Macro outlook: Slower growth ahead

Arga Samudro
Research Department, Bahana Sekuritas

Statistics Indonesia has recently released two major macroeconomic indicators, which were better than expected. On inflation, due to higher staple food prices with the advent of the fasting month, June headline inflation accelerated to 0.43% m-m (May: 0.16%), but this was lower than our estimate of 0.65% as well as market expectation of 0.50% (exhibit 2). The m-m level translated to 6.7% y-y (12-month low) and 1.99% ytd.

On the flip side, June core CPI was relatively flat at 0.25% m-m, reflecting a level of 4.81% y-y (May: 4.82%) on slight higher prices of clothing and housing.    

On the external trade, beating our and consensus expectations, May exports improved 3.73% m-m (-8.11% y-y) to USD14.8bn, mainly supported by higher demand for palm oil and chemical products. Exports for 5M14 reached USD73.4bn (-3.79% y-y).

Lower than our and the street’s estimates, imports contracted 9.23% m-m (-11.44% y-y), reaching USD14.7bn due to lower offshore raw material purchases. Imports for 5M14 reached USD74.2bn (-5.76% y-y).

In sum, the May trade balance booked a USD70mn surplus. Nevertheless, since the May surplus was not substantial, the 5M14 trade balance still booked a USD824mn deficit (exhibit 5).

Nevertheless, despite some improvement on current macroeconomic readings, we have revised several macro assumptions to anticipate further global financial market volatilities ahead.

On the Rupiah, even though we are not altering our 2014 and 2015 current account deficit (CAD) targets of 2.41% and 1.46% of GDP respectively, our prior 2014 year-end IDR target of 11,300/USD is now unlikely to be achieved amid the current expectation of a higher Federal Reserve rate in 1H15, which would likely trigger capital outflows from emerging markets including Indonesia. Thus, we are revising down our end-2014 IDR estimate to 11,900/USD and our end-2015 estimate to IDR11,950/USD (prior=11,200/USD).  

Additionally, on the interest rate outlook, we expect the central bank to maintain domestic macroeconomic stability over the medium term in response to changes in the Fed monetary policy, and thus revise our view that it would raise its benchmark rate by 25bps to 7.75% in 4Q14 (prior estimate: 7.50%) and maintain it throughout 2015. We reiterate our view that the benchmark rate would be kept at 7.50% at the next BOG meeting (10 July), on recent improved macro readings (exhibit 4).  

Finally, on the economic growth, given the IDR43tn cut in the government’s spending target and the higher imported inflation on the weakened IDR, which should continue to slow down domestic demand, we have revised down our 2014 GDP growth estimate to 5.25% from 5.33% previously (exhibit 3). Additionally, we have also cut our 2015 GDP projection from 5.73% to 5.53% mainly on the impact of further tightening by BI and IDR depreciation.
Exhibit 1. Macroeconomic forecasts