Indonesia safe from inflation problems in coming quarters

Sharply lower oil prices over the past several weeks will keep a lid on overall price pressures, says DBS.

DBS Group Research noted:

Inflation and trade data are on tap today. Headline inflation is likely to stay low at 4.4% YoY in June despite unfavorable base effects.

Notably, sharply lower oil prices over the past several weeks will keep a lid on overall price pressures. Going forward, inflation is not going to be a problem for the next few quarters.

On the external front, the threat of a synchronized slowdown in the US, the Eurozone and China will dampen commodity prices including oil.

On the domestic front, the central bank (BI) has already taken steps to restrict credit growth through higher rates on selected instruments and the implementation of more stringent requirements for home and vehicle loans.

Overall, these should translate into a benign inflation outlook for the next six months and we reiterate our average inflation forecast of 4.7% this year.

Accordingly, we expect the policy rate to be kept on hold and a balance struck between supporting growth and reducing volatility in the rupiah.

Oil prices have finally started to play catch up (to the downside) with the other commodities such as coal and palm oil. This is of particular significance given that Indonesia is a net oil importer and a net commodity exporter.

Diverging prices between oil and other commodities (coal, palm oil and metals) in late 2011 and early 2012 have worsened the trade balance and the recent recoupling of prices should offer some relief. That said, depressed commodity prices will still weigh on exports and a growth figure of -10.0% YoY has been penciled in for May.

Meanwhile, import growth is projected at 9.9%. This implies a trade surplus of USD170mn, compared to a deficit of USD641mn in April.