ICRA Indonesia’s Economic Review; an Update on the Macroeconomy

Inflation: severe floods caused by high rainfall amid a peak of the annual rainy season contributed to inflation growth in January 2014 as it disrupted distribution networks The higher food prices added around 0.56 percent to monthly inflation causing January's inflation rate to reach 1.07 percent on a month-to-month (mtm) basis. This led to a cumulative year on year (yoy) inflation figure of 8.22 percent, as compared to 8.38 percent in the previous month. Comparatively, December 2013 recorded inflation of 0.55 percent (mtm). Over the last four years, Indonesia's January Inflation ranged between 0.76 percent and 1.03 percent on account of seasonal floods. In the meantime, core inflation stood at 4.53 percent compared to 4.98 percent in December 2013 due to high base effect (expected normal consumption in January as compared to seasonal high consumption in December).

Trade Deficit: the uptrend in trade balance continued with a surplus of USD $1.52 billion in December 2013, leading to a surplus growth of about USD $0.7 billion (mtm). This surplus was attributable to the improvement in export including minerals such as nickel, copper etc amidst the rising commodity prices and in anticipation of the ban on the export of unprocessed minerals on 12 January 2014. On the other hand, imports contracted on account of the depreciating rupiah exchange rate and rising borrowing costs, which made imports costlier. Overall, exports reached USD $182.6 billion in 2013, weakening by 3.9 percent (yoy), while total imports showed a 2.6 percent decline (yoy) to USD $186.6 billion. Thus, the trade deficit in full 2013 was recorded at USD $4 billion, higher than the trade deficit of USD $1.6 billion in 2012.

Current Account Deficit: given the trade surplus during the entire 4th quarter of 2013, Indonesia’s current account deficit (CAD) for the year 2013 is expected to ease to 3.5 percent of GDP (year-end). The regulators have been continuously introducing measures to tighten its monetary policies, control inflation, improve foreign exchange reserves, and more. As a result, the CAD has been reducing since the record high of 4.4 percent of GDP (USD $9.9 billion) in the 2nd quarter of 2013. Regarding 2014, the government expects the CAD to ease below 3 percent on the back of an improvement in the non-oil and gas exports. However, this expectation may be countered by adverse impact of the recent ban on raw mineral exports, since these account for a major part of Indonesia's total exports.

Foreign Exchanges Reserves: the foreign exchange reserves that stood at USD $99.4 billion at the end of December 2013 are expected to increase further on account of two major sovereign debt issues that took place during January 2014. The overall impact on the reserves could however be countered by the recent ban on raw mineral exports which was implemented on 12 January 2014 and subsequent to which there have not been any exports of raw minerals.

Car & Motorcycle sales: in December 2013, car sales amounted to 97,691 units, which is a -12.6 percent decline from the previous month. However, these sales were 9.2 percent higher compared to December 2012 which stood at 89,456 units. Car sales showed a decline also in December 2012 at -13.7 percent (mtm). The good news is that, during 2013, around 1.2 million vehicles were sold in Indonesia, 100,000 more than 2012, despite the increase in interest rates. Motorcycles too have witnessed de-growth in December 2013 (mtm), in line with 2012 numbers. In December 2013, a total of 551,283 motorcycles were sold in Indonesia, marking a growth rate of -19.8 percent from November 2013, when 687,329 units were sold. However, as compared to December 2012, sales grew 13.6 percent. During the year 2013, a total of 7.7 million motorcycles were sold, as compared to 7.06 million in 2012, a growth of 7.3 percent. 

Jakarta Composite Index (JCI): the JCI witnessed volatility in January amidst the news of weak Chinese economic data, fears of further US tapering of USD $10 billion and local natural disasters (floods, vulcano) which have impacted on foreign inflows and outflows. The index, however has recovered during the second half of the month and closed at a positive note on 30 January 2014 at 4,418.76, as compared to 4,274.18 on 30 December 2013, a gain of 3.38 percent (mtm).The overall impact of the domestic macroeconomic situation as well as the international uncertainties and changes in local regulations had cost the index a de-growth of 1.66 percent during 2013, underperforming as compared to other major indices. The JCI opened at 4,346.48 in 2013.

BI Rate: during January 2014, the Indonesia's central bank (Bank Indonesia) retained its benchmark interest rate (BI rate) at 7.5 percent following a downward inflation trend and recovery in the current account position. This was in line with the overall expectations. The expected further US tapering - its impact on emerging markets - and local factors such as anticipated inflation due to flooding etc will impact on Bank Indonesia’s upcoming rate review. Although the rate is expected to be maintained, a revision in case of adverse macro-economic numbers cannot be ruled out.

Rupiah: the rupiah has shown almost a flat trajectory in January 2014 closing at 12,204 per US dollar as compared to 12,270 in December 2013. The rupiah rate seems to have withstood the impact of various adverse news during January, including Fed tapering by a further USD $10 billion, weaker Chinese economic data, as well as the expected impact of floods on inflation and domestic economy.

Government Debt Program: during January 2014, the government of Indonesia made two major debt issues. On 7 January, it raised USD $4 billion from the sale of US dollar-denominated bonds, of which USD $2 billion were 10-year government bonds and the rest were of 30 years tenure. The government raised a further USD $1.24 billion on 21 January. Indonesia is expected to raise a record of USD $29.2 billion (IDR 357.9 trillion) from international and local debt markets in 2014.

10-year Government Bond: the 10-year government bond yield stood at 8.89 percent as per 30 January 2014 compared to 8.56 percent a month earlier. The yield increased towards the last week amidst expectations of higher inflation on account of floods. However, the Indonesian 5-year Credit Default Swap (CDS) performed better as it reached about 232 (30 January 2014) compared to 238 (30 December 2013) reflecting a slightly better risk perception towards the Indonesian market, sustained by the improving trade balance that was expected to tackle the rupiah exchange rate fluctuation.

Regulatory Updates: since 12 January 2014 onwards, Indonesia banned the export of several raw minerals. Minerals such as nickel, bauxite, tin, chromium, gold as well as silver will witness a complete ban on export activities below a benchmark purity level. Whereas minerals such as copper, iron, lead, manganese and zinc can still be exported in a semi-processed form untill 2017. However, the exporters will have to pay export tax on these semi-processed minerals starting at 25%, which will progressively increase up to 60 percent up to 2017, when these minerals too (if unprocessed) will witness a complete ban. The government of Indonesia has implemented such a ban in order to promote progress of domestic manufacturing capacity, via the building of smelters, so that the country is able to export more value-added commodities. Growth of the manufacturing sector will also contribute to growth of the total economy. However, as sufficient domestic smelting capacity is yet to be established, the country is expected to experience a de-growth in export which may lead to pressure on the forex reserves as well as the employment ratio.

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

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