Indonesia inflation to bounce back to 4.7%

Blame it on fuel, electricity subsidies.

According to DBS, the trade numbers for September will provide a more accurate picture of the extent of trade deterioration.

Here's more from DBS:

In August, exports and imports fell by 12% MoM (-24.3% YoY) and 15% MoM (-8.0% YoY) respectively due in part to seasonal effects of the “Hari Raya” holiday.

As such, these figures have exaggerated the extent of the trade slowdown. For September, we expect trade flows to normalize, but still remain generally weak due to the lackluster global economic backdrop.

Moreover, commodity prices continued to stay at depressed levels, implying that export growth is likely to stay in negative territory. The import numbers will provide a gauge as to the health of the domestic economy.

Import has clearly outperformed exports over the past several quarters and this is set to continue. However, import growth has started to moderate.

This is not surprising because some raw material imports go into the production of goods exports, which have been weighed down by weak external demand.

On balance, imports should ease in level terms, but resilient domestic demand and investment-led growth should provide support. Export and import growth are expected to reach -13.1% YoY and 0.6% YoY respectively.

Inflation will rise back to 4.7% YoY in October after dipping to 4.3% in September. Headline inflation has stayed benign despite robust domestic demand and loan growth over the past year.

This is due in part to the fuel and electricity subsidies that the government has kept in place despite the increase in oil prices over the past 2-3 years.

To be fair, the more moderate pace of increase in food prices has also helped to keep a lid on inflation. For now, the strong domestic economy is placing some stress on the external accounts, but this has not manifested in the CPI.

Going forward, the implementation of the electricity tariff hikes and the potential increase in subsidized fuel prices would be key factors to watch in 2013.