ICRA Indonesia’s Monthly Review; an Update on the Indonesian Economy

• Inflation: Indonesia’s year-on-year (yoy) inflation rate slightly increased to 7.32 percent in May 2014 (vs 7.25 percent a month earlier) as a benign inflation was recorded at 0.16 percent, contributed by an increase in processed food and utilities prices following electricity tariff elevation. Year-to-date (YTD) inflation stood at 1.56 percent compared to 2.30 percent in the same period last year. Core inflation, which excludes administered and volatile prices, was 4.82 percent. Inflation rates could further move up in coming months in anticipation of the fasting month (Ramadan) leading up to major festive event of Idul Fitri and the further increase in electricity tariffs.

• BI rate: on 12 June, the central bank (BI) decided to leave its benchmark interest rate (BI rate) unchanged at 7.5 percent for the seventh consecutive month. This decision was supported by the current inflation rate which was still within BI’s target for this year (4.5±1 percent). It is also suggested that current BI rate level is sufficient to keep the inflation rate at bay while still giving a respite for economic growth. Previously, BI feared weakening GDP growth and revised it to 5.1-5.5 percent from previously 5.5-5.9 percent. In the first quarter of 2014, GDP growth was recorded at 5.21 percent.

• Trade balance: the trade balance dropped to a deficit of USD $1.96 billion in April 2014 after reporting a surplus of USD $680 million in the previous month. An unprecedented deficit was reported in the non-oil & gas sector at USD $901.5 million after consistently recording surpluses for the last eight months. The dip was led by palm oil exports which fell almost 50 percent from March, nicking USD $915 million off the exports, amid high inventory levels in India and an economic crunch in China. The trade deficit in the oil & gas sector, on the other hand, paced down to USD $1.06 billion. Meanwhile, imports increased due to seasonal factors (i.e. the approaching fasting month). There was also an interesting uptick in capital expenditure in the form of mechanical and electrical machinery which rose 18 percent month-on-month (mom) which could be a prelude to a pick-up in economic activities in the second quarter onwards. The imports were also supported by the temporary strengthening of the Indonesian rupiah exchange rate.

• Foreign reserves: May’s foreign exchange reserves stood higher at USD $107 billion from USD $105.6 billion in April on account of a surplus in capital and financial transaction, supported by increased foreign inflows. During the January-May 2014 period, the foreign fund inflow hovered around IDR 130 trillion. The level of current foreign exchange reserves can cover 6.2 months of imports (well above the international standard ratio of 3 months) or 6.0 months of imports and debt repayments.

• Revised budget draft proposal: the Indonesian government has submitted the revised budget draft proposal to the parliament as summarized below:

The government predicts the fiscal deficit to reach 2.5 percent of GDP, higher than 1.7 percent stated previously, amid heightened energy subsidies and lower expected national income. The effect of heightened energy subsidies was partially compensated by budget cuts in ministry and governmental institutions expenses in an amount of IDR 98.5 trillion - avoiding any significant inflationary hike as witnessed last year following the partial removal of fuel subsidies.

GDP growth was revised down to 5.5 percent from 6.0 percent amid global economic challenges marked by continued stimulus tapering in the US, subdued growth in China’s economy, and slow recovery in the Eurozone. Domestically, uncertainty is borne by the election period, compounded by lower tax revenue (decreasing by IDR 48 trillion to IDR 1,232 trillion) and lower non-tax revenue (in form of dividends which predicted to decrease by IDR 22 trillion on account of lower contribution from mining companies due to exports ban).

The country’s currency rate assumption was significantly revised, with the rupiah set at IDR 11,700 per US dollar after initially assumed at IDR 10,500/USD.

Oil lifting was also revised lower at 818,000 barrel per day (bpd) from 870,000 bpd.

Inflation target as per government view was revised at a better level (the only positive revision) at 5.3 percent from 5.5 percent as economic growth is predicted to remain slow and inflationary pressures mainly coming from supply scarcity issues that can still be tamed.

• Car & motorcycle sales: domestic car sales were down for the second month in a row, to 98,198 units in May and 106,811 units in April from 113,079 units in March. The latter was mainly due to holidays that cut significant numbers of effective working days. On a yearly performance, domestic car sales in May decreased by 1.5 percent, with April yoy increased 4.5 percent; leading to a year-to-date annual increase of 7.2 percent. In the opposite of car sales, domestic motorcycle sales grew to 743,030 units in May and 729,279 units in April from 725,629 units in March - booking a year-to-date sales of 3.46 million units (year-on-year increase of 5.9 percent) with Honda (62 percent of market share) and Yamaha (32 percent) as the market leaders.

• Jakarta Composite Index (JCI): the JCI was in speculative mood, at times boosted by several global economic indicators and domestic political sentiments leading up to ultimate presidential election. The market experienced a rather whirlwind period ended moderately positive, which opened at 4,840.15 at end of April and closed at 4,893.91 at the end of May, hitting as high as 5,031.57 in between. Despite the news of the weakening economy, China’s latest manufacturing index hitting 50.8 - the fastest pace in 5 months. On the other end, US also showed an improved job market, while Japan maintained its stimulus program and the European Central Bank has cited to lower deposit rate which came into realisation just now, going into negative territory to spur lending.

• Rupiah: The rupiah continued its weakening trend against the US Dollar in May, brushed off by continuing stimulus tapering in US for four consecutive months, leaving the level of monthly asset buying at USD $45 billion, with the uncertainty in the next government’s leadership still lingers plus the seasonal factor of debt repayment period. The rupiah closed at IDR 11,611 per US Dollar at the end of May compared to IDR 11,532 per US dollar one month before. It continued to slip to IDR 11,813 per USD on June 12 based on those factors.

• Bond Yield: The 10-year government bond yield rose slightly to 8.21 percent at the end of May from 8.09 percent at the end of April, with the trade balance performed worse than expected and a rally in US Treasury amid the continued paring of asset purchases by The Fed. Continued benign inflation can act as the likely refuge of such yield escalation. On June 12, the yield retraced to 8.17 percent.

Commodities

• Oil: the crude oil prices gained in the month of May after declining in April. As on May 30, 2014, the Western Texas Intermediate/WTI prices stood at USD $103.00 per barrel, a recovery from the previous month’s USD $99.27 per barrel. The prices rose in reaction to the stronger growth signal given out through various positive economic data releases in the month of May, including US, China and Japan, which indicated upcoming increase in demand. These were partially countered by several world events such as continued deadlock within Ukraine, unrest in Libya etc, which created possibilities of supply disruptions. As on June 12, the WTI prices have risen further to USD $105.98 per barrel, on mounting supply disruption concerns over turmoil in Iraq.

• Coal: coal prices on the other hand continued their downtrend. As on May 30, the coal price closed at USD $73.15 per ton, down from USD $73.55 per ton towards the end of April. As on June 10, the price decreased further to USD $72.25 per ton. The coal cycle has overall entered a downturn, reaching its 4.5 year low in March 2014. The price by now is fast approaching the half of its 2011 peak of USD $136.3 per ton. Low coal prices have been driven by global recession and downturn cycles within its end user industries. While some economic data releases have indicated improvement in the main consumer geographies, the prices of coal have not replicated such improvement. On June 12, it got corrected further to 72.15 percent.

• Crude Palm Oil (CPO): the price of CPO also continued its decline in May, closing at USD $754.05 per ton from April’s USD $804.01 per ton. The decline towards the end of May was based on an expectation of oversupply - whereby the CPO stock levels are expected to reach between 2 to 2.5 million tons at the end of 2014, similar to the historical high in 2012. This is also supported by the expectation that Indonesia and Malaysia, the world’s largest palm oil producers, would also end up producing more in 2014. CPO prices declined further to USD $746.81 on June 12. However, the recent news on El Nino’s impact to the palm oil production is expected to result in recovery of CPO prices.

• Gold: gold too has continued its decline into month of May, closing at USD $1,254.1 per ounce as compared to USD $1,283.80 per ounce at the end of April. The gold outlook has been bearish in parallel to the US Federal Reserve’s winding down of its bond buying program. While the Ukraine crisis has so far not impacted this downtrend significantly, its continuance may lead to investors shifting to the established safe haven. Further, the recent announcement of India’s easing gold imports may lead to a surge in demand from the country, which may drive up the gold prices. Gold already recovered at USD $1,266.30 as on June 12.

• Others: the Indonesian government and parliament have agreed to raise electricity tariffs in July to November 2014 for 6 types of consumers:

11.57 percent every two months for non-listed industries type I-3
5.7 percent every two months for households type R-2 (3500-5500VA)
5.36 percent every two months for government institution type P-2 (200KVA)
10.43 percent every two months for households type R-1 with 2200VA
10.69 percent every two months for general public lightings type P-3
11.63 percent every two months for households type R-1 with 1300VA

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