IDR likely to advance further on more downside potential for Indonesian government bond yields, says Scotiabank

The Indonesian rupiah is expected to advance further on more downside potential for Indonesian government bond yields, particularly if the coronavirus situation in China improves in the next one to two weeks, according to the latest research report from Scotiabank.

Indonesia’s GDP growth slowed to a four-year low of 5.02 percent y/y in 2019, indicating more monetary easing ahead amid benign inflation. In addition, the nation’s CPI inflation tends to be lower with the 2018 base year instead of 2012, providing additional scope for the BI to lower its policy rate in the months ahead.

In addition, more monetary easing is required to spur loan growth and revive Indonesia’s economic expansion. According to Bloomberg, PT Bank Mandiri that is Indonesia’s second-largest bank has warned that its loan growth may drop to around 8 percent that is the lower end of a target range of 8-10 percent for 2020 if the economic fallout from the novel coronavirus outbreak is prolonged, the report added.

BI Governor Perry Warjiyo said Wednesday that the central bank will keep policy accommodative this year, adding that the benchmark interest rate isn’t the only tool central bank officials will use.

Yield-seeking foreign investors are expected to return to Indonesia’s bond markets amid the BI’s accommodative stance and fading concerns over the 2019-nCoV outbreak, after net offloading a total of USD2.21 billion worth of local government bonds from January 27 to February 5.

As known, the IDR has been running a tight correlation with the 10Y Indonesian government bond yield, while remaining vulnerable to capital flight as portfolio investment inflows play a substantial role in financing the nation’s current account deficit and can be withdrawn at a short notice.

"We would like to sell USD/IDR at 13,600 now with a target of 13,200 and a stop of 13,800," Scotiabank further commented in the report.