News

BI rate: Room to further rise

The November Consumer Price Index (CPI) came in at 0.12% m-m, lower than our and market expectations, mainly supported by lower prices of staple foods and clothing (exhibit 1). On the other hand, higher prices on housing components including electricity tariffs and house rentals contributed to a higher November CPI compared to the October level of 0.09% m-m. Hence, m-m CPI translated into an 8.37% y-y level (7.79% ytd), slightly higher than 8.32% in October (exhibit 2).

Additionally, November core inflation dipped 0.20% m-m from the October level of 0.34% on lower gold and jewelry prices, reflecting a y-y level of 4.8%, slightly lower compared to our estimate of 4.85% but higher than the previous month’s level of 4.73% due to a low base (exhibit 2).

In contrast to our and consensus forecasts, October exports accelerated 2.6% y-y (6.9% m-m) to USD15.71b on higher offshore sales of mineral fuels, rubber and mechanical machineries. However, the October figure translated into 10M13 exports of USD149.7b, down 5.5% y-y.

On the other hand, October imports contracted by 8.9% y-y (up 1.1% m-m) to USD15.68b, mainly due to lower oil and gas imports, electrical machinery, iron and steel. Thus, October imports resulted in an unexpected trade surplus of USD42m. However, since BPS has revised its September trade deficit figure from USD657m to USD803m, the 10M13 trade deficit reached USD6.4b, similar to the 9M13 actual deficit (exhibit 3).

We believe the current appreciation of the IDR will be temporary as we expect BPS to revise the October trade balance to a deficit next month. Additionally, we expect Indonesia to book a full-year 2013 trade deficit of USD6.7b, suggesting an additional cumulative USD300m deficit in November and December. Hence, we reiterate our end-2013 IDR target of 12,000/USD.

Going forward, inflationary pressure should remain manageable as we expect end-2013 CPI to be below 8.8% y-y. However, we look for the central bank to lift the benchmark rate again to 7.75% at its 12 December policy rate meeting and make further monthly hikes of 25bp in January-March 2014, resulting in a level of 8.50% (exhibit 4).

This should be seen as a preemptive move to maintain macro stability if another round of capital outflows occurs due to the Fed’s stimulus tapering program in March. We believe this aggressive monetary policy would be required to decelerate the 2014 domestic economy, easing next year’s CA deficit to 2.6% of GDP from our 2013 target of 3.4%, and paving the way to a stronger end-2014 IDR of 11,300/USD.

 

 

Exhibit 1. Inflation breakdown


Source: National Statistics Bureau, Bank Indonesia and Bahana estimates

 

Exhibit 2. Headline & core inflation

 

Nov 13

BS

Cons.

Oct 13

Aug 13

Jun 13

May 13

Apr 13

Inflation (%, m-m)

0.12

0.20

0.17

0.09

1.12

1.03

-0.03

-0.10

Inflation (%, y-y)

8.37

8.46

8.45

8.32

8.79

5.90

5.47

5.57

Inflation (%, y-t-d)

7.79

7.88

7.84

7.66

7.94

3.35

2.29

2.32

Core infl (%, y-y)

4.80

4.85

4.75

4.73

4.48

3.98

3.99

4.12

Exports (%, y-y)

2.56

(5.1)

(2.6)

(7.49)

Imports (%, y-y)

(8.91)

(13.0)

(8.5)

1.05

Trade bal (USDm)

42

(400)

(775)

(803)

Source:  MoF, Bloomberg

 

Exhibit 3. Accumulated trade balance


Source: Bank Indonesia

 


Exhibit 4. Inflation & BI rate, 2013-2014F


Source: Bank Indonesia

Login