the policy on increasing the usage of domestic biodiesel through the B20 mandate.


The CAD may reach the upper limit of the safety level

While the CAD in 1H18 was 2.6% of GDP, it will go up to the upper limit of the safety level of 3% by year-end if its current trend continues in 2H18. Based on our calculations, every USD1b of savings in the CAD will reduce the CAD to GDP ratio by 0.1%. As such, at least USD5b of savings in the CAD will be needed to bring the year-end CAD back to the safety level of 2.5% of GDP. The central bank expects the CAD to be under 3% by the year-end.


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