Indonesian bonds trade flat ahead of exports data, likely to rally

The Indonesian 10-year bond yield is unchanged on Thursday, as investors await March trade figures, to be released at 0730 GMT. The benchmark 10-year bonds yield, which moves inversely to its price of bonds stood at 7.419 pct as compared to 7.361 pct on Wednesday by 0830 GMT.

The trade data for March is due on Friday. Earlier, the March exports figures is expected to tumbled 14.04 pct as compared to 7.2 pct y/y decline in February and oil exports fell by 36.5 pct y/y. March Imports are also anticipated to decline by 12.02 pct, from down 11.7 pct in February, indicating weak domestic demand and resulting in a trade surplus of USD 1.1bln. We expect the Bank Indonesia’s easing trend to continue in 2016 due to ongoing weakness in China and the Eurozone.

The regional trade recession continues to weigh heavily on Indonesia. However, given that both imports and exports are contracting significantly and coincidentally, we expect to see the maintenance of an ongoing trade surplus in March. In terms of the details, exports are expected to fall 21.6 pct y/y from 7.4 pct y/y in the previous month due to slower global demand. However, stronger palm and copra exports could persist and provide a slight upside risk to our forecasts. On imports, we project imports to decline 19.2 pct y/y basis, down from 11.7 pct y/y in the last month, due to the confluence of a weaker consumption and investment climate. Taken together, this should translate into an overall trade surplus USD500m (February USD1,136mn) for March.

“With the 25bps rate cut last week, the Bank Indonesia has now cumulatively cycle. We see scope for another 25-50bps in the up-coming policy meet”, said ANZ in its latest report.

Meanwhile, the Bank Indonesia governor Martowardojo said recently that the central bank still has room to ease monetary policy, adding that Bank Indonesia would be data dependent albeit more cautious in future policy decisions.

We foresee that the Bank Indonesia is unlikely to ease at the monetary policy meeting later this month, having already cut rates by a total 75 bps since January. This is consistent with the assessment that recent CPI figures have improved a bit -CPI edged up to 4.5 pct y/y in March from 4.4 pct y/y in February.

Lastly, if exports, inflation and GDP growth fail to improve over the coming months, easing will occur sooner rather than later, pushing bonds prices further up.