KI: Strategy Report - Better Trade and Inflation Data

Better Trade and Inflation Data



The trade balance reverses to a surplus of US$124 mn in July

The Central Bureau Statistic reported that Indonesia trade balance regains a surplus US$124 mn in July compared to a deficit of US$288 mn (revised) in June. This was better than consensus expectation of US$406 mn deficit as import declined at faster pace of 19.3% yoy to US$14.05 bn (-10.5% mom) compared to a 6.0% yoy decline in export to US$14.18 bn (-8.0% mom). Non-oil & gas trade balance saw a strong increase in surplus to US$1.73 bn in July compared to only US$320 mn in June, despite an increasing oil & gas deficit to US$1.61 bn in July (US$608 mn in June). Non oil & gas export in July reached US$11.63 bn (-7.9% mom and -9.2% yoy) while non oil & gas import was down faster to US$9.9 bn (-19.6% mom and -25.5% yoy). By countries of destination, non-oil and gas export in July was dominated by export to USA of US$1.3 bn followed by China of US$1.19 bn and Japan of US$1.11 bn which all together represented around 31% of Indonesian export. Meanwhile, non-oil and gas import contraction is mainly influenced by decrease in import of iron & steel, electronic machinery, and plastic.



Annual inflation eases to 3.99% in August

Indonesia’s general inflation was up 0.47% mom in August, which came slightly higher than consensus estimate of 0.42%. This was mainly driven by higher prices in i) food, processed food and cigarettes, ii) electricity, water, and gas and iii) health expenditure components. However, yearly inflation came at 3.99% in August vs. consensus estimate of 4.15%. Meanwhile, core inflation was at 4.47% yoy in August which is better than 4.64% in July but higher than consensus estimate of 4.08%. On calendar basis, consumer prices gained 3.42% yoy in August. We still foresee yearly inflation to gradually reach our year end forecast of 5.3% as high base effect from last year’s fuel price increase will gradually ease through the rest of the year and negative impact from electricity price hike.



We expect BI to maintain its policy rate at 7.5%

Despite slowing inflation rate and widening real interest rate, we still expect BI to hold rates unchanged in next week’s meeting given still unfavorable CAD outlook and as domestic economies are still susceptible to external shocks especially from potential hike in Fed rate. Bank Indonesia has hinted it would not loosen its monetary policy until the current account deficit (CAD) narrows to 2.5 % of GDP, a level unlikely to be reached until after next year. The central bank expected the current account deficit to reach around 3.0 % for full year 2014 against last year’s 3.3 %. Concerns over capital outflows and a liquidity squeeze would also become more potent if the Fed needs to adopt a more hawkish stance next year. BI’s tightening policy and CAD target for full year 2014 is still in line with our new assumption of CAD at around US$25 bn and BI rate of 7.5%.