Economic and Markets Research Snapshot CPI and Trade Report

August 2013

Accelerating Inflation, Widening Trade Deficit

CPI Review
Indonesias July CPI surged more than expected to 3.29%mom with annual inflation reaching 8.61%yoy from 5.90%yoy in June. The inflationary surge is explained largely by the non-fundamental components of administered prices and volatile foods. Higher inflation in administered prices came mainly in response to the government decision on 22 June 2013 to raise subsidized fuel prices by 33.33% in average, in addition to soaring fuel consumption and declining oil production. The impact of the fuel price adjustment was partially reflected in previous month and further inflationary pressure from fuel price hike already surfaced in July. Moreover, the significant rise in inflation also represented the second round effect of the fuel price hike and rising transportation cost. In the administered prices category, inflation reached 15.10%yoy, having spiked from 6.70%yoy in the previous month. In additional, seasonal effects of Ramadan also contributed largely to surging volatile food inflation. Volatile foods inflation was up to 6.07%mom compared to 1.18%mom in the previous month. In July 2013, core inflation was recorded at 4.44%yoy, climbed from 3.98%yoy in the previous month. The higher core inflation is driven by seasonal factor of the onset of the new academic year. The most important contributor with the surging inflation in July 2013 was the transportation component with inflation running at 9.60%mom compared to 3.80%mom in June. Commodities which contribute to rising inflation in this component are fuel price and transportation tariff. Furthermore, foodstuffs component, driven by soaring prices of shallot, chicken, fish, chili, eggs and rice, contributed inflation at 5.46%mom. Meanwhile, clothing component contributing 0.09%mom on deflation was driven by declining gold jewelry prices.

Trade Review
Indonesias June trade deficit widened to deficit of USD 847 million compared to deficit of USD 527 million in May 2013. Export in June was weakening to USD 14,741 million (down by 4.58% from a year earlier) from USD 16,133 million in May 2013. This worsening export performance was triggered by declining both oil & gas exports with pace -4.99%yoy and dropping non-oil and gas exports by -4.44%%yoy to USD 11,984 million from USD 13,207 million in the previous month data. The deteriorating non-oil and gas export was mainly triggered by declining export of mineral ores (-43.15%mom) and mineral fuel (-15.49%mom). On the other hand, the import in June 2013 was at USD 15,587 million from revised USD16,661 million. The declining import is driven by falling non-oil & gas import to USD 12,058 million from USD 13,225 million one month earlier. The falling non-oil and gas import was triggered by dropping import of iron/steel and vehicle/automotive parts by 25.43%mom and -25.36%mom. Based on type of goods, imports of capital goods dropped by 9.52%mom to USD 2,570 million while imports of raw material declined by 5.82%mom to USD 11,803 million. Moreover, imports of consumer goods fell by 5.73%mom to USD 1,213 million in June 2013.

Market Implication
FX Markets Widening trade balance deficit in June of USD 847 million has lead trade balance deficit of USD 3.3 billion in H12013. Furthermore, current account deficit is expected to be worsening in Q2/2013 to 3.5% of GDP from 2.4% of GDP in Q1/2013, as predicted by Bank Indonesia. Considering worsening current account deficit and surging inflation in July due to fuel price hike and Ramadan season, we expect IDR would be still under-pressure against USD inChanges the near in term. However, we also expect the IDR would be appreciated to 10,100 level by by the end of year Consumer Price Index (Percent) Main Driven of Inflation Component as expectation of improving external balance and re-entering capital inflows. Bond Markets The foreign investor would be concerned on the spike of inflation in July since they still wait and see to re-enter to IDR government bond market. Nevertheless, based on latest data from Directorate General of Debt Management MoF, Bank Indonesia tends to enter IDR bond market by IDR 32 trillion compared to end of June in order to stabilize the bond market. We expect that improving condition in IDR bond market triggered by BIs measures would not be sustainable. Going forward, we expect bond market would be still under-pressure in the near term. 1

FOODSTUFF PREPARED FOOD HOUSING CLOTHING MEDICAL CARE EDUCATION TRANSPORTATION GENERAL Food and Non-Food FOOD NON-FOOD

M-on-M changes Y-on-Y changes YTD (Jan-Jul) May-13 Jun-13 Jul-13 May-13 Jun-13 Jul-13 2011 2012 2013 -0.83 1.17 5.46 11.14 10.70 14.81 0.77 4.05 13.03 0.35 0.67 1.55 5.60 5.79 6.49 2.56 3.90 4.27 0.75 0.21 0.44 4.71 4.55 4.84 2.15 1.97 3.44 -1.22 -0.29 -0.09 0.54 -0.14 -0.41 3.07 1.18 -3.73 0.23 0.23 0.40 3.24 3.26 3.23 3.14 1.86 2.19 0.06 0.04 0.69 4.41 4.34 4.47 1.99 1.06 1.31 0.05 3.80 9.60 1.64 5.48 15.25 1.07 1.03 13.93 -0.03 1.03 3.29 5.47 5.90 8.61 1.74 2.50 6.75 -0.33 0.20 0.96 1.08 3.80 2.89 8.71 3.22 8.56 11.20 4.09 6.81 1.54 3.98 9.22 0.11 0.61 1.65

Component Foodstuffs

Change (%)

Drivers

Contribute (%) 1.36

5.46 Red onion, chicken meat, fish, chili, rice, eggs, beef, potatoes, tomatoes, red peppers, salted fish, instant noodles, chicken alive, goat meat, spinach, long beans, banana, watermelon, tomato fruit, and coconut

Prepared foods, beverages and cigarettes 1.55 Fried chicken, greasy pastries, noodles, soup, slurry, cake, martabak, satay, cigarettes, and filter cigarette Housing Clothing Medical Care Education, recreation and sports Transportation and Communications Source : BPS & BII Economic Research 0.44 Brick, household fuels, labor wages, housing contracts, housing rents, and servant wages -0.09 Gold and jewelry 0.40 Body care and cosmetics sub-sector 0.69 Tution fee (preschool, primary school, junior high school, and college/university) 9.60 Gasoline, transport fares in the city, inter-city freight tariff, air freight tariff, and diesel oil Total

0.28 0.10 -0.01 0.02 0.04 1.50 3.29

Source : BPS & BII Economic Research

Year on year Inflation

YoY-Inflation (%)
(%) 24
20
General Food Non Food

Indonesias Trade Performance

Trade Performance
Trade Balance Exports Growth, y-o-y Imports Growth, y-o-y

yoy (%) 120 90

US$ bn 5.00 4.00 3.00

16

60
12

2.00 1.00 0.00 -1.00

30
8

0
4

-30
0

-2.00 -3.00
Aug-02
Jun-03

-60
J ul-05 Aug-07 J un-08
Jul-10

yoy (%)

J ul-13 M ar-13 Nov-12 J ul-12 M ar-12 Nov-11 J ul-11 M ar-11 Nov-10 J ul-10 M ar-10 Nov-09 J ul-09 M ar-09 Nov-08 J ul-08 M ar-08 Nov-07 J ul-07 M ar-07 Nov-06 J ul-06 M ar-06 Nov-05 J ul-05 M ar-05 Nov-04 J ul-04 M ar-04 Nov-03 J ul-03 M ar-03 Nov-02 J ul-02 M ar-02

Aug-12

J un-13

Nov-03

F eb-05

M ay-06

Oct-06

Nov-08

F eb-10

M ay-11

Oct-11

J an-03

Apr-04

Sep-04

M ar-07

J an-08

Apr-09

Sep-09

M ar-12

J an-13

Dec-05

Dec-10

Source: BPS & BII Economic Research

Year on Year Growth of Indonesias Exports

Exports Performance (yoy growth)
Total exports 150 120 90 60 30 0 -30 -60 -90
Aug-02 J un-03 J ul-05
Aug-07 J un-08

Year on Year Growth of Indonesias Imports

Imports Performance (yoy growth)
yoy (%)
170 120 70 20 -30 -80
J an-03 Apr-04 S ep-04 M ar-07 J an-08
Apr-09 S ep-09

Oil & gas exports

Non-oil & gas exports

Total import

Oil & gas import

Non-oil & gas import

M ar-12

J an-13

J un-03

J ul-05

Dec-05

J un-08

J ul-10

Dec-10

J un-13

Aug-02

Aug-07

Aug-12

Nov-03

F eb-05

M ay-06

Oct-06

Nov-08

F eb-10

M ay-11

Oct-11

J ul-10

Aug-12

J un-13

Nov-03

F eb-05

M ay-06

Oct-06

Nov-08

F eb-10

M ay-11

Oct-11

Source: BPS & BII Economic Research

Indonesia's Trade Performance (Billions US$)

J an-03

Apr-04

S ep-04

M ar-07

J an-08

Apr-09

S ep-09

M ar-12

J an-13

Dec-05

Dec-10

Source: BPS & BII Economic Research

2013 January February 15.02 2.57 12.45 March 15.02 2.93 12.10 April 14.76 2.45 12.31 May 16.13 2.93 13.21 June 14.74 2.76 11.98

YTD (Jan-Jun) 2012 96.96 20.17 76.79 2013 91.05 16.28 74.77

Export

Total Export Oil & Gas Total excl. oil/gas

15.38 2.65 12.72

Import (incl. Trade Zone)

Total Import Oil & Gas Total excl. oil/gas

15.45 3.97 11.48 -0.07 -1.31 1.24

15.31 3.64 11.67 -0.30 -1.07 0.78

14.89 3.90 10.98 0.14 -0.97 1.11

16.46 3.63 12.83 -1.70 -1.18 -0.53

16.66 3.44 13.23 -0.53 -0.51 -0.02

15.59 3.53 12.06 -0.85 -0.77 -0.07

96.45 21.44 75.01 0.51 -1.27 1.78

94.36 22.11 72.26 -3.31 -5.82 2.51

Balance (incl. Trade Zone)

Total incl. oil/gas Oil & Gas Total excl. oil/gas

Y on Y Growth
(percent)

Export

Total Export Oil & Gas Total excl. oil/gas

-1.25 -15.56 2.37 6.15 31.35 -0.44

-4.32 -23.48 0.89 3.00 4.29 2.61

-12.91 -16.00 -12.13 -8.81 -2.65 -10.82

-8.73 -31.14 -2.41 -2.80 -11.92 0.13

-4.14 -21.44 0.78 -2.21 -0.19 -2.72

-4.54 -4.95 -4.44 -6.82 5.22 -9.83

-1.68 3.00 -2.84 15.40 11.42 16.58

-6.09 -19.26 -2.63 -2.16 3.11 -3.67

Import (incl. Trade Zone)

Total Import Oil & Gas Total excl. oil/gas

M on M Growth
(percent)

Export

Total Export Oil & Gas Total excl. oil/gas

-0.12 -10.56 2.37 -0.85 7.03 -3.30

-2.34 -3.25 -2.15 -0.89 -8.16 1.63

0.06 14.05 -2.83 -2.78 7.15 -5.88

-1.76 -16.27 1.76 10.59 -7.01 16.84

9.30 19.35 7.30 1.20 -5.34 3.05

-8.63 -5.81 -9.26 -6.44 2.72 -8.82

Import (incl. Trade Zone)

Total Import Oil & Gas Total excl. oil/gas

Source: BPS & BII Economic Research

Indonesia's Imports include Trade Zone by Type of Good (Mil US$)

Category Import Total Consumer Goods Raw Material Capital Goods Value CIF (US$ mn) May Jun M-o-M growth 2013 2013 (% ) 16660.5 15587.3 -6.44 1286.4 1212.7 -5.73 12532.8 11803.9 -5.82 2841.3 2570.7 -9.52 Value CIF (US$ mn) Jan-Jun Jan-Jun 2012 2013 96449.2 94361.9 6749.8 6412.1 70277.1 72172.9 19422.3 15776.9 Jan-Jun Share of Import growth (Y-o-Y) Jan-Jun 2013 (% ) (% ) -2.16 100.00 -5.00 6.80 2.70 76.49 -18.77 16.72

Source: BPS & BII Economic Research