Morgan Stanley Forecasts Four Indonesia Rate Cuts in 2019

(Bloomberg) -- Morgan Stanley is standing out from the consensus on Indonesia, saying the central bank will cut interest rates four times by year-end to spur growth.

Policy makers have room to slash their benchmark to 5% due to lower U.S. Treasury yields and falling oil prices, said Min Dai, head of Asia ex-Japan FX and rates strategy at Morgan Stanley in Hong Kong. Bank Indonesia will trim its key rate to 5.50% by the end of December, according to the median estimate in a Bloomberg survey of economists.

“We acknowledge that that’s quite out of consensus,” Dai said of his rate forecast. “While Bank Indonesia raised rates last year as Treasury yields and oil prices climbed, those two factors are not the case in markets this year. This provides a very nice tailwind for BI to do a bit of easing.”

Indonesia’s looming rate cuts will help stabilize the currency and enable local bonds to extend their recent rally, Dai said. The rupiah will end this year around current levels at 14,000 per dollar, before strengthening to 13,800 by March 2020, said Dai, who submitted the most accurate forecast for the currency in Bloomberg’s latest rankings. Ten-year yields will drop to 7% by the end of December, he said. They were at 7.12% on Wednesday.

Bank Indonesia is overwhelmingly tipped to join the shift toward lower rates as slowing global growth and rising trade tensions convince central banks around the world to ease policy. Twenty-seven of 33 economists surveyed by Bloomberg predict BI will cut its benchmark when it meets Thursday, its first reduction since raising rates by a combined 175 basis points last year to counter an emerging-market sell-off.

Positive Loop

The central bank will probably lower borrowing costs by 25 basis points this week and follow that up with similar reductions in August, September, and either October or November, Dai said.

“It can be a positive feedback loop,” he said. “More rate cuts could fuel more growth and the currency can be supported by positive inflows, so you’ll see duration gains from the bonds as well.”

The Federal Reserve’s dovish tilt is boosting the appeal of emerging-market assets and will allow Bank Indonesia to cut rates without having to fret over fund outflows, said Dai, who joined Morgan Stanley in 2014 and moved to Hong Kong from the investment bank’s London office last year.

“As a global EM investor, you will naturally overweight Indonesia as a starting point,” he said. “There are not too many alternatives out there and if investors continue to be bullish on emerging markets, I don’t think BI rate cuts are going to make people take their money out of bonds.”

Here are some of Dai’s other investment views:

• Recommends buying unhedged Indonesia bonds to get additional gain from currency appreciation
• “The dollar will weaken for the rest of 2019. We think global growth will come down and global earnings will surprise on the downside”
• “Indonesia is less affected by trade tensions because they’ve got quite a domestic consumption-driven economy”
• “Some factories and global names would like to move production lines out of China into Asian countries, and I know Indonesia is competing for the foreign-direct investments. You’d expect Indonesia to benefit from that”

To contact the reporter on this story: Ruth Carson in Singapore at rliew6@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds

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