3 threats Indonesia must fight against in 2013

Low 4.3% inflation will uptick.

According to DBS, price pressures have been well-contained over the past year despite robust economic growth and we have notched down our average inflation estimate for 2012 and 2013 to 4.3% and 4.9% respectively.

Here's more from DBS:

The biggest reason why inflation has been so low this year is because food prices have generally been stable and because administered prices have kept fuel and electricity prices low.

Going into 2013, higher inflation is to be expected. Firstly, a quarterly sequential increase in electricity tariff has already been approved and this may add around 0.2pct-pt to average inflation for the full year.

Secondly, minimum wages are set to surge across the country, with Jakarta’s minimum wage set to rise by 44% in 2013. This should translate into higher costs to firms, some of which will pass these added costs on to consumers through higher prices.

Notably, the inflation forecast for 2013 does not factor in any changes in subsidized fuel prices. Reforms on fuel subsidy have proved to be difficult and it is unlikely for a fuel price hike to materialize unless oil prices breach USD 125/bbl for an extended period, placing stress on the budget and the current account.

Despite the low inflation print, the central bank (BI) is likely to maintain a mild tightening stance. Stress in the economy has been reflected in the widening trade deficit and the sizable current account deficit.

In order to cool the domestic economy (and reduce import pressures), the central bank (BI) is expected to hike the FASBI deposit rate by 75bps by mid-2013, while keeping the policy rate unchanged.

Higher short-term interest rates should also help to attract inflows and stabilize the external accounts. Some macro-prudential measures (stricter conditions on home and vehicle loans) have already been utilized by BI earlier this year. More incremental measures will likely be forthcoming if the trade balance does not improve.