By Dian Ayu Yustina, Anton Hendranata & Anton Gunawan

January 2, 2014

Mild inflation closing the year 2013
The statistic office released the December’s inflation and November’s trade data today.  As expected, inflation was relatively tame at 0.55%mom, closing the year at 8.38%yoy.
The number is slightly above our expectation at 0.48%mom (8.31%yoy) and also slightly above the consensus at 0.5%mom (8.33%yoy).  This showed that the inflation pressure is coming back to its normal pattern (after the impact of a series of administered prices hike last year, i.e. the subsidized fuel price hike and the electricity rate hikes).
As expected, pressure came mainly from the higher raw food prices i.e. fish, rice and chilli (contributed around 0.2% out of total 0.55%) affected by the heavy rainy season that may have disrupt production/distribution.
The monthly core inflation was at 4.98%yoy in December. The weaker IDR may have played some part in the rising core inflation.

Wider trade surplus in November
The trade balance recorded a wider surplus at US$0.78bn, which isslightly higher than our projection at US$0.53bn and well above the market expectation (US$0.07bn). The wider surplus was more because of the significant decline in imports (-10.6%yoy). Meanwhile exports are still declining by -2.4%yoy.
The non oil sector performed well. Surplus in the non oil and gas sector continued to widen to USD1.9bn (about 1.5 times bigger than the previous month). This is more than enough to counter the higher deficit in the oil and gas sector (USD1.2bn).  Imports of oil products were rising again dominating the deficit in the oil and gas balance.
Non oil exports was positive as demand improved and some of the commodity prices are stabilizing. Biggest improvement was in the exports of CPO and raw mineral exports, each grew by 41.5% and 14.7%mom. Manufactured products were mixed, improvement were mostly seen in foot wear and plastic products while machineries, mechanical instruments and vehicles are slowing down. Improving demand were in sight particularly from China and India, as the average exports prices were actually lower. However, we still need to see a sustainable improvement in the manufacturing sector to reduce exposure from the vulnerability of natural resource based exports.
A significant decline were seen in the non oil and gas imports, while the oil and gas sector was still rising. Based on its use, the raw material imports finally showed a considerable decline. This suggested there is already signs of slowing domestic demand as already shown by some indicators i.e. slowing down of retail sales (11.3%yoy), cement sales and money growth.

Market & Policy Implications

We expect the inflation in 2014 to be relatively tame at 4.9%yoy by year-end, assuming no significant change on the administered prices as we are in the election year, unpopular policies tend to be avoided.
We are expecting the recovery in the trade balance to continue, as we finally see the impact of 175bps rate hike last year on imports. However, oil and gas deficit remained a problem. Weaker IDR may cause the fiscal burden on the subsidized fuel to increase. However, in terms of volume, it is expected to reach slightly below the 48mnKL quota in 2013.
Thus, policies on structural reform is still needed particularly to guard the recovery of the trade balance particularly on the imports side. We still have to see whether the biodiesel requirement could have a significant impact in reducing pressure on the oil and gas trade balance.
Challenges also remained with the government to implement the raw mineral exports ban in January 12. We expect the CA deficit to improve to around -2.9%of GDP this year.
An improvement in the trade balance should be positive for the rupiah. Thus, we may see a strengthening of the rupiah this year and may reach Rp11,058/USD by year end. Positive data on trade and inflation may also provide some breathing room for the monetary authority. The central bank may keep the BI rate at 7.5% at its next meeting. Pressure on the rupiah should gradually ease as BI has recently issued an improvement on the regulation of hedge swap transaction, allowing onshore commercial banks to swap USD for IDR, to improve onshore USD liquidity.