, Indonesia

Indonesia's export growth forecast to reach -8.0%

The weak growth environment has dampened demand for non-commodity exports, says DBS.

DBS Group Research noted:

Inflation has been benign, averaging just 4.1% in the first half of this year. For 2H, inflation is likely to continue inching up largely due to unfavorable base effects, but we do not think that it will become a source of concern.

Firstly, commodity prices are likely to remain depressed amid a lackluster global growth environment. Secondly, the central bank (BI) has already embarked on selective tightening through more stringent vehicle and property loans. Overall, demand pull inflation is likely to ease in the coming months.

Food prices bear watching in the immediate term. Sequentially, we expect a pickup in food prices in the run up to Ramadan (ends in mid-August). However, there are worries that poor local weather conditions may have impacted on crop yield and lead to elevated food prices in 2H.

Higher prices for the import of soy could also have a marginal impact on headline CPI. We expect headline CPI to stay at 4.5% YoY in July. Pressure on the trade balance is likely to persist. On the export side, it is difficult to envision an improvement unless commodity prices start to recover.

Moreover, the weak growth environment has also dampened demand for non-commodity exports. Meanwhile, the resilient domestic economy has resulted in a steady uptrend in imports (especially raw materials and capital goods).

The divergence in performance has sharply eroded the trade balance and the country registered two consecutive months of trade deficits in April and May. A recovery in commodity prices and/or a slowdown in import growth would help to narrow the trade balance in the coming quarters. We are projecting export growth to reach -8.0% YoY and import growth to reach 13.0% YoY in June.

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