April 2013 Consumer Price Index Indonesia inflation and March 2013 Trade Preview

Inflation result is expected to be relieving. The central bureau statistic will announce April 13 inflation and March 13 trade data on Wednesday (1/5). After several periods of high inflation, we forecast consumer prices to deflate 0.14% mom this month, pulling down the on-year inflation to 5.53% yoy from 5.90% in Mar13. Thus, the year-to-date inflation is expected to reach 2.28% ytd.

Food prices: deflation. The government’s import permits on garlic and onion seems to have brought about results this month as the prices of the two commodities deflated, based on our price observation. Moreover, other commodities such as chicken eggs, and soybean also became cheaper.

Core inflation will likely slow down (again). Although cost pressure has begun to creep up due to previous administered prices hike, core inflation may have decreased (again) this month. Several underlying factors supported our forecast i.e.:

1. Gold price continued to ease in Apr13 by 4.2% mom
2. money supply growth has slowed down
3. the rupiah’s nominal effective exchange rate has remained stable
4. Investment activities have been easing recently suggested by lower growth of cement and industrial production index.

Meanwhile, we only see minor pass- through effects of higher raw food prices through core inflation. Therefore, we think the core inflation will continue to slow to 4.15% yoy in Mar13 from 4.21% yoy in February 2013.

Volume increase may have reduced trade deficit. Trade balance is expected to print a lower deficit of US$0.06bn in Mar13 from US$0.3bn in Feb13. Export will likely accelerates as countries like China, Korea, and Singapore reportedly increased imports of Indonesia goods by 29% mom, 22% mom, and 11% mom, respectively. It may have been partly down played as a consequence of declining commodity prices such as coal (-2.9% mom), CPO (-2.6% mom), crude oil (-6% mom) and rubber (-6.5% mom) in the corresponding month (see exhibit 4). Meanwhile, as we see moderation trend in investment, non-oil and gas imports are expected to ease whereas oil and gas imports will likely remain firm due to robust subsidized fuel consumption. That said, we think exports and imports accelerated 7.6% mom and 5.7% mom, respectively.

Policy implications: high likelihood of status quo on policy rates. Against the background above, we see the central bank will leave both BI rate and FASBI rate unchanged at 5.75% and 4% in its next board meeting. As we have mentioned before, Bank Indonesia will employ its non-interest rate tools by gradually absorbing liquidity with longer-term instruments to mitigate the temporary spike in inflation. Nevertheless, we expect a FASBI rate hike the soonest in Jun13 by at least 25bps, especially if the government does implement the two- price tier system on subsidized fuel prices.

Indonesia Market Summaries, April 29 2013