Indonesian Central Bank Panics: Cuts Interest Rate for the Fourth Time in 2016!

The Indonesian central bank unleashed another surprise

From Bloomberg (bold added)

Indonesia’s central bank cut its benchmark interest rate for the fourth time this year, indicating its willingness to support economic growth in the face of mounting global risks.

Governor Agus Martowardojo and his board cut the reference rate by 25 basis points to 6.5 percent after local financial markets had closed on Thursday, in line with the forecasts of 11 of the 29 economists surveyed by Bloomberg. The rest had predicted the rate would stay unchanged.

After staying pat for two months, policy makers in Indonesia are finding room to ease rates again following a drop in the inflation rate to the lowest in more than six years in May. With a Brexit vote looming next week and uncertainty clouding the outlook for U.S. interest rates, Bank Indonesia may be positioning itself for any fallout from a increase in risk aversion.

Bank Indonesia also cut the seven-day reverse repo rate -- which will become the new benchmark interest rate in two months time -- by 25 basis points to 5.25 percent.

Indonesian inflation is forecast to reach the midpoint of the 3 percent to 5 percent target by the end of the year, the central bank said. It forecast the economy probably expanded 4.9 percent to 5 percent in the second quarter, compared with 4.9 percent in the previous three months.

The bank also eased macro-prudential limits to help spur lending. It raised the minimum loan-to-funding ratio to 80 percent from 78 percent, loosened rules on property purchases and reduced the minimum deposit required to buy homes.

Why the need for stimulus? Or why the need for activist central banking response through crisis resolution measures? Why the fourth time? Just what had happened to the previous three rate cuts?

Have the above signified as the key reasons behind the series of rate cuts? 

Indonesia’s loan growth has been on a slump since 2012. And such downturn in loan growth implies lesser money supply growth which has also manifested itself via a downtrend in annual GDP.

And even in the wake of the rupiah’s recent crash, the consumer inflation via the CPI reacted by also turning lower.

And these has spurred a panic among Indonesia’s monetary bureaucrats?

Though better than the Philippines, based on World Bank’s financial inclusion data, banks have essentially underserved the Indonesian population.

This only means that bank activities have been concentrated to a few households and enterprises.

So any debt data comparisons will tend dilute the actual intensity of credit activities.

Again, it would be true where household debt has been relatively low when compared to the more developed economy neighbors, but then again, that’s because only less than 20% (World Bank says 13% in 2014) of the population has been engaged in bank credit activities.

Nonetheless, even with a small segment of population into formal bank credit, in 9 years household debt to gdp has skyrocketed by 52%!!! This only means credit (by a few) has been swiftly outpacing GDP growth!!! 

This means that slowing loan growth could mean “peak debt” for households with access to the formal banking system.

Now if we look at nominal loans from 2006 to the present, Indonesian loans have spiraled 439% during the past 10 years! This partly explains the huge jump in household debt to gdp, and perhaps this also suggest of the debt upsurge in select private enterprises. 

Again, with likely an overdose in debt exposure (high gearing ratio) for those with access to the formal banks, hence the diminishing loan growth!

So like almost all government today, treat debt problems by providing them with even more debt! 

Of course, given the ballooning budget deficit plus borrowing rampage by those with access to credit, Indonesia’s external debt has equally soared by 134% since 2003. 

Some of these could be from currency valuation effects, but most have likely emanated from increased leveraging by both private and public sectors. 

And the huge jump in external debt exposes Indonesia's dollar short position. Indonesia's external debt accounted for 1.99 times her foreign exchange reserves!

But there is really nothing to worry about. You see in the current setting, weak growth amidst zero bound rates equals soaring stocks! And rate cuts will only transfer more of resources to levered speculators who will likely increase their exposure on the markets through even more leverage.

Nevertheless, the pattern of the price chart of Indonesia's JCI equity benchmark eerily resembles one of her neighbors.

All economic charts from Tradingeconomics.com