Analysts at Goldman Sachs offer a word of caution on the Indonesian rupiah despite the Asian currency’s resilience to the risk-off mood.
Key quotes
"The Rupiah has outperformed peers over the past few weeks despite the risk-off environment and a worsening Covid situation. We think this is partly a function of relatively low foreign positioning in local bond markets, which has dipped to 23% from almost 40% in 2019.”
“Moreover, the central bank has stated that FX stability is a priority and has reiterated that it will use its intervention tools to mitigate market volatility. In line with this, Bank Indonesia kept policy unchanged in its July meeting despite projecting a lower growth rate of 3.5-4.3% in 2021 (vs. 4.1-5.1% previously).“
“While the combination of low foreign ownership of local bonds and a policy preference for FX stability should allow IDR resilience to continue, IDR outperformance may be more difficult to achieve.”
“In particular, Bank Indonesia's downgrade of its growth forecasts came after the country announced stricter movement restrictions, especially in Java and Bali to curb the spread of the Delta variant. On the back of this move, we recently also downgraded our forecast to 3.4% for annual 2021 growth.“
“The Finance Minister reiterated that budget deficit target would remain at 5.7% or potentially lower while also announcing that government will cut the issuance of government bonds by around 30-40% in H2 this year. Finally, while lower bond supply (in isolation) is positive for the bond market, the potential for core yields to drift higher over the medium term also contributes to our cautious outlook the IDR."
USD/IDR stays below 14,500
USD/IDR remains sidelined below 14,500 starting out a fresh week. The spot was last seen trading at 14,485, almost unchanged on the day.