Indonesia trade balance to remain under pressure

Indonesia ran its first deficits in 21 months in April and May as exports got hit hard by falling commodity prices, says DBS Group Research.

DBS Group Research noted:

July inflation and June trade data will be out this week. Inflation has been benign in the first half of the year and we do not expect this to change in 2H.

Lower oil prices have drastically reduced the chances of a fuel price hike and inflation expectations should fall accordingly. Moreover, selective monetary tightening has already taken place and this should also reduce demand-pull inflation in the coming months.

Sequentially, we expect a pickup in food prices in the run up to Ramadan (ends in mid-August). However, the headline figure should still be at a comfortable 4.5% YoY in July. For the full-year, we reiterate our 4.7% average inflation forecast.

The trade balance has been under pressure over the last few months. In April and May, the country ran its first deficits in 21 months as exports got hit hard by falling commodity prices. For the first five months of the year, exports rose by barely 1.5% compared to the same period last year. In the immediate term, further uncertainties in the global economy are likely to continue weighing on commodity prices.

As such, a moderate recovery in exports is only expected in 2013. Meanwhile, import growth has stayed robust amid resilient domestic demand. Following selective tightening measures, the pace of import growth should start to moderate. Overall, the trade balance is still expected to stay in positive territory this year.