More reasons for fuel price hike

May 2013 inflation and April 2013 trade: More reasons for fuel price hike

Headline CPI was deflated by 0.03% mom or increased 5.47% yoy, lower than consensus and our estimates of 0.11% mom and 0.18% mom inflation, respectively. The decline was mainly driven by raw food and gold prices. Core inflation eased to 3.99% yoy in the same period, lower than our and consensus estimates. Decline in gold price has indeed helped to ease core inflation (contributed –0.1ppt to monthly inflation). However, Indonesia Market Summaries think not all is attributed to gold price and also believe mild core inflationary pressure partly reflected moderation in domestic demand.

The central bureau statistic also announced Apr13 trade data which showed a deeper deficit than our and consensus forecasts. Trade balance turned to deficit of US$1.6bn from a surplus of US$0.14bn in the previous month as exports contracted 2.2% mom while imports recorded otherwise, +9.6% mom. Exports were single-handedly pulled down by oil and gas contracting 18.4% mom. This result was not surprising as oil price and domestic production also went down in the corresponding period.

Meanwhile, imports performance rose on the back of higher domestic demand for non-oil and gas. Non-oil and gas imports accelerated 15.8% mom in Apr13 which was driven by growth in consumer goods (18.8% mom) and raw material (10.3% mom). Nevertheless, the tendency of the increase may have been inventory stocking ahead of fasting period rather than as a sign of economic acceleration as leading indicators still suggest economy in moderation pressure. This argument is justified as the monthly change of non-oil and gas imports which tend to peak two months before fasting period.

The recent data release provides stronger support for the government to increase subsidized fuel price.

1. Easing inflationary pressure will provide leeway of low inflation base that would lower the overall impact of inflation.
2. The sharp increase in trade deficit and, recently, under pressure rupiah, on the other side, show urgency to address fuel subsidy policy.

At this juncture, we maintain our view that inflation is likely to reach 8.2% in YE13 given the hike in subsidized fuel price. On monetary policy, in addition to intervening in bond and FX market, we also expect the central bank to eventually increase its interest rate, starting with the FASBI rate to support the currency. Thus, we see that FASBI and BI rate to increase to 5.0% and 6.25% respectively.

for Indonesia Market Summaries 4 June 2013