Last week, Bank Indonesia (BI, the central bank) cut its key policy interest rate by 25bp to 5.25% and announced a number of macroprudential lending rules to boost bank lending capacity and demand for new loans. Since inflation has remained in check (3.5% y/y in August, equal to the mid-point of BI’s 2.5%-4.5% target range) and the IDR stable (YTD +3% vs. the USD), BI is focusing on supporting growth. Although real GDP growth edged down only slightly to +5.1% y/y in H1 2019 from +5.2% in 2018 as a whole, this solid outcome was only achieved thanks to stepped-up public spending (+6.7% y/y) and a stronger slump in real imports (-7.2% y/y) than in exports (-1.9%) so that net exports made a positive contribution to overall growth in H1. We expect the export recession to continue in Q3 as nominal USD-denominated exports contracted by -7.5% y/y in July-August 2019. And we project at least one more rate cut in 2019 to prop up the economy as the global growth and trade outlook falters. Full-year GDP growth is forecast at +5% in 2019 and +4.6% in 2020.
