Best of both worlds, but how much longer?

(1)

1

 Once again, consumer price inflation declined precipitously, to 4.00% YoY (0.09% MoM) in May-23. Transportation and clothing/footwear contributed to monthly deflation, at -0.07%

and -0.02% apiece, but these were outweighed by food inflation which contributed +0.13%.

 Deflation in transportation was entirely expected in the month following Lebaran (Eid al-Fitr).

For clothing, it is much less so, especially at such rapid clip (-0.46% MoM). It is, however, readily explained by an influx of excess inventory from China, an issue which we have delved into in a recent special report (see: Collideascope #1 – Full House). In the report, we showed that apparels are one category of goods which have seen an increase in import from China at much lower unit prices.

 We have also flagged this decline in imported inflation as a major factor behind the decline of core inflation, which – at just 2.66% YoY – is fast approaching its pre-Ukraine War, lockdown- era levels. Falling core inflation, then, might be as much a supply-side issue as it is a reflection of weaker demand.

 Still, it is hard to shake the suspicion that demand is weakening as we speak, especially with loan growth continuing to slow. The BCA Spending Index (Intrabel), based on our proprietary transaction data, also picks up a softening in consumer spending post-Lebaran versus the comparable period last year.

Executive Summary

 Inflation continues to fall fast to 4.00% YoY (0.09% MoM), as transport costs normalized after Lebaran while excess inventory in China pushed down clothing and footwear prices.

 Consumption is starting to soften post-Lebaran, as households have spent their lockdown savings, and now may have spent the windfall from 2022’s end-of-the-year fiscal spending too.

 Low inflation is not inherently incompatible with strong growth, but it probably is when the two largest global economies are either facing demand issues (China) or may soon be (US).

 China-driven disinflation may allow Asian central banks, including BI, to cut earlier than the Fed. However, fiscal stimulus and RRR cuts could deliver more immediate jolt than BI7DRR cut.

 CPI reading near or below 3% is quite likely this year, with the main spoiler being the probable emergence of El Niño over the next few months.

CPI:

Best of both worlds, but how much longer?

05 June 2023

Barra Kukuh Mamia Senior Economist

(2)

2

 So while the most recent headline data shows the best of both worlds (low inflation and strong growth at 5.03% YoY in Q1-23), this may not be the case for too long. The mounting oversupply in China and growing likelihood of a recession in the US could further suppress the demand for Indonesian commodities, which in turn further weaken the impetus for spending especially in commodity-dependent regions.

 Disinflation, then, could come at the expense of growth. This is our primary concern over the government’s budget plans for 2024, which is set to be unveiled in August. None of the MoF’s macro assumptions for next year are unrealistic by itself – including the growth target at 5.3- 5.7% and inflation at 1.5-3.5%.

 Taken together, however, they might be incompatible. The former is a good bet in a year like 2022, when global supplies are constrained and commodities are at a premium – but it may imply inflation higher than 3.5%. Conversely, if the world is facing a demand deficit, inflation is likely to fall within the target range – but growth could fall short.

 Of course, the government does have ample fiscal resources to steer the economy towards its targets. The central and regional government’s cash balance at BI and commercial banks was approaching IDR 1,300 Tn in March, and well-timed disbursement could counteract the softening demand.

 Fiscal support is even more critical since households have spent their excess savings during

“the great revenge spending” between the end of the Delta wave (Aug or Sep-21) and the fuel price hike in Sep-22. The replenishment of these savings between Sep and Dec-22 was helped by a burst of fiscal stimulus, as the government spent 46% of its eventual expenditure during the last four months of the year (a total of IDR 1,434 Tn).

 This is why we have been arguing that fiscal spending and BI reserve requirement ratio (RRR) cuts could be the go-to policies in the next few months if growth falters. In contrast, cuts to the BI 7-day Repo Rate (BI7DRR) might be a riskier proposition with the Fed now seen as unlikely to pivot before the end of the year.

 Nonetheless, there are increasing bets that some Asian central banks could cut policy rates this year – Fed notwithstanding – and BI is among the top of that list along with the Korean and Philippine CBs. We now see this possibility as well, although we note that rate cuts tend to act with considerable lag compared to fiscal stimulus and RRR cuts – so it may not be the tool of choice to instantly “juice up” the economy.

 The likelihood that Asian CBs could cut earlier than the Fed is also supported by the Chinese inventory dynamics. While China is increasingly unloading the excess goods to the rest of Asia and the “Global South”, its exports to the US is actually declining. As such, the US enjoys less of the China-driven goods disinflation compared to Asia – especially now that recalcitrant services inflation is the Fed’s main headache.

 One thing that could also prevent monetary easing in Indonesia is one that we have not talked about since the first paragraph: food inflation. The price of some spices – garlic and bird’s eye chili chief among them – has risen in May, and the same is true for poultry.

(3)

3

 There is an even bigger threat: strong El Niño-like ocean temperature anomaly is happening near the Americas, although not yet on the Asian side of the Pacific. If El Niño actually breaks out, the local food production could be negatively affected, which could become a pressing concern ahead of the 2024 Elections.

 Still, if these things do not materialize, there is a good chance that CPI inflation would continue to decline. A sub-3% reading is even plausible by the end of the year – quite probable, in fact. Recall that administered prices contribute 1.70% to inflation, mostly from the Sep-22 fuel hike. Once this effect is in the rear-view mirror (i.e. by Q4-23), we could be looking at a much lower headline inflation figure.

Source: BPS, calculation by BCA Economic Research

Panel 1. Inflation is declining across the board, even affecting core items

-1 0 1 2 3 4 5 6 7

Jan-20 Apr-20 Aug-20 Nov-20 Mar-21 Jul-21 Oct-21 Feb-22 Jun-22 Sep-22 Jan-23 May-23

Core Admin Prices

Volatile Food CPI Inflation

% YoY

4.00 0.57 1.70

1.73

-1 0 1 2 3 4 5 6 7

Jan-20 Apr-20 Aug-20 Nov-20 Mar-21 Jul-21 Oct-21 Feb-22 Jun-22 Sep-22 Jan-23 May-23

Foodstuffs Housing & Utilities

Transportation Others

CPI Inflation

4.00 1.18

1.21 0.48 1.13

% YoY

(4)

4

Source: BI, OJK, BCA big data, calculation by BCA Economic Research

Source: Ministry of Trade, BPS

Panel 2. Slowing core inflation may reflect weaker demand and slowing loan growth

% YoY % YoY

Panel 3. Rice remains the main driver of food inflation, but spices are increasingly an issue

% YoY % YoY

60 80 100 120 140 160 180 200

-20 -10 0 10 20 30 40 50

Jan-17 Jul-17 Jan-18 Jul-18 Dec-18 Jun-19 Nov-19 May-20 Nov-20 Apr-21 Oct-21 Apr-22 Sep-22 Mar-23

% YoY index (2017 = 100)

 Base money growth

 Money multiplier

 Implied money velocity (based on big data)

17.3

-24.6%

0.2%

1.0%

1.3%

2.9%

3.2%

4.9%

7.1%

10.1%

34.6%

-30.5%

1.4%

1.3%

0.7%

-3.1%

-1.7%

3.5%

6.3%

11.3%

21.5%

-80% -60% -40% -20% 0% 20% 40% 60% 80%

Bird's eye chili Beef Cooking oil Sugar Chicken egg Chicken Shallot Rice Red chili Garlic

YTD

Change in prices YTD:

 Apr 2023

 May 2023

-5 0 5 10 15 20

Jan-20 May-20 Sep-20 Dec-20 Apr-21 Jul-21 Nov-21 Mar-22 Jun-22 Oct-22 Jan-23 May-23

14.50 14.89

RICE

Producer prices

Retail prices

% YoY

-40 -20 0 20 40 60 80

Jan-20 May-20 Sep-20 Dec-20 Apr-21 Jul-21 Nov-21 Mar-22 Jun-22 Oct-22 Jan-23 May-23

-0.75 -18.45

COOKING OIL

Producer prices

Retail prices

% YoY

-0

-20 -15 -10 -5 0 5 10 15

-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0

Jan-08 Feb-09 Feb-10 Feb-11 Feb-12 Mar-13 Mar-14 Mar-15 Mar-16 Apr-17 Apr-18 Apr-19 Apr-20 Apr-21 May-22 May-23

% YoY % YoY

Core inflation, detrended

Loan growth, detrended

-0.2-2.1

(5)

5 Chart 1. Households have spent their accumulated savings from Covid

-93.5

-200 -100 0 100 200 300 400

Jan-11 May-12 Sep-13 Jan-15 May-16 Oct-17 Feb-19 Jun-20 Oct-21 Mar-23

Household net liquidity (deposit minus loans)

IDR Tn (YoY)

-60

-50

-40

-30

-20

-10

0

10

20 -10

-5 0 5 10 15 20 25 30

Jan-10 Nov-10 Aug-11 Jun-12 Mar-13 Dec-13 Oct-14 Jul-15 May-16 Feb-17 Nov-17 Sep-18 Jun-19 Apr-20 Jan-21 Oct-21 Aug-22 May-23

Imported WPI IDR/USD (revesed axis) -4.24 -3.26

% YoY % YoY

4.0 3.32.7 4.94.7

-6 -4 -2 0 2 4 6 8 10

Jan-20 Apr-20 Jul-20 Sep-20 Dec-20 Mar-21 May-21 Aug-21 Nov-21 Jan-22 Apr-22 Jun-22 Sep-22 Dec-22 Feb-23 May-23

Indonesia Malaysia Thailand India US

Inflation % YoY

Panel 4. Inflation has slowed globally, but more noticeably in Asia thanks to Chinese imports

(6)

6

Selected Macroeconomic Indicator

Source: Bloomberg, BI, BPS Notes:

^Data for January 2022

*Data from earlier period

**For changes in currency: Black indicates appreciation against USD, Red otherwise

***For PMI, >50 indicates economic expansion, <50 otherwise Key Policy Rates Rate (%) Last

Change

Real Rate (%)

Trade &

Commodities 31-May -1 mth Chg (%)

US 5.25 Jun-23 0.35 Baltic Dry Index 977.0 1,576.0 -38.0

UK 4.50 Jun-23 -4.20 S&P GSCI Index 528.2 565.0 -6.5

EU 3.75 Jun-23 -2.35 Oil (Brent, $/brl) 72.7 79.5 -8.6

Japan -0.10 Jan-16 -3.60 Coal ($/MT) 135.3 191.6 -29.4

China (lending) 4.35 Jun-23 4.25 Gas ($/MMBtu) 2.10 2.27 -7.5

Korea 3.50 May-23 0.20 Gold ($/oz.) 1,962.7 1,990.0 -1.4

India 6.50 Apr-23 1.80 Copper ($/MT) 8,070.0 8,577.0 -5.9

Indonesia 5.75 May-23 1.75 Nickel ($/MT) 20,433.0 24,210.5 -15.6

CPO ($/MT) 759.6 941.5 -19.3

Rubber ($/kg) 1.30 1.34 -3.0

SPN (1M) 4.33 5.37 -104.1

SUN (10Y) 6.36 6.51 -15.4

INDONIA (O/N, Rp) 5.63 5.71 -8.4 Export ($ bn) 19.29 23.42 -17.62

JIBOR 1M (Rp) 6.40 6.40 0.1 Import ($ bn) 15.35 20.59 -25.45

Trade bal. ($ bn) 3.94 2.83 39.43

Lending (WC) 8.95 8.89 6.13

Deposit 1M 4.20 4.18 2.24

Savings 0.69 0.67 1.92

Currency/USD 31-May -1 mth Chg (%) Consumer confidence

index (CCI) 126.1 123.3 119.9

UK Pound 0.804 0.796 -1.00

Euro 0.936 0.908 -2.99

Japanese Yen 139.3 136.3 -2.18

Chinese RMB 7.109 6.913 -2.76

Indonesia Rupiah 14,993 14,670 -2.15 Capital Mkt 31-May -1 mth Chg (%)

JCI 6,633.3 6,915.7 -4.08 USA 46.9 47.1 -20

DJIA 32,908.3 34,098.2 -3.49 Eurozone 44.8 45.8 -100

FTSE 7,446.1 7,870.6 -5.39 Japan 50.6 49.5 110

Nikkei 225 30,887.9 28,856.4 7.04 China 50.9 49.5 140

Hang Seng 18,234.3 19,894.6 -8.35 Korea 48.4 48.1 30

Indonesia 50.3 52.7 -240

Stock 2,738.1 2,789.1 -51.06

Govt. Bond 830.0 822.7 7.29

Corp. Bond 11.8 11.8 -0.01

-28.8 2.7 9.0

Chg (%)

Mar Dec

Apr

144.2 145.2 -0.68

Foreign portfolio

ownership (Rp Tn) May Apr Chg (Rp Tn)

External Sector

Prompt Indicators

Car sales (%YoY)

Manufacturing PMI Motorcycle sales (%YoY)

Central bank reserves ($ bn)*

Chg (bps) Apr

May Money Mkt Rates 31-May -1 mth Chg

(bps)

Bank Rates (Rp) Mar Feb Chg (bps)

-19.4 40.5 24.6

Apr Mar

Scan for the link to our report depository or click:

https://s.id/1fMOq

(7)

7

Indonesia – Economic Indicators Projection

*Estimated number

** Estimation of Rupiah’s fundamental exchange rate

Economic, Banking & Industry Research Team David E.Sumual

Chief Economist

[email protected] +6221 2358 8000 Ext:1051352

Agus Salim Hardjodinoto

Head of Industry and Regional Research [email protected]

+6221 2358 8000 Ext: 1005314

Barra Kukuh Mamia Senior Economist [email protected] +6221 2358 8000 Ext: 1053819 Victor George Petrus Matindas

Senior Economist

[email protected] +6221 2358 8000 Ext: 1058408

Gabriella Yolivia Industry Analyst

Lazuardin Thariq Hamzah Economist / Analyst

[email protected] +6221 2358 8000 Ext: 1071724 Keely Julia Hasim

Economist / Analyst [email protected]

+6221 2358 8000 Ext: 1071535

Elbert Timothy Lasiman Economist / Analyst [email protected] +6221 2358 8000 Ext: 1074310

Thierris Nora Kusuma Economist / Analyst [email protected] +6221 2358 8000 Ext: 1071930 Arief Darmawan

Research Assistant

Firman Yosep Tember Research Assistant [email protected] +6221 2358 8000 Ext: 20378

2018 2019 2020 2021 2022 2023E

Gross Domestic Product (% YoY) GDP per Capita (US$)

Consumer Price Index Inflation (% YoY) BI 7 day Repo Rate (%)

USD/IDR Exchange Rate (end of year)**

Trade Balance (US$ billion) Current Account Balance (% GDP)

5.2 3927

3.1 6.00 14,390

-8.5 -3.0

5.0 4175

2.7 5.00 13,866

-3.2 -2.7

-2.1 3912

1.7 3.75 14,050

21.7 -0.4

3.7 4350

1.9 3.50 14,262

35.3 0.3

5.3 4784

5.5 5.50 15,568

54.5 1.0

5.0 5285

3.4 5.75 15,173

35.3 -0.7

PT Bank Central Asia Tbk

Economic, Banking & Industry Research of BCA Group 20^th Grand Indonesia, Menara BCA

Jl. M.H Thamrin No. 1, Jakarta 10310, Indonesia Ph : (62-21) 2358-8000 Fax : (62-21) 2358-8343

DISCLAIMER

This report is for information only, and is not intended as an offer or solicitation with respect to the purchase or sale of a security. We deem that the information contained in this report has been taken from sources which we deem reliable. However, we do not guarantee their accuracy, and any such information may be incomplete or condensed. None of PT. Bank Central Asia Tbk, and/or its affiliated companies and/or their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining unchanged after the issue thereof. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. Opinion expressed is the analysts’ current personal views as of the date appearing on this material only, and subject to change without notice. It is intended for the use by recipient only and may not be reproduced or copied/photocopied or duplicated or made available in any form, by any means, or redist ted to others without written permission of PT Bank Central Asia Tbk.

All opinions and estimates included in this report are based on certain assumptions. Actual results may differ materially. In considering any investments you should make your own independent assessment and seek your own professional financial and legal advice. For further information please contact:

(62-21) 2358 8000, Ext: 20364 or fax to: (62-21) 2358 8343 or email: [email protected]