Macro picture: Inflation & trade updates

Arga Samudro
Research Department, Bahana Sekuritas

Much lower than our and consensus expectations, January CPI deflated 0.24% m-m, reflecting a y-y level of 6.96% (December: 8.36%). This unexpected figure was driven by the government’s move to cut local fuel prices twice (exhibit 4) in response to continued drop in global oil prices.
On Core CPI, only the clothing component (exhibit 3) showed a price increase while the remaining components slowed with transportation, exhibiting a significant deflation due to the fuel-price cuts. Hence, January’s core inflation also slowed 0.61% m-m (4.99% y-y).

Due to year-end holidays, December imports contracted 6.61% y-y (+2.8% m-m) to USD14.4bn (exhibit 2). The decrease was felt across several products such as mechanical machinery, plastics and chemicals. In sum, full-year 2014 imports contracted 4.53% y-y to USD178.2bn.
Additionally, December’s exports also contracted 13.83% y-y to USD14.6bn due to weak global demand as the economies in China, Japan and India experienced sluggish recoveries. Thus, full-year 2014 exports fell to USD176.3bn, contracting 3.43% y-y.
We note December’s surplus of USD187m, somehow helped the full-year 2014 external trade deficit to ease to USD1.9bn, from USD4bn in 2013.

Looking ahead, we expect 2015 total exports to remain flat at USD176.3bn (-0.01% y-y) due to the drop in oil prices which would likely be followed by slower primary commodity prices, including CPO and coal. However, at the same time, manufacturing exports may pick up driven by rising demand from the US (9% share of Indonesia’s exports). Additionally, we also expect total imports to further decelerate to USD175.8bn (-1.3% y-y), resulting in a modest external trade surplus of USD432m.

On the back of subdued inflationary pressures and an improving trade balance, we expect the central bank, partly due to the overhang from the possible upcoming Fed rate hike, to leave its benchmark rate unchanged at 7.75% at its February Board of Governor meeting on 12 February.