MUFG's Senior Currency Analyst Michael Wan notes that Bank Indonesia benefits from Indonesia’s net commodity exporter status, but faces weak starting macro conditions and fiscal constraints as oil rises. Higher energy prices threaten subsidy costs and the 3% of GDP deficit cap. MUFG expects BI to hold rates with a dovish bias, leaving IDR FX and bonds vulnerable during the Strait of Hormuz crisis.

BI on hold as IDR seen underperforming

"For Bank Indonesia, the good news is that Indonesia is a net commodity exporter, and so even though it does import oil and gas, if commodity prices including palm and coal were to rise more generally it could benefit."

"Nonetheless, the key is that the starting point of macro conditions including sovereign credit risk and fiscal sustainability for Indonesia is not ideal, and with higher oil prices likely raising pressure on fuel subsidies to increase the 3% of GDP budget deficit limit could become more difficult to maintain in a tail risk event of sustained oil price spikes."

"We see BI keeping rates on hold in this meeting, but the bias is still a dovish one for BI, and as such from a FX and rates perspective we think that both IDR FX and bonds are biased to underperform in the midst of the SoH crisis."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)