Indonesia’s February macro preview

Following recent floodings, all eyes will be on Indonesia’s January Consumer Price Index (CPI) to be released on 3 February by Statistics Indonesia (BPS).  Recent bad weather has caused severe floods, not only in greater Jakarta but also in several other areas nation-wide, disrupting goods and services distribution. Hence, we have raised our January headline inflation target from 0.81% m-m to 1.05% m-m, translating to 8.40% y-y CPI, slightly higher than the December’s level of 8.38%. Additionally, we expect the January core CPI to accelerate to 5.15%.


We expect 2014 full-year CPI to reach 5.92% y-y, higher than our previous target of 5.74%, mainly due to: 1) Heavy rainfalls in early January that has disturbed economic activity and raised prices of goods and services, and 2) PLN’s (the state-owned electricity company) plan to raise electricity tariffs for two industry groups, including I-3 (only listed companies) and I-4, with a 52% average tariff hike and adjustment tariffs to market prices applied to four high-end customer groups. At this stage, we are also raising our 2015 CPI estimate to 6.02% y-y from 5.88% y-y.


Due to the year-end holidays, we expect m-m export growth to contract by 1.9% (+1.5% y-y) to USD15.6bn and import growth to contract by 0.3%
(-3.1% y-y) to USD15.1bn. This would indicate a trade surplus of USD518m. The December figures would reflect a 2013 full-year trade deficit of USD5bn.


Given that the import slowdown on a weakened IDR led to a trade surplus in October-November 2013, we expect the 4Q13 current account (CA) deficit to decelerate to 3.1% of GDP (USD6.1bn) from the 3Q13 level of 3.8%. A slower deficit would indicate a full-year 2013 CA deficit of 3.55% of GDP. The 4Q13 figures would translate into a 2013 full-year balance of payments (BoP) deficit of USD13.8bn or 0.02% of GDP. Looking ahead, we think the 2015 BoP may return to a surplus, supported by an easing CA deficit of 2.6% of GDP.


At the next BOG meeting on 13 February, we expect BI to hold its benchmark rate on an improved trade balance and a relatively subdued CPI. As we expect the CA deficit to ease on slowing imports and inflationary pressure to remain manageable despite recent price shocks coming from higher LPG and electricity tariffs, we are cutting our BI rate target from 8.5% to 8% (exhibit 1). We see that BI still requires rate hikes to maintain short-term macroeconomic stability given global financial volatility.


We expect 4Q13 GDP growth to continue to decelerate to 5.24% y-y, for a 2013 full-year figure of 5.67% y-y. As we expect a looser monetary bias, we raise our 2014 GDP growth target to 5.33% (exhibit 2) from 5.24%, mainly on resilient domestic demand and an improving trade balance.  This makes Indonesia’s 2014 GDP growth as one of the highest amongst emerging markets (exhibit 3), which should bode well for the equity market.



Arga Samudro ( Economist Bahana Sekuritas )