On 16th June 2016, Bank Indonesia announced that it would cut interest rates by 0.25% to a benchmark rate of 6.5%. While it was considered an unexpected move for those outside the country given the uncertainty over the Federal Reserve’s decision regarding interest rates, for those familiar with Indonesia, this cut was expected given the Jokowi administration’s focus on lowering the cost of lending for businesses as well as consumers (See Indonesia is Behind the Curve of Monetary Policy). The question being asked now is will Bank Indonesia (BI) undertake its fifth cut for 2016 in August after leaving rates stable in July?

The shock result of the UK’s referendum over whether Great Britain should remain in the European Union has brought about an unwelcome wave of uncertainty across global markets. Within this context, it may be expected for Bank Indonesia to keep rates as they are. However, the stability of the rupiah over the last several months coupled with rosier investor sentiment towards Indonesia regarding its economic fundamentals over the long-term – after slightly better than expected Q2 GDP growth – may well take precedent (See Indonesia’s Economic Outlook in 2016 and Beyond). A key determining factor in the decision by Bank Indonesia over whether or not to cut rates is most likely to be the impact of the Tax Amnesty on strengthening the rupiah and bolstering the state budget which has faced a tax revenue shortfall.

Bank Indonesia’s take on the success of tax amnesty is by no means clear. While the Indonesian government has remained optimistic despite the slow uptake of the policy at only 0.4% of targeted revenues being received to date, BI is independent from government policy. The tax amnesty has without doubt brought in significant inflows of capital, but the extent to which the government’s targets can be reached and the multiplier effect that repatriated assets can have on the Indonesian economy still remains to be seen (See Indonesian Government Banking on Tax Amnesty to Plug Tax Shortfall). Furthermore, the tax amnesty is but one policy, and BI will be careful to avoid relying on a singular policy that so far has been met with more interest than action.

Reducing the cost of lending remains a priority of the Jokowi administration with good reason. As Indonesian businesses strive to compete as part of the ASEAN Economic Community (See Indonesia and the ASEAN Economic Community – Ready for Regional Integration?), they remain hobbled by the highest lending rates in the region. Therefore, BI proceeding with a modest cut of a further 0.25% is very likely given the more positive data emerging from the country and the wish to continue this growth streak through looser monetary policy.

Global Business Guide Indonesia - 19th august 2016

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Indonesia Snapshot

Capital: Jakarta
Population: 259 million (2016)
Currency: Indonesian Rupiah
Nominal GDP: $936 billion USD (IMF, 2016)
GDP Per Capita: $3,620 USD at Current Prices (IMF, 2016)
GDP Growth: 5.0% (2016)
External Debt: 36.80% of GDP (BI, Q2 2016)
Ease of Doing Business: 91/190 (WB, 2017)
Corruption Index: 90/176 (TI, 2016)

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