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Stock Index
Bahana Securities

23 Oct 2019 | 17:13 WIB
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23 Oct 2019 | 17:13 WIB
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Desirable February deflation, Undesirable rupiah weakness


Beating our and market expectations, the country’s February Consumer Price Index (CPI) showed further deflation of 0.36% m-m (January: -0.24%), the lowest level in 15 years. February data also showed y-t-d CPI deflation at 0.61%. We note that the last time, deflation for two-months in a row was recorded in March-April 2011.

With the support of regular fuel price cuts in January, price levels of transportation and staple foods trended down (exhibit 3). Additionally, on a y-y basis, February CPI decelerated to 6.29% (January: 6.96%). Also, lower than market and our estimates, February core inflation slightly slowed to 4.96% y-y (January: 4.99%), despite the negative impact from electricity tariff adjustment and price hike for non-subsidized 12kg-LPG.

Contrary to disinflationary data for January-February showing a 0.6% y-t-d deflation, we expect March CPI to move back into inflation territory. There are two major factors underlining our expectation.

First would be higher administered prices. The Ministry of Energy and Mineral Resources (ESDM) has raised regular fuel price to IDR6,900/ltr in Java, Madura and Bali, while the fuel price for outside those areas also inched up to IDR6,800/ltr, resulting in IDR150/ltr price hike on average, up 2.2%. Separately, Pertamina (State-owned oil company) has also hiked prices of non-subsidized 12kg-LPG to IDR134,000/canister, increased 3.8%.

Secondly, higher CPI will stem from the surge in rice prices as a result of potential delay in harvest season. At this stage, we believe there could be a 0.15% inflation in March based on our sensitivity analysis. However, we expect the 1H15 inflation to remain manageable, at 6.5% - 7.6% y-y.

Despite the deflationary trend, and expected further surplus in trade balance, we believe that the central bank, at its next policy rate meeting on 17 March, will maintain its benchmark rate at 7.50%.

In our view, the central bank is likely to remain cautious leading up to the Fed’s monetary policy decision in April, the outcome of which may result in continued and undesirable weakness of IDR, which could break the 13,000/USD level.

At this stage, we are concern companies particularly for SMEs with the need for USD raw materials imports and foreign debt servicing requirements.  Note that Indonesia’s 11M14 external private debt of USD160.5bn, up 15% y-y, has not only exceeded the government’s external debt of USD134bn but also comprised of sizeable short-term loans amounting to USD50bn or more than 31% of total private offshore borrowings.

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