FX call - Flows supportive of IDR going towards 8500. Currency strategists Claudio Piron and Yen Ping Ho are looking at a new year-end USD/IDR target of 8,500 (from 9,300). The IDR strength so far has less to do with normalization as we do not believe Bank Indonesia will hike this year, but rather the phenomena of foreign investor diversification into local EM bonds. In Indonesia's case, foreign investors now register a record 20.9% of total local outstanding bonds as higher yields, relatively lower debt profiles and FX appreciation sustain foreign investor interest. With BI expected to remain on hold, we expect interests in the bond market to remain strong.
Beyond the portfolio flows into IDR, it is also important to recognize that Indonesia's balance of payments cycle appears to have established a more stable and buoyant cycle. We forecast the current account surplus will register 0.8% of GDP this year and note that export growth at 59.3% oya in January, was the fastest pace since August 1987. The issue is whether export growth can continue to outpace imports. Our view is that the narrowing in non-energy balances may occur only in H2 as the domestic demand recovery remains
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