ICRA Indonesia’s Monthly Economic Review; a Macroeconomic Update

Inflation: As expected, in the month of Christmas and New Year celebrations, inflation was high at 0.55 percent (month-to-month/mtm), pushing the year-on-year (yoy) inflation to 8.38 percent. This is the highest annual inflation rate since 2008 and also the highest among the 10 countries within ASEAN. On the positive side, Indonesia’s inflation rate is lower than the Central Bank’s revised target of between 9.0 percent and 9.8 percent. In December, as usual, a higher consumer price index (CPI) was caused by an increase in food and processed food, beverages, cigarette and tobacco prices. It is expected that the effect of the fuel price increase (June 2013) along with the rupiah exchange rate depreciation and logistics disruption that all battered Indonesia’s inflation figure in 2013 will not continue into 2014. Therefore, the inflation target of 2014 is 4.5 ±1 percent.

Trade Balance: There was a stronger monthly trade performance as November 2013 recorded a surplus of USD $776.8 billion on the back of higher growth of export activities by 1.5 percent (mtm) to USD $15.93 billion - largely caused by non-oil & gas exports - compared with a decrease in import of 3.6 percent (mtm) to USD $15.15 billion, which was still dominated by machineries. Cumulatively, January to November 2013 exports amounted to USD $165.6 billion, and imports to USD $171.2 billion; resulting in the year-to-date trade deficit of USD $5.6 billion. Compared to last year, year-to-date November exports slipped 5.2 percent while imports only decreased by 2.8 percent.

Economic Growth: The Indonesian economy is expected to grow between 5.7 percent and 5.8 percent (yoy) in Q4-2013, bringing the annual figure to around 5.6 percent to 5.8 percent as cited by the Minister of Finance (Chatib Basri), still absorbing the impact of inflationary pressures coupled with continued rupiah exchange rate depreciation on account of high oil imports and capital outflow mostly as an effect of US Federal Reserve’s stimulus tapering. This GDP growth figure fell well short of the targeted 6.3 percent for 2013. The central bank also quoted that the current account deficit would ease to the proximity of 3.6 percent at the end of 2013, and expected to further shrink to 2.9 percent in 2014.

Foreign Reserves: Indonesia’s foreign exchange reserves closed at USD $99.4 billion at the end of year 2013, up from USD $97.0 billion in November. This level is equivalent to 5.6 months of import or 5.4 months of imports and servicing external debt. The increasing reserves are expected to provide more financial robustness against external headwinds.

10-year Government Bond: The yield in December 2013 showed a lower figure of 8.56 percent compared to a month earlier. For the second semester, starting in July to November, the yields had been 7.83 percent, 8.42 percent, 8.50 percent, 7.47 percent and 8.66 percent. The depreciated value of the rupiah in combination with concern over the Fed’s tapering (that would limit foreign fund circulation) contributed to the higher November figure, and the clarity of this issue and benign monthly inflation led to a lower December figure. This was in line with 5-year credit default swap (CDS) spreads over 2013 which moderated around 200-250 basis points (bps) band and closed at 237 at the end of the year. It also peaked at the time of the interest rate reference increase and high inflation occurred sometime in mid-year.

Rupiah: At the end of December 2013, the rupiah slipped further to around 12,270 per USD (vs. 11,977 at end of November). The realization of stimulus tapering, slashing the bond buying program by USD $10 billion per month to USD $75 billion per month - after an encouraging macroeconomic development in the US - triggered a capital flight from high yield emerging markets and, coupled with seasonal increasing demand in USD to pay forex loans, put pressure on the rupiah. Total outstanding private external debt as of October 2013 stood at USD $136.6 billion compared to USD $123.0 billion in same period last year. During 2013, the rupiah fell 26.4 percent and became the weakest performing currency in Asia (compared to the yen, rupee, peso, ringgit and baht).

BI Rate: After seeing a benign forecast of year end inflation, Indonesia's central bank decided to maintain the country’s benchmark interest rate (BI rate) at 7.50 percent in December 2013. This is in line with our expectation in the previous month’s discussion, where interim data of Indonesia’s November trade surplus also played a part and further confirmed the central bank’s expectation corresponding to its tight monetary policy.

Jakarta Composite Index (JCI): The JCI closed at a steady level of 4,274.18 on the last trading day of December compared to 4,256.44 as the closing figure a month before. The stock exchange seemed to have already absorbed all sentiments and impending news, which includes the Fed’s stimulus tapering which was announced in mid-December. In the last trading day a year earlier in 2012, the JCI closed at 4,316.69. The year 2013 has been a roller coaster ride for the JCI where it had reached a peak and all time high of 5,200.69 on 29 May 2013 and subsequently dived to 3,967.84 on 27 August (the lowest point since 24 July 2012’s level of 3,992.11).

Car & Motorcycle Sales: Gaikindo reported slowing growth of Indonesia’s car sales in November 2013. Car sales were recorded at 111,785 units or grew at a rate of 7.8 percent (yoy), picking up slack in the previous month of 4.9 percent. By November 2013 year-to-date, total car sales stood at 1.13 million units or up by 22.6 percent (yoy). On the other hand, motorcycle sales booked a growth of 10.8 percent (yoy) to 688,527 units, amounting to the year’s cumulative sales of 7.2 million units (vs. 6.6 million in the same period of 2012).

Written by Kreshna D. Armand, Pradnya Desai and Setyo Wijayanto
www.icraindonesia.com

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