Snapshot Indonesia's CPI and Trade November 2014

Inflation Remain Manageable and the Decline in Trade Balance Deficit

CPI Review

Inflation in October 2014 remain manageable at 0.47% (m-o-m), rising from 0.27% (m-o-m) in previous month. Furthermore, yearly inflation in October 2014 rose to 4.83% (y-o-y) from 4.53% (y-o-y) in a month earlier. The rising yearly inflationary pressure is caused by the impact of long drought, electricity tariff hike, and the increasing of 12kg LPG price. In October 2014, volatile foods experienced inflation of 0.24% compared to preceding month. This was mainly due to the effects of the long dry season. A major drought this year has an impact on the presence of crop failure in some central areas of agriculture in Indonesia. As a result, the supply of foodstuffs to be reduced which affects the increase in the price of some commodities of food, such as red pepper, chili, rice, green pepper, and oranges. Meanwhile, yearly core inflation in October 2014 slightly decreased to 4.02% (y-o-y) from 4.04% (y-o-y) in the previous month. Contributors to core inflation in October 2014 are an increase in the price of housing rent/contract, tuition fees, and cigarettes. Administered prices inflation in October 2014 increased to 1.34% (m-t-m) from 0.54% (m-t-m) in previous month as LPG (12 kg) price and electricity tariff climbed. Looking ahead, we expect yearly inflation will likely tame in the following months and will reach 5.12% by the end of this year if there is no rise in fuel prices. However, if there is a fuel prices increase of Rp 3,000 in November, then we expect that inflation will reach 8.0% - 8.5% by the end of this year.

Trade Review

The trade balance in September 2014 was still deficit of USD 270 million slightly better compared with a deficit of USD 312 million in one month earlier. Exports in September stood at USD 15,275.8 million, rising by 5.48% (m-t-m), and increasing by 3.87% (y-o-y). The improving export performance was driven by increase in non-oil and gas exports to USD 12,653.2 million from USD 11,883.5 million in the previous month data. Furthermore, non-oil and gas export rose due to rising exports of coal (5.73%m-o-m), CPO (4.26%m-o-m), machinery/electrical appliance (3.29%m-o-m), rubber & the article thereof (6.40%m-o-m), and machinery/mechanical appliance (11.08%m-o-m). Furthermore, oil and gas export also rose to USD 2,622.6 million in September from USD 2,598.2 million in the previous month.

On the other hand, the deficit trade balance was caused by the increasing imports was still high during September 2014. The total imports spiked to USD 15,546.1 million, rose by 5.09% (m-t-m), from USD 14,793.2 million in one month earlier. The improving growth of imports is driven by rising non-oil & gas imports (4.39%m-o-m) and oil & gas imports (7.42%m-o-m). The improving non-oil and gas import was triggered by rising imports of machinery/electrical appliance (1.38%m-o-m), Iron/Steel (7.76%m-o-m), Plastics & the article thereof (7.97%m-o-m), chemical organic (9.97%m-o-m), vehicle & parts (19.46%), the articles of iron/steel (12.59%m-o-m), cereal (39.01%m-o-m), and cotton (2.89%m-o-m).

By type of goods, imports of raw material increased by 5.64% (m-o-m) to USD 11,756.5 million and imports of capital goods rose by 4.90% (m-o-m) to USD 2,620.8 million. Moreover, imports of consumer goods slightly increased by 0.26% (m-o-m) to USD 1,168.8 million in September 2014.

Market Implication

FX Markets

The decline in the trade balance deficit and manageable inflation in October give positive sentiment of Rupiah. However, the Rupiah is still haunted by the cessation of QE3 by the US Federal Reserve and Fed Fund Rate hike expectations associated with improved US economic data. In addition, negative sentiment of Rupiah comes from the unclear government's plan to raise fuel prices and political conditions are still uncertain. With this condition, the Rupiah is still under pressure in the near future.

Bond Markets

In line with manageable inflation in October and slightly down of the trade balance deficit also provide a positive sentiment in the Indonesia’s bond markets. In addition, the lack of supply of bonds in the primary market in the rest of 2014 give positive impact to bond market transactions in the secondary market. This is due to most investors hunt for Indonesian bonds in the secondary market that have an impact on the strengthening of the bond prices. However, the government's plan to raise fuel prices that can make inflation surge that could withstand the strengthening of the Indonesia's bond markets. Overall, we see that the Indonesia’s bond market would remain moving mixed with limited positive tendency in the near future.