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Economics: Indonesia
135/bbl for the rest of the year and a USD/IDR average of 9,550, then doubling
subsidized fuel prices as early as Sept08 would still leave the subsidy:GDP ratio
at 3.1%. If we assume prices remain close to current levels, ie. crude at USD 130/
bbl and USD/IDR at 9,350, then doubling prices would bring the subsidy:GDP
ratio to 3%.
In the mean time, growth will cool
The May fuel price hike will moderate activity, and to that end we have shaded
our growth forecasts lower, to 6.0% this year and 6.3% for 2009. Our previous
projections had been at 6.3% for 2008 (unchanged from 2007) and 6.5% for
2009.
We look for growth
of 6.0% and 6.3%,
in 2008 and 2009
Admittedly growth has held pace so far, with GDP rising 6.3% YoY in the first
quarter, unchanged from 4Q07. We think this pace of growth might hold even
in 2Q08. Come the second half, however, a triple combination of higher fuel
prices, higher inflation and higher interest rates will result in a relatively pronounced
slowdown in growth, to a slightly sub-trend average of 5.7% YoY (Chart 4).
Chart 4: Slowdown in 2H08
%-pt contrib to YoY GDP growth
8
7
6
5
4
3
2
1
0
-1
-2
-3
Mar-06 Dec-06 Sep-07 Jun-08
DBSf 08: 6.0%
Pte cons Govt cons Investment
Net exports GDP YoY
Chart 5: Higher inflation this year
% YoY
20
18
Headline CPI
16
14
12
Core CPI
10
8
6
BI target
4
2
Jan-05 Jan-06 Jan-07 Jan-08
DBSf
10.3
8.6
Inflation, interest rates will rise
Prior to the fuel price hike, inflation was already accelerating on higher food
and energy prices, with headline CPI up at a one and a-half year high of 9% YoY
in April. Naturally, the fuel price hike will exacerbate already-high inflation.
Come June, when the impact of the fuel price hike will be more fully felt, we
expect inflation to rise to around 12% YoY. In the months thereafter, inflation
will remain above 11% YoY, taking full-year inflation to 10.3%. This is well
above inflation of 6.4% in 2007, and the central bank’s inflation target of 4-6%
for the year. Next year, inflation should ease to 7.2%, but this will still exceed
BI’s target of 3.5-5.5% (Chart 5). To be sure, inflation particularly this year will
be largely supply-driven. However, there are also some demand-pull factors at
play, as evidenced by strong import growth and the likelihood that growth this
year will remain at, rather than below, trend.
The fuel price hike
will bump alreadyhigh
inflation up to
10.3% this year,
and 7.2% next
year, exceeding BI
targets
To cap these pressures and also cool expectations of future inflation, we think
the central bank BI is likely to lift its (new) overnight benchmark interest rate by
a further 75bps by end-3Q08, to 9.25%. Up until June 8 the operational target
had been the 1-month SBI rate. Judging by BI’s two rate hikes since early May –
ahead of the fuel price hike – BI has displayed a preference for moving in 25bp
moves, small steps by historical standards. The way inflation is set to pan out,
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