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

Inflation: moderate inflation of 0.26 percent month-to-month (mtm) occurred in February 2014 (compared to 1.07 percent mtm in January). Lower inflation lead to a modest decline in the year-on-year (yoy) inflation to 7.75 percent compared to 8.22 percent in the previous month. Meanwhile, core inflation was up slightly to 4.57 percent yoy from 4.53 percent.

Trade Balance: Indonesia's trade balance in the first month of 2014 recorded a deficit of USD $0.43 billion (versus USD $0.07 billion in January 2013). The deficit was mainly due to a shortfall of the oil & gas trade balance amounting to around USD $1.06 billion whilst non-oil & gas trade recorded a surplus of around USD $0.63 billion. Cumulatively, exports dropped by about 5.8 percent yoy to USD $14.48 billion in relation to the implementation of ban on overseas shipments of raw minerals.

Balance of Payments (BOP): after reporting deficits in the previous three quarters, Indonesian fourth quarter BOP reported a surplus of around USD $4.4 billion. The surplus was due to a decline in the current account deficit to USD $4.0 billion (1.98 percent of GDP) from USD $8.5 billion (3.85 percent of GDP in Q3-13) and an increase of surplus in the capital and financial accounts to USD $9.2 billion (vs. USD $5.6 billion in the previous quarter). The improving BOP automatically lifted up reserve assets to USD $99.4 billion in December 2013 from USD $95.7 billion in Q3-13, equivalent to 5.5 months of imports and servicing government’s external debt.

Cumulatively, the BOP in 2013 posted a USD $7.3 billion deficit after booking USD $0.2 billion surplus a year before due to the widening gap of the current account deficit to USD $28.5 billion (3.26 percent of GDP) from USD $24.4 billion. The higher gap was mainly on account of the slowdown of global economy coupled with declining commodity prices. Another contributing factor to the BOP deficit in 2013 was a declining surplus in the capital and financial account to USD $22.7 billion in 2013 (vs. USD $24.9 billion in 2012). This was attributable to global financial market uncertainties with respect to the tapering off of monetary easing policy in the US, the investors’ concerns on high inflation and the widening current account deficit.

Foreign Exchange Reserves: foreign exchange reserves improved to USD $100.65 billion in the first month of 2014 versus USD $99.4 billion in December 2013. The stronger foreign exchange reserves were contributed by the December trade surplus which was the largest during 2013. Indonesia's trade surplus during the month reached around USD $1.52 billion as the total export of USD $16.98 billion exceeded the import level of USD $15.46 billion thanks to robust performance across the sectors. The issuance of global bonds totaling USD $4.0 billion in January has also strengthened the reserves.

State Budget: the government planned to revise its macroeconomic assumptions in the state budget 2014 especially regarding the rupiah exchange rate (against the US dollar) and oil lifting. The rupiah is expected to remain between IDR 11,500 to IDR 12,000 per US dollar (vs. IDR 10,500 in the current budget). Furthermore, oil lifting is also estimated at a lower level between 800,000 and 830,000 barrels per day (bpd) from 870,000 bpd assumed currently.

Car and Motorcycle Sales: four-wheel vehicle sales in Indonesia reached about 103,494 units in the first month of 2014. It grew about seven percent yoy and 5.9 percent mtm with Astra International reporting a dominant market share of about 53.0 percent. The robust car sales were partially backed by sales of low-cost green cars (LGCC) released by various automotive makers. Elsewhere, two-wheel sales dipped by about 10.3 percent yoy to 579,361 units although on a monthly basis it grew at about 5.1 percent. The declining annual motorcycle sales were related to natural disasters adversely impacting the purchasing power of its consumers and disrupting distribution networks.  

Jakarta Composite Index (JCI): the JCI closed at a stronger level of 4,620.22 at the end of February (vs. 4,418.76 at the end of the previous month). This bullish stock market was mainly backed by improving domestic macroeconomic indicators such as manageable inflation and narrowing trade deficit as well as the stronger rupiah. These factors had led to positive market catalyst for investors during last month. Another factor boosting the JCI was an expectation of healthy financial reports that would be released by listed companies. Furthermore, from a global perspective, a positive sentiment came from the US central bank that might adopt an accommodating monetary policy in the near future.

BI rate: Indonesia's central bank (Bank Indonesia) decided to maintain the benchmark rate (BI Rate) at 7.50 percent. This decision was backed by a relatively manageable inflation in January 2014. Although exceeding the inflation rate in December 2013, a rate of 1.07 percent mtm was not far from the historical average of 2008-2013. It is expected that the central bank will maintain the BI rate unchanged in the next governor’s meeting on 13 March following the benign February inflation and keeping the tight money policy stance.

Rupiah: in tandem with the strengthening of the JCI, the rupiah exchange rate also appreciated against the US dollar at IDR 11,634 from IDR 12,204 in January, mainly due to a narrower trade deficit that stimulated investors on the buying stances of the nation’s assets. However, the rupiah movement in the short-term could potentially be influenced by the recovery of the US economy coupled with domestic political conditions with respect to the legislative election scheduled in April.

Oil: expectations on the improved US economy coupled with demand from this country for heating oil amidst prolonged cold weather boosted the price of crude oil. The WTI closed at a higher level of USD $102.59/barrel from USD $97.49 a month before. In the near term, the price might be influenced by geopolitical factors in Ukraine. Russia’s military action raised concerns of economic sanctions against one of the major energy producers in the world.

Coal: by the end of February, the coal price closed weaker at USD $77.55/ton compared to USD $80.03/ton in January, partly due to slower economic growth in China which is one of the biggest coal importers in the world. Indonesian coal exports in 2013 dropped to around 124.4 million tons (vs. about 175.6 million tons in 2012). The government plans to cap coal production at around 400 million tons this year, 5 percent less than last year's production in an effort to curb the decline in price.

Crude Palm Oil (CPO): the CPO price also closed stronger at USD $855.36/ton at the end of February from USD $766/ton in the previous month. This was backed by the weather-disrupted harvests in Indonesia, the world’s biggest CPO producer. The industry’s association said that CPO production is predicted to expand to around 29.5 million tons in 2014 (from 26.2 million tons in 2013), of which only 18 million tons would be exported. A higher target of biodiesel usage mandatory at 10 percent (January 2014) and 20 percent (January 2016) compared to 5 percent (September 2013) for industry and commercial segments will potentially reduce the CPO supply in the global market which might trigger a higher price of CPO.

Gold: the gold price was also in a bullish trend as its price climbed to USD $1,321.6/ounce from USD $1,240.1/ounce in January. This was supported by robust demand from China coupled with a statement from the Federal Reserve’s chair Janet Yellen to continue existing monetary policies.

The Indonesian Financial Services Authority (OJK) plans to give leeway to insurance companies and pension funds to invest in debt securities rated at least BBB (previously set at minimum A). The change in rating level requirement is expected to encourage multi-finance companies to issue bonds or MTN to support their financing needs.

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

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