Update Indonesian Macroeconomy; ICRA Indonesia's Monthly Review

Inflation: Indonesia's year-on-year inflation rate declined slightly to 7.25 percent in April 2014 (versus 7.32 percent in the previous month) as a slight deflation of 0.02 percent occurred due to stable food prices and the harvesting season. Year-to-date inflation stood at 1.39 percent compared to 2.32 percent in the same period last year. Core inflation, which excludes administered and volatile prices, was recorded at 4.66 percent. However, inflation rates could rise in the coming months following the electricity tariff increases for the industrial segment starting in May 2014 and the government’s aim to cut fuel subsidies further.

BI Rate: the central bank of Indonesia (BI) decided on 8 May 2014 to hold its benchmark interest rate (BI rate) at 7.5 percent amidst manageable inflationary pressures. The current inflation rate is still on track with BI’s target for this year of 4.5±1 percent. At the same time, BI revised down its GDP growth target for 2014 to 5.1-5.5 percent from 5.5-5.9 percent, citing the slowdown of China’s economy as one of the main factors. In Q1-2014, Indonesia’s GDP grew by 5.21 percent (yoy), lower than the 5.72 percentage growth (yoy) recorded in the previous quarter.

Trade Balance: Statistics Indonesia reported a trade surplus of USD $680 billion in April 2014, sustained by a surplus in the non-oil & gas sector of USD $2.05 billion. This was counterbalanced with a trade deficit of USD $1.37 billion in the oil & gas sector amidst increasing domestic fuel consumption. Looking at the monthly profile, export accelerated to USD $15.22 billion (versus USD $14.63 billion) thanks to robust non-oil & gas sector. The three biggest markets for non-oil & gas exports in April were China (USD $1.5 million), USA (USD $1.3 million) and Japan (USD $1.2 million). In the previous month, Indonesia posted a higher trade surplus of USD $0.86 billion with a lower oil & gas trade deficit of USD $0.73 billion.

Balance of Payments: Indonesia continued to book a surplus in its balance of payments (BOP) of USD $2.1 billion in Q1-2014, despite being lower than the USD $4.4 billion the country posted in the fourth quarter last year. The surplus was backed by the improvement in the current account deficit to USD $4.2 billion (2.06 percent of GDP) during the quarter following the decrease in imports and narrowing deficits in services and income accounts. Further, the BOP was also supported by the USD $7.8 billion surplus in the capital account due to the country’s resilient economic fundamentals. However, it was lower than the USD $9.2 billion capital account surplus that Indonesia posted in the fourth quarter of 2103.

Foreign Reserves: following the surplus in the balance of payments in the first quarter of 2014 and further backed by robust oil and gas revenue, Indonesia's foreign exchange reserves increased to USD $105.6 billion in April 2014 (versus USD $102.6 billion a month before). The current reserves cover 6.1 months of imports or 5.9 months of imports and debt repayments. BI typically maintains its foreign assets at a level sufficient to cover at least three months of imports as adopted by international standards.

Economic Growth: Indonesia’s economy grew at 5.21 percent (yoy) and 0.95 percent (qtq) during the first quarter of 2014. Looking at the expenditure side, the growth was mainly fuelled by domestic demand on the back of strong consumption from the rising number of middle class segment. Household expenditure still positioned itself as the biggest contributor with a growth of 5.61 percent (yoy) and 0.70 percent (qtq) to IDR 1,354.0 trillion. Nevertheless, on a quarterly basis, export performance dropped slightly by 0.78 percent to IDR 568.3 trillion. Java and Sumatra remained the largest contributors to the national economy with shares of 58.5 percent and 23.9 percent, respectively.

Car & Motorcycle Sales: domestic car sales were up slightly by 1.1 percent (mtm) to 113,079 units in March 2014 (versus 111,881 units in February) bolstered by the launching of new cars by automotive makers. On yearly performance, domestic car sales in March increased by 17.8 percent compared to 95,996 units in March 2013. A significant growth was booked by Honda which climbed by 21.9 percent to 14,529 units. Other producers recorded lower growth such as Suzuki (3.2 percent) and Toyota (0.8 percent) to 14,013 units and 39,046 units, respectively. In tandem with the uptrend of car sales, domestic motorcycle sales grew by 6.9 percent (mtm) and 9.1 percent (yoy) to 725,629 units with Honda (63.48 percent) and Yamaha (31.3 percent) as market leaders. The increasing political tensions prior to the election did not adversely impact on both car and motorcycle sales.

Investment Statistics: during the first quarter of this year, investment realization in Indonesia hit the highest level at IDR106.6 trillion, up by 14.6 percent (yoy) compared to the same period last year. This was sustained by stronger Domestic Direct Investment (DDI) at about IDR 34.6 trillion as well as Foreign Direct Investment (FDI) of around IDR 72.0 trillion (versus IDR 27.5 trillion and IDR 65.5 trillion, respectively last year). According to the Indonesia Investment Coordinating Board (BKPM), domestic investments mainly concentrated in electricity, gas and water sectors (32.8 percent) whilst foreign investors mostly preferred the mining sector (24.0 percent). Compared to the government’s target, Q1-14 investment realization represented about 23.3 percent (FDI 24.2 percent and DDI 21.7 percent). The government targets around IDR 456.6 trillion of investments in 2014 comprising FDI (IDR 297.3 trillion) and DDI (IDR 159.3 trillion).

Jakarta Composite Index (JCI): the JCI fluctuated last month especially following the quick count result of April 9th  legislative election which was not in line with the market expectation. Most notably, the PDI-P as the umbrella party of the presidential candidate Jokowi failed to achieve its targeted votes of 27 percent. Therefore, this party has to form a coalition with other political parties in order to qualify for a nomination of a presidential candidate. The market responded with a drop in JCI to 4,765.73 on 10 April. The JCI finally closed at a stronger level of 4,840.15 at the end of April (versus 4,768.28 in March) following the release of financial results of listed companies. The rally continued in the first week of May as it closed at a higher level of 4,860.89 on 8 May.

Rupiah: the rupiah weakened against the US dollar during the last month, mainly on account of the uncertainty in the next government’s leadership. Investors seemed to wait for the progress of the coalition among major political parties for the presidential election in July. The rupiah closed at IDR 11,532 per US dollar on 30 April compared to IDR 11,404/USD one month before. The rupiah continued to weaken to IDR 11,624 per US dollar on 8 May.

Bond Yield: the 10-year government bond yield rose slightly to 8.09 percent on 30 April from 7.96 percent at the end of March. It was influenced by the US Treasury rally amidst the continued paring of asset purchases by the Federal Reserve. The surplus in trade balance and lower inflationary pressures are, however, expected to act as positive catalyst for the bond market.

Bank BTN’s Acquisition: Bank BTN’s acquisition plan by Bank Mandiri proposed by the Minister of State Enterprises was expected to create a bank having total assets of IDR 900 trillion in order to catch up with other regional big banks like DBS Bank (Singapore) and CIMB (Malaysia). BTN was reported to have LDR of more than 100 percent reflecting a tight liquidity in particular to expand its mortgage business. Bank Mandiri, in another perspective, has limited home financing but owns stronger capital and network. The synergy of these two state-owned banks would enable them to compete not only domestically but also regionally. However, the government finally postponed the plan in a circular citing it has stirred controversy of possible massive layoffs and threats to the existence of the government subsidized mortgage program for low to middle-income segment.

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