In line with our estimate but in contrast to the market expectations which believed another series of rate cut by 25 bps, Bank Indonesia has maintained the BI (Bank Indonesia) rate at 6.50% as well as its lending facility rate at 7.00% and its deposit facility rate at 4.50%. We see that short-term macroeconomic stability over external uncertainties should become the central bank top priority in the last BOG meeting.
The UK referendum vote to leave the EU has understandably prompted a significant market reaction. We expect overall impact of the Brexit to be insignificant due to Indonesia's limited exposure to the UK. In general, the impact would be indirect and may come from a prolonged global slowdown.
A surprise indication from the U.S. Federal Reserve that it may raise interest rates at its next policy meeting in June weighed on global stock markets in May. The intensifying debate of a US Fed's June hike has also been dampening global investors' appetite for Indonesian stocks and Rupiah.
May total imports bounced back by 2.98% MoM (-4.12% YoY) to USD11.1 bn, mainly on the back of higher demand for imported consumption goods as Indonesia started to enter cyclical trend on the advent of June’s fasting month. Note that import for consumption and intermediary goods surged 15.7% MoM and 3.86% MoM respectively in May.
May CPI surge to 0.24% MoM (April: -0.45% MoM) on the back of rising prices for almost all components during the advent of June’s fasting month. The CPI reading was lower than our estimate but relatively in line compared to consensus projection. We note that in term of MoM CPI level during the advent of fasting month, May 2016 inflation was the lowest level for the past 4 years.
Due to lower-than-expected 1Q16 GDP reading, Bank Indonesia has revised down its 2016 full-year economic growth target to 5.0%-5.4% from previous estimate of 5.2%-5.6%. Nevertheless, the central bank expects economic growth to pick up in the next quarters, exceeding 1Q16’s level powered by government capital spending disbursement.
Higher compared to our estimate but relatively better than prior quarter’s level, the 1Q16 current account deficit (CAD) narrowed to USD4.7 bn (2.1% of GDP; USD5.1 bn in 4Q15) which was primarily led by larger non-oil and gas trade surplus. Moreover, slower-than-expected government capital expenditure disbursement in the first quarter of 2016 caused a disappointing import demand, dragging down 1Q16 non-oil & gas import to -7.0% QoQ.
The statistics bureau (BPS) announced on Wednesday that Indonesia’s economy expanded an annual 4.92% in 1Q16, below the economist median expectation of 5.06%. Less contribution from direct investment and government spending realization were the major drags on economy growth but real private consumption managed increased to 4.94% YoY (4Q15: 4.92%).
It is worth spotting that lower YoY level was due to less contribution from direct investment and government spending realization. Furthermore, relatively in line with our estimate, a slower-than-expected government capital expenditure as well as a modest direct investment realization from domestic and foreign investors paved the way to slightly deceleration in gross capital formation to 5.57% YoY (ours: 5.34%, 4Q15: 6.90%).
April CPI turned back to the deflation territory, plunging to -0.45% MoM (March: 0.19% MoM), dropping to 3.60% YoY, beating the street expectation but relatively in line compared to our estimates. We note that April MoM was the lowest level since March 2008(base = 2012) while YoY level down to its 4-month low at 3.6%. Overall, April CPI brought YTD figure to book a relatively subdued inflation of 0.96%.
In line with our and market expectations, Bank Indonesia has maintained the BI (Bank Indonesia) rate at 6.75% as well as its lending facility rate at 7.25% and its deposit facility rate at 4.75%. This is also in line with the central bank’s previous statement which would prioritize the strengthening of term structure before deciding to further lower benchmark rate.
The change from BI rate as benchmark to RR rate has certain potential direct and indirect consequences for banks. The indirect consequence relates to how effective BI monetary policy is after the change of benchmark to RR rate compares to BI rate as the benchmark. Should RR rate adoption as benchmark renders smoother transmission of monetary policy, this is beneficial for banks as BI can expand can lower market interest rate faster, thus enabling banks to trim cost of funds.
We foresee the outlook remain challenging for cement sector mainly due to oversupply condition. Hence we maintain our Neutral rating on the sector with preference of market leader since they could survive in tough business landscape. We maintain our BUY rating for SMGR with TP of Rp12,000 and HOLD rating for INTP with TP of Rp21,000.
Following prior month’s reading, and also higher than our as well as the Bloomberg survey’s estimate, March exports grew 4.25% MoM (-13.51% YoY due to high-base) to USD11.8 bn helped by raising aggregate volume both from non oil-gas and oil-gas items, reflecting a pickup in global demand.
March CPI was back into inflation territory, accelerating to 0.19% MoM (February: -0.09% MoM) although this was better than our estimate as well as market consensus expectation. On the year on year basis, the headline inflation slightly up 4.45% YoY (February: 4.42% YoY). All in all, March CPI brought YTD reading to a relatively benign inflationary pressure at 0.62% (last year: -0.44%).
For three consecutive monthly BOG meetings, the central bank cut its policy rate by 25bps for each. In the latest meeting, BI rate was lowered to 6.75% as well as deposit facility rate to 4.75% and its lending facility rate to 7.25%. This is in line with our expectation as well as the street’s estimate.
Following prior month’s trend, February’s total imports continued to weaken to around USD10.2 bn, contracting by 2.91% MoM (-11.71% YoY) but at the slower pace compared to previous month’s growth of -13.33% MoM, which was mainly due to a prolonged weak domestic demand as shown by lower consumption import growth at -13.6% MoM.
Facing 2016, developers tend to have more conservative tone as they set marketing sales target relatively flat compared to their achievement last year (exhibit 2). Developers are still waiting for the macroeconomic conditions to be more conducive to launch their products.
In line with our expectation as well as couple of economists’ expectations, the central bank has cut all of its policy rates by 25 bps. BI rate was slashed to 7.00% as well as deposit facility rate to 5.00% and its lending facility rate to 7.50%.
Worse than our as well as market consensus’ estimates, January exports contracted 11.9% MoM (-20.7% YoY) to USD10.5 bn (the lowest nominal level since September 2009) due to sluggish global economic recoveries. In addition, setback in exports were strongly displayed by lower in both of aggregate export volume (-10.0% MoM) and aggregate export price (-2.0% MoM).
Gloomy China and other emerging markets’ economic outlook would continue to derail global recoveries, keeping oil prices to remain at bay, further attenuating Indonesia’s exports. At this stage, Indonesia’s economic growth may stagnant at below 5% YoY in the 1H16.
Indonesian equity markets turned around for the better last week. The Rupiah and the price of crude oil which are among main determinants in the equity market has reversed course. Rupiah appreciated by 0.6%, bringing YTD appreciation of 1.4% against USD to 13,700. Meanwhile, crude oil price gained 29% to USD33.5/bbl, rebounding from 12-year low of USD26/bbl.
January CPI slowed to 0.51% MoM (December 2015: 0.96% MoM), but increased to 4.14% in term of annual basis (December 2015: 3.35% YoY). This was surprisingly better than our estimate as well as market expectations. A tamed inflationary pressure was supported by the positive impact of lower administered prices.
We believe in 1H16, import’s trend to normalize, following a weakening pattern similar to 1H15 as private consumption should remain subdue and the full positive impact from government spending will be more seen in 2H16 and. Hence, given assumption that exports will also remain sluggish on plunging oil prices, we expect 1H16 trade deficit to record a surplus.