INDONESIA: 10-Yr Yields Risk 7.00% Test; BI Faces 17,000 IDR
- The current surge in oil prices has similarities to the fiscal challenge Indonesia faced during the 2022 Russia-Ukraine conflict. During that period local 10yr government yields surged beyond 7.50%, while USD/IDR spent most of the year tracking higher as well (see the chart below). 10yr yields were last around 6.725%, while USD/IDR was close to 16900, largely kept in check by continued BI intervention.
- In 2022, Indonesia's energy subsidies tripled to over Rp 500 trillion to keep fuel prices stable. Today, every $1/bbl increase in local price of oil adds an estimated Rp 6.8 trillion ($400 million) to the deficit. Whilst higher palm oil / coal prices provide an offset the cost of fuel compensation consistently outpaces these gains.
- Indonesia has a strict legal limit on fiscal deficits at 3% of GDP. Forecasts suggest that if oil averages $92/bbl, the deficit could hit 3.6%. Note as well, the starting point for the fiscal position was arguably better in 2022 compared to today: -2.4% as a share of GDP for 2022, as the balance improved post the Covid shock, while 2025's deficit was -2.6%.
- To avoid a repeat of the 2022 legal suspension of this cap, the government is likely to scale back ambitious new projects, whilst trying to stave off being forced to raise subsidized fuel prices to protect the budget.
- 10-Yr yields are correlated to fiscal discipline, rising recently on fiscal fears. Yields are likely to face upward pressure toward 7.00% on widening deficits and weakening Rupiah concerns.
- This leaves the BI in a difficult spot, whilst trying to defend a weak currency and in 2022, BI was forced into aggressive rate hikes.
- The Subianto government seems to have little appetite for higher rates which will likely see the BI try to hold the BI rate steady for now to try and anchor bond yields and the currency.
- The risks are now are for either rate hikes to be forced upon the BI, or risk a steeper curve.
Fig 1: Indonesia 10yr Yield & USD/IDR
Source: Bloomberg Finance L.P./MNI
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RBA: RBA's Hauser - Will Do What It Takes To Return Inflation To Target, A$ Up
RBA Deputy Governor Hauser is speaking at a fireside chat (see this link) and has noted that the central bank will do what is necessary to return inflation to target. He stated inflation is too high and that while some pressures will unwind, there is also supply constraints. Whilst this looks to be reiterating recent RBA guidance, it does hint that further policy action is needed to ensure inflation returns to target. AUD/USD is up, last near 0.7095/00, so close to a 0.7100 test. ACGB yields are pushing up from earlier lows as well. 3yr was last around 4.28%, (earlier lows were at 4.255%).
MNI: CHINA JAN CPI +0.2% Y/Y VS MEDIAN +0.4%; DEC +0.8%: NBS
- CHINA JAN CPI +0.2% Y/Y VS MEDIAN +0.4%; DEC +0.8%: NBS
- CHINA JAN CPI +0.2% M/M VS +0.2% M/M DEC
- CHINA JAN FOOD PRICES -0.7% Y/Y VS +1.1% Y/Y DEC
- CHINA JAN NON-FOOD PRICES +0.4% Y/Y VS +0.8% Y/Y DEC
- CHINA JAN PPI -1.4% Y/Y VS MEDIAN -1.5%; DEC -1.9%: NBS
- CHINA JAN PPI +0.4% M/M VS +0.2% M/M DEC
CHINA: Central Bank Injects CNY403.5bn via OMO
As expected and ahead of the Lunar New Year break the PBOC continues to inject liquidity, today adding further 14-day reverse repo. This takes the total injection this week alone to almost CNY650bn, with sizeable maturities still to come this week.
- The PBOC issued CNY78.5bn of 7-day reverse repo at 1.4% during this morning's operations.
- The PBOC issued CNY400bn of 14-day reverse repo during this morning's operations.
- Today's maturities CNY75bn.
- Net liquidity injection CNY403.5bn.
- The PBOC monitors and maintains liquidity in the interbank system through the issuance of reverse repo.
- The CFETS Pledged Repo Deposit Institutions 7 Day Weighted is at 1.47%, from prior close of 1.55%.
- The China overnight interbank repo rate is at 1.35%, from the prior close of 1.34%.
- The China 7-day interbank repo rate is at 1.47%, from the prior close of 1.57%.
