Indonesia Early Economic Indicator – October 2007

31 10 2007

Early Indicators

Strong Domestic Demand

In August 2007, the dRi Coincident Economic Index (CEI), which tracks the current state of the economy, rose further to 106.41 from 106.12 in July 2007 (up by 0.27% month-on-month). The CEI has now risen on six straight occasions, strongly suggesting that the economy is continuing to expand further.

The dRi Leading Economic Index (LEI), which moves ahead of the Coincident Index (around 6 to 12 months), fell to 110.28 in August from 110.72 in July 2007 (down by 0.40% m-o-m). The fall, however, does not mean that the Indonesian economy is heading toward a slowdown in the near term. The fall in the LEI, we believe, is only temporary, and the LEI is likely to rebound in the coming months.

Improving purchasing power, combined with relatively low interest rates, have spurred domestic demand. Against this backdrop, investment activities have also increased significantly. As a result, the engine of economic growth is more balanced than before, thus meaning that the current economic expansion is more sustainable than before.

All in all, we believe that the current economic recovery is sustainable. And we maintain our forecast that the Indonesian economy is likely to continue picking up its growth pace for the rest of 2007. As such, we reiterate our forecast that the Indonesian economy will grow by 6.23% in 2007. And the expansion is expected to continue in 2008, in which year we forecast the economy to grow by 6.33%.


Indonesia Business Sentiment – October 2007

31 10 2007

Better performance albeit higher cost pressures

In the August-September survey, the Business Sentiment Index (BSI) rose for the seventh straight survey, up 9.6 percent to 135.3. Both components of the BSI showed gains: the component measuring sentiment toward current situations, the Present Situations Index (PSI), jumping 15.8 percent to 127.3 and the component of the BSI measuring expectations over the next six months, the Expectations Index (EI), rising by 4.5 percent to 143.2.

More CEOs expressed positive views on current business conditions in the latest survey. All in all, CEOs have much to cheer. Most importantly, the government has continued to ensure macroeconomic stability, pushing interest rates down to low levels and pursuing policies that have helped to restore faith in the rupiah. Moreover, some businesses would have experienced a significant pick-up in activities at this time of the year due to the more profligate purchasing behavior of consumers since Ramadan fell in September.

The US sub-prime crisis in the States has had only a minimal impact on the business environment in Indonesia.

Looking forward, CEOs remain upbeat. Yet there are some clouds on the horizon. In particular, CEOs are increasingly worried over inflation.

Business confidence toward the government declined again in the latest survey: the business confidence in the government index (BCGI) slipped 1.78 percent to 97.78, after falling 3.4 percent in the earlier survey.

Indonesia Consumer Confidence Index October 2007

31 10 2007

Confidence Deteriorates As Low-Income Households Suffer

The Consumer Confidence Index (CCI), which had dipped by 2.1% in August, retreated further in September, losing 1.9% to a level of 83.0.

Unlike in August when the decline in the CCI owed much to apprehension over the short-term outlook, September’s decline was mostly driven by less favorable assessments of present-day conditions (the Present Situations Index (PSI) fell by 2.4% to 63.8). This is of some concern since further declines in this index in the months ahead may reflect softening growth in the economy.

Rising prices of basic foodstuffs continue to dampen consumers’ assessments of current economic conditions. Moreover, consumers are also having to grapple with other problems such as higher education costs in the new academic year, kerosene fuel scarcity and stubbornly high cooking oil prices. These factors are behind the 2.4% decline in the PSI. Meanwhile, looking ahead, consumers are also less upbeat: the Expectations Index (EI) sagged by 1.6% from 98.9 in August to 97.4 in September.

Buying intentions deteriorated slightly in September. According to the survey, the percentage of respondents planning to buy durable goods fell from a high of 28.9% in August to 26.2% in September. Rising foodstuff prices, weaker income gains, and growing concerns over the health of the economy were all contributing factors.

Yet despite consumer concerns over rising prices and unemployment, confidence in the government held up. In the latest survey, the Consumer Confidence in the Government Index (CCGI) rose 2.2% to 100.2. Nonetheless, it is still worth noting that consumers were more dissatisfied with the government’s ability to stabilize the price of goods (this component of the CCGI fell 2.5% to just 78.7 in September).

Indonesia Inflation Outlook Oct 2007

31 10 2007

To Remain High

In September 2007, the consumer price index (CPI) rose 0.80% MoM (month on-month), after rising 0.75% MoM in August 2007. As such, the YoY (year-onyear) inflation rate rose to 6.95% in September from 6.51% in August.

Prices rose in all components of the CPI: the foodstuffs component rose by 1.81% MoM, the education component by 1.70% MoM, the clothing component by 1.22% MoM, the processed foods component by 0.45% MoM, the medical care component by 0.44% MoM, the housing component by 0.18% MoM, and the transportation component by 0.07% MoM.

The inflation figure in September was slightly above our expectations (we had expected inflation in September to reach only 0.62% MoM). While we had anticipated the significant increase in the education component (due to the beginning of the new academic year for universities) and in the clothing component (due to the impact of Ramadan), the increase in the foodstuffs component was greater than expected. Besides the impact of Ramadan, we also believe that hikes in toll road tariffs and surging cooking oil prices have given traders an excuse to jack up their selling prices to an excessively large degree.

Looking ahead, we expect the month-on-month inflation figure to remain high in October. Seasonal factors are likely to continue putting upward pressures on general prices in this month. Note that prices typically rise over the Ramadan and Lebaran period due to the strong demand for foodstuffs, prepared foods, and clothing. In addition, prices in the transportation component are likely to tick up in October since transportation companies are allowed by the government to hike their fares several days prior to, as well as after, the Lebaran festivities.

Against this backdrop, we predict that inflation will reach 0.87% MoM in October 2007, with the YoY inflation rate rising to 6.96%.

Over the next several months the year-on-year inflation figure is likely to hover close to 7.0 percent. We still believe, however, that there is a good chance that the year-on-year inflation figure shall fall significantly in December to around 6.25%. Note that in December 2006 there was an upward shock from rice prices due to the extended dry season. Thus, if the government can anticipate rice scarcity this year (should a extended dry season take place) and import rice several months in advance, then a similar shock should be avoided. Indeed, signs are that the government has already started to import rice in various qualities several months in advance. As such, a rice price shock is not likely to occur in December. We therefore expect a rather sharp downward adjustment in the year-on-year inflation figure in December. CPISBIOutlook-Oct07

Indonesia Trade Outlook October 2007

31 10 2007

Bright Prospects Remain

Exports in August 2007 dropped to US$ 9.61 bn, down by 2.11% from US$ 9.81 bn in July 2007. Imports, in contrast, rose to US$ 6.85 bn, or up by 9.38% from US$ 6.26 bn in July. As a result, the trade balance in August narrowed to US$ 2.76 bn from US$ 3.55 bn in July.

On a yearly basis, exports climbed by 7.80% y-o-y in August 2007. Imports also rose: up by a hefty 20.07% y-o-y. Cumulatively, in the first eight months of 2007, exports grew by 13.35% while imports grew by 16.87% from their levels in the corresponding period of 2006. As a result, the trade balance widened to US$26.53 bn from US$24.65 bn in the first eight months of 2006.

Although exports did indeed decline in August 2007, the figure is still relatively high by historical standards. This suggests global demand is still strong. Meanwhile, the increase in imports in August 2007 indicates that domestic economic activity remains strong.

Looking ahead, we believe that demand for Indonesian products will remain firm in the near term given that several economic indicators in Indonesia’s main trading partners are likely to remain positive. Thus, exports are expected to increase in September 2007. At the same time, domestic demand is expected to remain firm. As such, we expect imports to be higher in September than in August 2007.

All in all, we expect exports to reach US$ 10.56 bn in September 2007, or up from US$ 9.61 bn in August 2007. Meanwhile, imports are expected to increase to US$ 7.09 bn in September 2007 from US$ 6.85 bn in August 2007. Consequently, Indonesia’s trade balance is expected to widen to US$ 3.47 bn in September 2007 from US$ 2.76 bn in August. IndonesiaTradeOutlook-Oct07