Macro outlook: Weakness to persist

Arga Samudro
Research Department, Bahana Sekuritas

During July’s fasting month and the Lebaran festivities, we expect demand-pull inflationary pressure to escalate as Indonesia’s workers have greater incomes with the public holiday’s allowances (THR).  We note that some staple food prices have risen including those for eggs and chicken. Additionally, we see price increases for airline transportation, trains, intra-province buses and hotels in the lead up to the the Lebaran festivities.  Hence, we expect July headline inflation to spike to 1.15% m-m (4.76% y-y) from June’s level of 0.43% (6.7% y-y) with core CPI also moving up to 0.97% m-m from 0.4% in June.

On the trade balance, we expect June exports to have contracted 2.44% m-m (-2% y-y due to a lower base)  to USD14.5bn, mainly due to slower demand for coal from China as well as lower palm oil exports to India and Pakistan. We also estimate that manufacturing exports would have declined slightly on lower demand as shown in exhibit 2. Furthermore, we expect June imports to have reached, up 1.2% m-m (-4.5% y-y), supported by higher domestic demand on seasonal effects. Thus, since we expect lower exports than imports, we look for the June trade balance to return to a deficit of USD469mn (May: USD70mn surplus). At this stage, June external trade should translate into a 1H14 trade deficit of USD1.3bn (exhibit 5).   

Due to accelerated business expansion and the Lebaran festivities in 2Q which had raised import demand, we are of the view that the 2Q14 current account (CA) deficit should have widened to USD7.8bn or 3.68% of GDP (1Q14: 2.05%), particularly amid relatively weak export growth on sluggish global demand. On the flip side, we expect the 2Q14 capital account to have increased to USD8.8bn (1Q14: USD7.8bn) supported by capital inflows into the domestic financial market worth USD4.8bn despite increased uncertainty over the general elections. We expect the 2Q14 balance of payments (BoP) surplus to have slowed down to USD1.05bn (1Q14: USD2.07bn).

Although we expect relatively worse m-m macroeconomic indicators in August, we believe BI would maintain its benchmark rate at 7.50% at the next BOG meeting on 14 August. We believe the recent higher CPI pressure and enlarged trade deficit should be temporary due to seasonal events.   

Finally on the GDP outlook, we expect 2Q14 GDP growth to remain weak at 5.2% y-y (+2.57% q-q), similar to 1Q14’s actual level of 5.21%. We note that private consumption would have remained resilient in the advent of the general elections as well as the fasting month. On the contrary, we expect investments to have decelerated further on the negative impact of the tightening policy, whereas government expenditure growth would have declined due to spending cuts. Additionally, the weaker 2Q14 trade balance (USD2.4bn deficit) should also have restrained GDP growth from bouncing back from the lowest y-y level since 3Q09.