CPI:

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1

 The consumer price index (CPI) rose by 3.55% YoY (0.40% MoM) in May-22, slower than the previous month as Ramadan passed into rear-view mirror. In a month where disinflation should have been the theme, however, these numbers suggest that inflation will remain a major concern in the near future – after all, if extended over a whole year, the 0.40% monthly pace is consistent with a 4.91% annual inflation.

 Inflation for “Lebaran staples” such as transportation (+0.65% MoM) and food (+0.78% MoM) cooled down, but remains quite hot compared to previous post-Ramadan benchmarks (Charts 1). For the former, elevated jet fuel prices and the large number of holidays and long weekends in May are largely to blame. Meanwhile for the latter, we are seeing the impact of global food inflation starting to seep into the domestic market, as evident from increasing prices of food items with higher import components such as tofu, bread, and meat. With the government absorbing the rising energy prices (more on this later), food inflation will indeed be the main wild card in the coming months, due to constraints in global fertilizer supplies as well as increasing food protectionism by producing countries.

 We are also seeing increased willingness on the part of producers/sellers to pass on their rising input costs onto their customers, consistent with our “starting gun” hypothesis where certain events such as Lebaran or fuel price hikes may serve as signal for synchronized price adjustment. This is quite evident from the increase in wholesale price index (WPI) (Charts

Executive Summary

 The consumer price index increased by 3.55% YoY (0.40% MoM) in May 2022. However, this rather strong inflation figure is quite surprising given the disinflationary theme that typically emerges after seasonal effects subside as some items remain hot despite normalising demand.

 This is largely due to rising food prices as global supply disruptions drive up the prices of foods with higher import components. Indeed, foodstuffs are the main wild card in the coming months due to the still-disrupted global fertilizer supplies and the rise of protectionist policies in food-producing countries.

 Increased energy subsidy spending is expected to relieve some of the pain in the short term. However, short-term inflationary pressures are likely to remain as higher demand and a stronger US dollar would incentivise producers to pass on the extra production costs to consumers.

Higher subsidies a lifeline, but not exactly a panacea

2 June 2022

Lazuardin Thariq H.

Economist/Analyst

Barra Kukuh Mamia Senior Economist

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2

2), in contrast to its placidity in previous months. Meanwhile, the recent strengthening of the US Dollar would also add to the already-high import price inflation.

 Set against all these pressures, the government’s decision to increase its energy subsidies to the tune of IDR 349.9 Tn should help relieve some of the pain, but is unlikely to be a panacea.

There is in fact an argument to be made that it may backfire, as cheap energy (relative to the world) stimulates demand and imports, while the increased spending would have to be paid by more bond issuance – and therefore, indirectly, more money creation.

 However, we disagree with this argument for a couple of reasons. Firstly, the fiscal deficit is not expected to increase, as the government expect higher revenue from commodities and higher VAT to offset the increased subsidies.

Secondly, and most importantly, this increased fiscal commitment is coupled with tighter monetary policy by BI, in the form of higher reserve requirements (up to 9% in

September). This Keynesian pirouette means that banks will be limited in their ability to finance the private sector (consumers and businesses alike), ultimately curtailing core inflation – which, we should recall, is cyclically related to loan growth.

 Looking beyond 2022, we still expect energy inflation to eventually show through, as the budget deficit would eventually need to fall below 3% of the GDP. Short- and long-term yields may need to rise as well, in line with tighter global liquidity and the end of the government’s burden-sharing agreement with BI. For now, though, we expect relatively benign inflation albeit slightly above BI’s upper limit of 4% YoY, while BI still has the room to hike its benchmark rate (BI7DRR) by 50 – 150 bps, primarily to guard against excessive Rupiah depreciation.

“The impact of global food inflation starting to seep into the domestic market, as evident

from increasing prices of food items with higher import

components”

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3 Chart 1. Inflation slows down as seasonal effects recede, but foodstuffs remain the X-factor driving up higher inflation

Source: BPS, BCA Economists Last Update: 2 June 2022

Chart 2. Producers maybe more eager to pass-on costs to protect their margin following stronger dollars

Source: Bank Indonesia, Bloomberg Last Update: 2 June 2022

4.2%

14.4%

14,380

13,600 13,850 14,100 14,350 14,600

0%

5%

10%

15%

20%

Dec-20 Apr-21 Aug-21 Dec-21 Apr-22

YoY 1 USD = IDR

▬ Producer/wholesale price index

▬ Importer price index

▬ USD/IDR (rhs)

1.6%

1.2%

0.8%

3.55%

-1%

0%

1%

2%

3%

4%

Jan-20 May-20 Sep-20 Jan-21 May-21 Sep-21 Jan-22 May-22

▬

YoY inflation (%), contribution from:

 Core ^ Volatile food ^Administered price

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4

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 1.00 May-22 -7.30 Baltic Dry Index 2,566.0 2,404.0 6.7

UK 1.00 May-22 -8.00 S&P GSCI Index 786.5 756.8 3.9

EU 0.00 Mar-16 -8.10 Oil (Brent, $/brl) 122.8 109.3 12.3

Japan -0.10 Jan-16 -2.60 Coal ($/MT) 410.1 281.9 45.5

China (lending) 4.35 Oct-15 2.25 Gas ($/MMBtu) 8.46 6.84 23.8

Korea 1.75 May-22 -3.05 Gold ($/oz.) 1,837.4 1,896.9 -3.1

India 4.40 May-22 -3.39 Copper ($/MT) 9,445.5 9,770.5 -3.3

Indonesia 3.50 Feb-21 -0.05 Nickel ($/MT) 28,343.5 31,722.0 -10.7

CPO ($/MT) 1,525.7 1,709.0 -10.7

Rubber ($/kg) 1.66 1.61 3.1

SPN (1M) 3.11 2.65 46.6

SUN (10Y) 7.03 6.97 5.9

INDONIA (O/N, Rp) 2.79 3.49 -70.4 Export ($ bn) 27.32 26.50 3.1

JIBOR 1M (Rp) 3.54 3.55 -0.8 Import ($ bn) 19.76 21.96 -10.0

Trade bal. ($ bn) 7.56 4.54

Lending (WC) 8.62 8.66 -3.55

Deposit 1M 2.85 2.88 -3.49

Savings 0.63 0.69 -6.27

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

index (CCI) 113.1 111.0 113.1

UK Pound 0.794 0.795 0.22

Euro 0.932 0.948 1.79

Japanese Yen 128.7 129.7 0.80

Chinese RMB 6.672 6.609 -0.95

Indonesia Rupiah 14,578 14,482 -0.66 Capital Mkt 31-May -1 mth Chg (%)

JCI 7,149.0 7,228.9 -1.11

DJIA 32,990.1 32,977.2 0.04

FTSE 7,607.7 7,544.6 0.84 USA 56.1 55.4 70

Nikkei 225 27,279.8 26,847.9 1.61 Eurozone 54.6 55.5 -90

Hang Seng 21,415.2 21,089.4 1.54 Japan 53.3 53.5 -20

China 48.1 46.0 210

Korea 51.8 52.1 -30

Stock 2,503.9 2,599.7 -95.79 Indonesia 50.8 51.9 -110

Govt. Bond 782.8 827.9 -45.00

Corp. Bond 18.1 18.5 -0.47

N/A 23.2 13.6

Chg (bps) Apr

May Money Mkt Rates 31-May -1 mth Chg

(bps)

Bank Rates (Rp) Feb Jan Chg (bps)

Foreign portfolio

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

External Sector

Prompt Indicators

Car sales (%YoY)

Manufacturing PMI Cement sales (%YoY) Motorcycle sales (%YoY)

Central bank reserves ($ bn)*

-7.1 -13.6 -2.6

Apr Mar Chg

(%)

Mar Feb

Apr

135.7 139.1 -2.46

5.0 16.1 65.2

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5

Indonesia – Economic Indicators Projection

* 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 Senior Industry Analyst [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

Derrick Gozal Economist / Analyst [email protected] +6221 2358 8000 Ext: 1066122 Livia Angelica Thamsir

Economist / Analyst [email protected] +6221 2358 8000 Ext: 1069933

Lazuardin Thariq Hamzah Economist / Analyst

[email protected] +6221 2358 8000 Ext: -

Keely Julia Hasim Economist / Analyst [email protected] +6221 2358 8000 Ext: - Ahmad Aprilian Rizki

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

Arief Darmawan Research Assistant

2017 2018 2019 2020 2021 2022E

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)

5.1 3877

3.6 4.25 13,433

11.8 -1.6

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

4.8 4615

4.2 4.0 14,660

48.5 1.4

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

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