Garlic and onion prices drive inflation, but supply crunch should ease - Bank Danamon | Outlook data
The following is an Indonesia economic briefing released by PT Bank Danamon Tbk, a leading Indonesian bank.
Indonesia Economic Briefing
Garlic and onion inflation, wider trade deficit
By Dian Ayu Yustina, Anton Hendranata & Anton H. Gunawan
April 1, 2013
Inflation Highlights: Garlic and Onion Inflation
· Mar-13 CPI headline inflation rate was still rising sharply by 0.63%mom, which is significantly higher than our forecast and the consensus’ median. It then brought the year on year inflation rate to jump to 5.90%, compared to 5.31% in the previous month due to a low base effect.
· Lack of supply in onion and garlic is the main culprit of rising inflation in the last two months. The price increase in March reached around 150% and 105% each, far higher than the month before, due to needed stricter import requirement to release the imported garlic and onion to the market. Late response from the government (agriculture ministry and trade ministry eventually issued a dispensation of import requirement – Permentan no.40/2013 and Kepmendag no. 510/2013 were only issued on March 20th and 21st) exacerbate the rising price of garlic and onion in March.They could not help dampened the jump in the onion and garlic prices in March, but maybe in April.
· The excessive implementation of the horticulture product import limitation policy without the effort to strengthen the domestic production is one of the main reasons of the scarce supply of onion and garlic. However, we think this lack of supply is only temporary and will moderate in the coming months, as the other food prices movements in March had been relatively stable or even declining (i.e. garlic and onion alone contributed around 0.64% out of 0.51% food inflation). If the government is consistent in synchronizing the domestic needs with the importation policies, the price of these two items will eventually decline. If not, the year end inflation could climb above our expectation at 5.5%, even without the subsidized fuel price hike.
· Meanwhile, the monthly core inflation at 0.13%mom in Mar-13 turned out to be lower than the previous month’s (0.30%mom) and last year’s (0.20%mom) numbers. It thus leads to a lower year on year core inflation rate at 4.21% vs. 4.29% in the previous month, due to a high base effect. This lower core inflation was mainly driven by a decline in the Rupiah price of gold jewelry around 4%
Trade Highlights: Wider trade deficit
· Trade balance (BPS data release) was still in the negative territory, registering a higher deficit of US$0.33bn, as exports decline faster.
· Exports declined larger than expected by -4.5%yoy (-2.5%mtm) which was mostly driven by deteriorating oil and gas sector. Oil products and gas exports declined quite considerably each by 15.4%mtm and 12.3%mtm. However, exports of crude oil somewhat recovered and grew by 21%mtm, slightly reducing concern over the state of oil production lately. Increase of crude oil exports was largely driven by its volume (17.6%mtm), rather than the price (3.4%). The limited lifting of oil has been an issue for some time due to some technical problems in some of the fields. Oil lifting could fall well below the state budget’s target (900 thousand barrel per day), thus reinstating pressure on the oil trade balance.
· Non oil and gas exports registered a monthly decline by 2.1%mtm, signaling that a rebound in some of the commodity prices is still not enough to maintain positive growth in exports as demand remained weak. CPO, mineral fuels and textiles declined, while other manufactured goods (i.e. machineries, electrical appliances and mechanical instruments) still supported the overall export performance.
· On the other hand, the pressure on the trade balance is somewhat lighter, with the slowing down of import pace. Import grew slower at 3%yoy, that mostly driven by lower imports of oil and gas, particularly crude oil. This may be due to some recovery in the oil production though the sustainability is still in question. As the fuel price hike issue has shifted to limitation policy of fuel consumption, the threat on bulging imports on oil is still there as the consumption limitation policy would be hard to monitor and will only have limited impact on reducing oil imports. Meanwhile, non oil and gas imports grew by 1.6%mtm supported by growth in the vehicles, iron and steel. In February, imports were largely driven by consumption goods while raw material and capital goods shows a slight decline.
Market & Policy Implications
· Inflation this month stays high, mostly driven by the higher food prices due to some imports and distribution problems. However, we do not think the pressure is structural, and expect a moderation in the coming months as we enter the harvesting season. With the inflation rate stays high in March, the chance of subsidized fuel price is getting less likely and the government may preferably shift to the fuel rationing scheme. Nevertheless, potential pressure on inflation this year should be monitored closely, with BI should stay ahead of the curve to anchor inflation expectation. Without a fuel subsidy reduction policy, we expect the inflation rate to reach 5.47%yoy in 2013, thus BI may hold the BI rate steady at 5.75% this year.
· Higher inflation expectation has led to a correction in the bond market. Yield for 10-yr benchmark have risen to 5.58% after the announcement of the inflation number.
· Trade balance figure remained a concern as it slides deeper in the negative territory. Potential pressure in the oil and gas trade balance could put additional pressure in the current account, which will lead to a negative sentiment on the rupiah. Rupiah seen weaker at Rp9,735/USD after the trade and inflation data announcement. However, we still expect an improvement in the trade balance and thus, still maintain our view of strengthening rupiah at Rp9,502/USD by year end. In the short term however, we think rupiah will still hover in the range of Rp9,600-9,700/USD, though with some upside risks. We think that this is still in line with BI’s favoring weak rupiah to dampen imports. However, BI may still act if they think that the weak rupiah translated into an additional pressure in the inflation.
