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Weekly Report - Deflation accelerates
March 03, 2015 10:13 WIB

Less noise on the political front coupled with continued macro improvements has underpinned the market’s upward trend which has resulted in fresh highs. Foreign inflows continued to increase: reaching IDR10.6t in February, the highest in 7 months. More good news comes in the announcement of further deflation in February, reaching 0.36% m-m, mainly on lower food and transportation prices. This month, however, the accelerating deflation trend may be broken due to the recent hikes in gasoline and LPG canister prices. Encouragingly, the deflation may give BI more room to cut its benchmark rate further, not only helping to accelerate economic growth but also providing support for the currently weak IDR. 

Further deflation in February – more interest rate cuts to come? 
Developments on the macro front remain favorable - as seen in the further deflation in February. The deflation in February was all the more remarkable given the widely-publicized increases in rice prices during the month. In February, deflation reached 0.36% m-m, or even greater than January’s deflation of 0.24%. February’s deflation owed to two main factors: 1. Easing food prices with deflation of 1.47% m-m (on lower prices of spices) and 2. Easing prices in the transportation component with deflation of 2.3% m-m. By comparison, the impact of higher rice prices on inflation was relatively low at only 0.11%. The deflation in February brings down overall inflation to only 6.29% from 6.96% in January and 8.36% at the end of 2014. Historically, inflationary pressure is low in both March and April, especially with the start of the main harvesting season in Indonesia. Nonetheless, the recent hikes in both gasoline and LPG canister prices could break the trend of accelerating deflation in March. 

With continued deflation, all eyes are now on BI to see whether it cuts interest rates further after reducing its benchmark BI rate by 25 bps two weeks ago. In our view, the recent rate cut highlights two main points: firstly that BI’s inflation targeting framework is still in place, suggesting that further deflation would lead to more rate cuts in the future, and secondly that BI has greater flexibility (and is more willing) to move away from its tight monetary policy stance. We view that more relaxed monetary policy is crucial to help the government achieve its ambitious 5.7% economic growth target this year. As such, further rate cuts could be on the cards, and if they do materialize, this would bode well for the stock market going forward. Our economist expects for a rate cut in Mar-May period and another cut in Nov-Dec period, totalling 50 bps. 

Fuel price hikes in March and a weak IDR 
With rising crude oil prices in February, the government has decided to raise gasoline prices by IDR200 to IDR6,800/liter (up 3%) whilst maintaining the price of diesel fuel at IDR6,400/liter, arguably to minimize the impact on overall inflation. The increase in gasoline prices is, however, much less than the 18% m-m increase in the average Brent oil price in February of USD58.8/barrel, implying that: 1. the government still controls the balance between a larger fuel subsidies budget (and higher deficit) and inflation, with the risk on the former much smaller at this juncture; and 2. The possibility of further increases in gasoline prices – although minimal – since the spot Brent oil price now stands above USD60/barrel. In the short term, rupiah weakness remains a main concern. Whilst macro improvements have taken place, the currency has continued to move south, and the IDR even touched the psychologically-important level of IDR13,000/USD. Nonetheless, we still believe that IDR strengthening will gradually transpire, especially in 2H when the impact of the government’s efforts to accelerate growth start to show. 

The market’s rerating continues 
Less noise on the political front coupled with continued macro improvements has underpinned the market’s upward trend which has resulted in fresh highs. Last week, the JCI went up 0.9%, with YTD performance reaching 4.3%. Weekly inflows surged to IDR3.38t last week, bringing the total monthly inflows in February up to IDR10.6t, the highest monthly inflow in 7 months. In the short term, the market will focus on: 1. the release of more 2014 corporate results; 2. BI’s rate policy following the announcement of further deflation in February; and 3. progress on budget spending, especially on infrastructure. In regard to point one, 15 companies under our coverage have so far released their 2014 figures. Overall the results are pretty much inline with expectations. Banks and construction stand out while the heavy weight Astra International was hit by impairments on its coal assets. 
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Trade Outlook

Trade Outlook - Better Trade Performance
February 13, 2015 14:15 WIB

December exports climbed 7.4 percent MoM to US$ 14.6 bn, helped by strong oil and gas exports (+11.7 percent MoM), and non oil and gas exports (+6.6 percent MoM). Both volume and average aggregate prices rose - up 0.9 percent and 6.4 percent, respectively.

Mineral fuels (HS 27) and animal and vegetable fats (HS 15) remained at the top of the list, and accounted for more than 28 percent of the non oil and gas exports. Compared to the previous month, exports of these two products fell by 2.6 percent and 2.9 percent, respectively.

Shipments of Indonesia's non oil and gas export products to China were down (-1.1 percent MoM), while non oil and gas exports to Japan and the U.S. rose by 2.1 percent and 23.9 percent, respectively.

Although oil and gas imports slipped 2.4 percent MoM in December, non oil and gas imports increased by 4.5 percent. In total, imports reached US$ 14.4 bn, or up 2.8 percent MoM. In volume terms, December's imports jumped 16.1 percent. Average aggregate prices, however, were 11.4 percent lower.

By product type, imports of mechanical machinery and equipment (HS 84) were 0.5 percent lower, and electrical machinery and equipment imports (HS 85) fell by 7.8 percent. Shipments of non oil and gas products from China and Singapore increased by 12.2 percent and 4.6 percent, respectively. Meanwhile, imports from Japan were 0.2 percent lower.

By classification of use, imports of capital goods dropped 3.5 percent while imports of raw materials and consumption goods rose 3.3 percent and 11.3 percent, respectively. For the full year of 2014, imports of raw materials accounted for 76.4 percent of Indonesia's total imports.

Overall, Indonesia recorded a trade surplus of US$ 186.8 mn in December compared to a US$ 425.4 mn trade deficit in November. In FY14, Indonesia's trade deficit reached US$ 1.88 bn - or lower than the deficit of US$ 4.1 bn recorded in 2013.

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CPI & SBI Outlook

CPI & SBI Outlook November 2014
November 27, 2014 14:54 WIB

Inflationary pressures began to rise in October. After posting benign inflation of 0.27 percent MoM in September, October’s MoM inflation accelerated to 0.47 percent. Nonetheless, on a yearly basis, inflation reached only 4.83 percent. And cumulatively, in the January-October period, headline inflation only reached 4.19 percent, or far lower than last year’s 7.42 percent.

All CPI components rose in October. The housing component (+1.04 percent) and the medical care component (+0.60 percent) recorded the largest MoM increases. The other components also posted increases: the prepared foods component rose 0.43 percent, the foodstuffs component edged up 0.25 percent, the education component climbed 0.23 percent, the clothing component added 0.21 percent, and the transportation component rose 0.16 percent.

In November, the government finally bit the bullet and hiked subsidized fuel prices to create a more sustainable state budget. Through this policy, the price of subsidized premium gasoline was raised from IDR 6,500/liter to IDR 8,500/liter, while the price of diesel fuel was upped from IDR 5,500/liter to IDR 7,500/liter. The price of subsidized kerosene was kept unchanged at IDR 2,500/liter. In our estimates, the government’s decision to hike fuel prices by 32 percent on average will create additional inflation of 2.2 percent, meaning that the inflation rate will reach around 7.4 percent at the end of 2014.

To cushion the impact of the fuel price hikes, the government provided social assistance to low income families through several socialprotection cards, i.e. the Indonesia Health Card (KIS), the Indonesia Smart Card (KIP) and the Prosperous Family Card (KKS). .. For November, given the absence of seasonal factors, heightened inflationary pressures will be driven by the government’s decision to hike subsidized fuel prices. Indeed, inflationary expectations already increased ahead of the fuel price hikes with the prices of several types of commodities heading higher. Then, after the announcement, increases in transportation fares and the prices of some goods followed. In our estimate, the full impact of the fuel price hikes will be seen in the December inflation figure.

Against this backdrop, we predict inflation of 1.29 percent MoM in November, translating into YoY inflation of 6.01 percent.

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Forecast For Desember 2014

Exports US$ 13.80 bn
Imports US$ 13.60 bn
Trade Balance US$ 221.60 bn

Forecast for 2014

Exports US$ 175.50 bn
Imports US$ 177.40 bn
Trade Balance US$ 1.80 bn

DRI Forecast for January 2015

MoM(%) 0.47
YoY(%) 7.72

End of period(% p.a) 7.50

Forecast for 2014

Inflation(%) 5.04
SBI(% p.a) 7.50