Indonesia Macro Flash

Oct Inflation Surprises on the Downside; Trade Surplus Slightly Up

October inflation surprised on the downside at 2.57% YoY (+0.19% MoM)
versus consensus of 2.83% (Citi: 2.9%).

The lower than expected inflation was led by a sharp drop in MoM food inflation (to +0.28% mom in Oct vs. 1.4% in Sep) and the surprise decline in transport/ communication component (-0.7% mom vs. +0.9% the in Sep). The decline in food price inflation for the month is in line with expectations given the end of Idul Fitri, but we are somewhat surprised that the decline in inter-city-transport fares, petrol and air/train fares








would lead to deflation in the transport component given that we also saw a
modest rise in LPG prices, toll tariffs, and higher world fuel prices that may
have only partly offset the positive impact from the stronger IDR.

BI to keep policy rates at 6.5% on 4 November, as widely expected, and
unlikely to signal an exit strategy yet

With headline inflation surprising on the downside, there is good chance that year-end inflation will remain around 3.8% by year-end, comfortably in the 3.5%-5.5% inflation target for this year. Thus, despite recent volatility in the IDR and expectation of higher inflation next year, we think BI will keep its monetary policy language “neutral” and
avert signaling any sign of an exit strategy in its upcoming monetary policy
meeting – we don’t expect hints of hawkishness until early next year.

Exports and imports underperformed; trade surplus widened in Sep –

Export contracted more in Sep on a year-on-year basis vs. Aug (Sep: -19.9%, Aug:
-15.4% YoY), underperforming consensus expectation for a moderating
contraction of 12% on the back of high base in Sep-08 and sharp contraction
in the exports of oil and gas. Non-oil and gas exports contracted by 17.2% yoy
(Aug: -6.5%). On a month-on-month SA basis, exports fell after 3 months of
consecutive gains (Sep: -2.0%, Aug: 8.7%), led by a drop in animal/vegetable
oil exports, whereas metals & minerals picked up. By destination, the biggest
monthly drop in non-oil and gas exports was to Europe and China, while
exports to Singapore, Japan and Australia increased. The decline in imports
(Sep: -24.2%, Aug: -21.2% YoY) also underperformed expectations
(consensus:-17.3%) due to a fall in non-oil and gas imports, especially ships
and floating structures. As imports contracted faster, the trade surplus
widened to US$1,269mn from US$1,020mn in Aug. We expect a narrowing in
the trade and current account surplus going into 4Q09 as Indonesia’s domestic
demand increases its pace of recovery and commodity prices bottom. (Tim Riset City)