Surprise Tightening

INDONESIA - Report 02 Dec 2013 by Cyrillus Harinowo and Maria Kartika Purisari

Executive Summary
As many predicted, GDP growth softened further in Q3, confirming the recent declining trend. Growth was 5.62%, and 5.83% for first nine months of the year. But the balance of payments improved mildly, with the current account deficit shrinking to 3.8% of GDP from 4.4%. Still, that performance was slightly below expectations, too. The stubborn deficit worries the Central Bank, which is hoping to see the deficit shrink further. It therefore raised the benchmark interest rate by 25bp at its most recent policy meeting, in mid-November. ​

But the trade balance tumbled back into deficit in September, to the tune of $660 million, after its “accidental” surplus in August. Exports increased by 13.19% from August, to $14.81 billion. However, they declined 6.85% year over year. Imports rose to $15.47 billion up 18.86% m/m and 0.77% y/y.

The deficit was evidently caused by the large oil import bill. Oil and gas exports in September were $2.515 billion, and imports $3.579 billion, for a deficit of $1.064 billion; non-oil exports were $12.30 billion, and imports $11.89 billion, meaning non-oil trade generated a surplus of $ 410 million.

The Central Statistical Agency reported mild inflation for October, a reversal, albeit small, of the deflation of September. The 0.09% m/m inflation led to y/y inflation of 8.32%, little enough compared to the initial prediction of above 9% for the year. Though the rise was benign, Bank Indonesia raised its benchmark interest rate by 25 bp. Was that justified?

Prospects for 2014 seem similar to those of 2013. The government predicts growth of 6%, based on normal business growth of 5.80%, with a 0.20% addition due to the upside risk of an election year. The elections are expected to be peaceful. The cliffhanger is whether the Indonesian Democratic Party of Struggle (PDIP) will nominate Jakarta Metropolitan Area Governor Djoko Widodo, aka Jokowi, as its presidential candidate. Last year, when Jokowi was tapped as a gubernatorial candidate, we stated that he had the right characteristics for higher office. Now he’s a real media darling, and many polls peg him as the leading presidential candidate. His nomination could boost economic prospects; if he’s not chosen, prospects will fall. Our forecast for 2014 growth is 5.50% to 6.70% - with further upside prospects if Jokowi runs.

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