Indonesia’s Money Supply (M2) growth increased to 11.0% y-o-y in April from +10.0% in March, inching up from +10.9% in February. The increase was due to higher net foreign asset as foreign appetite for the country’s financial assets improved. Additionally, net claims on the central government improved due to faster government fund disbursement during the month. These were, however, offset partially by a slowdown in net claims on domestic activities as the high funding cost environment continued to restrain credit demand.
The slowdown in private credit was due to a further slowdown in working capital and consumption credit but mitigated by a pick-up in investment credit. Going forward, we expect the private credit to continue slowing down, on the back of higher borrowing costs and we expect a tightening bias to prevail in 2H 2014, after remaining stable in the 1H. The growth of deposits, on the other hand, started to gain pace in April. As a result, the loan-to-deposit ratio of the banking system eased to 94.1% in April from 94.7% in March.
Meanwhile, Indonesia’s foreign exchange reserves continue to build-up at USD107bn in May, from USD 105.6bn in April and USD102.6bn in March. The increase was due to higher oil and gas export receipts and inflow of foreign portfolio investments. Our reading of the recent Indonesia Rupiah’s (IDR) movement suggests that the IDR still face some selling pressure in the near term, as the mid-year seasonality of dividend payment and income repatriation takes place. Nevertheless, we expect the IDR to appreciate to an indicative rate of 11,500 IDR/USD by the end of 2014, as investors have adjusted well to the US QE tapering and along with an expected higher foreign exchange reserves during the year.