Indonesia inflation softens but rate cuts not forthcoming

In fact, 2013 might see some tightening as inflation gains momentum.

Here's more from Maybank Kim Eng:

Inflation declines in September. After stabilizing at around 4.5-4.6% YoY since April, headline consumer inflation weakened to 4.31% in September. Slower increases in food and transport prices contributed to the decline. This is likely due to softer commodity prices, especially that of soybeans, which is off highs reached in August. Crop prices have been dampened by yields exceeding producer expectations according to the US Department of Agriculture. Furthermore, South American soybean production is expected to increase robustly in 2013. Meanwhile, international oil prices have risen but on a YoY basis are up only at single-digit rate compared with over 40% increase last year at about the same time. Some inflation rates accelerated but either the increases or the weight of the item were small so these failed to detract from the slide in raw foods and transport.

Monetary policy likely to be unchanged but with tightening bias. Even with softer inflation in September, we believe it would be unlikely for Bank Indonesia to cut the policy rate as inflation is likely to pick up going forward. One reason for this would be the plan to increase the electricity tariff by 15% next year as approved by the House of Representatives. Although this has now been delayed for two years, concurrence by the chairman of the Indonesian Chamber of Commerce and Industry and agreement by the Indonesian Employers Association on the direction if not the magnitude (10% preferred over 15%) are positive signs. In addition, the IMF in its latest Article IV consultation report notes that “replacing costly and inefficient energy subsidies with targeted cash transfers would create room for critically needed increased infrastructure and social spending.” It further notes that “reducing excess liquidity would improve the effectiveness and credibility of monetary policy.” We expect the policy rate to be unchanged till the end of the year but to increase 50 bps in 2013.

Return of the trade surplus. In August the trade balance returned to surplus after incurring deficits the previous four months. The slump in merchandise imports, down 8% YoY to USD13.9b, the first contraction since 2009 was largely responsible as exports remained weak. Exports fell 24.3% to USD14.1b and the resulting trade surplus was USD249m. This brought the 8M12 surplus to USD497m, down 98%. Exports likely will remain under pressure with China’s slower growth dampening commodity prices while higher taxes on mineral exports restrict quantities shipped out. Meanwhile the decline in imports may have been due to the rupiah’s depreciation this year making imports more expensive. In 8M12, exports have dropped 5.6% while imports increased 10.3%.