Economics Markets Strategy - the DBS Vickers Securities Equities ...

Economics: Indonesia
Economics – Markets – Strategy
we see no harm in BI tightening in larger doses of 50bps. However, owing either
to caution over the growth outlook and/or a desire to avoid appearing that it is
in a panic over inflation, the central bank will likely continue moving in 25bp
steps, unless there is a significant decline in the rupiah or inflation starts to
surprise far beyond expectations.
Consumer the first victim
Higher fuel prices, higher inflation and higher borrowing rates will take the
most immediate toll on consumer spending. Private consumption expenditure
(PCE) growth this year should still match last year’s 5.0% pace, but this will owe
largely to above-5% growth in the first half. In 2H08, PCE growth will probably
average 4.5% YoY. Prior to the fuel price hike, rising inflation had already eaten
noticeably into consumer confidence, which as of Apr08 is at two-year lows
(Chart 6). Higher fuel prices and higher interest rates should also moderately
dampen consumer demand for motor-vehicles.
Chart 6: Inflation rising, c'ser confidence falling
Index
% YoY
130
0
C'ser conf
2
120
CPI YoY (RHS, inv)
4
110
100
6
8
10
90
80
12
14
70
60
Latest: Apr08
16
18
20
Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Apr-08
Chart 7: Food PCE due for an adjustment
Raw and processed fd, wtd ave
% YoY % YoY
5
4
3
2
1
0
Food inflation (inv, RHS)
Real food PCE
DBSf
Latest: 1Q08
Mar-01 Sep-02 Mar-04 Sep-05 Mar-07 Sep-08
0
2
4
6
8
10
12
14
16
18
20
Food PCE may be
due for a long
downward
adjustment
Even food PCE – almost half total consumer spending – looks set for a slowdown.
Despite the run-up in food prices since 2007, real spending on food has only
accelerated. This might have been fuelled by the improvement in real wage
growth last year, to 4-5% YoY by our estimate. However slower economic activity
overall may mean that nominal wages won’t rise as much as last year; even if
they did, high inflation will erode much of those gains. Meanwhile the rise in
food prices will probably become more pronounced in 2H08; back in 2005 there
were clearly pass-through effects between higher subsidized fuel prices and
food prices (Chart 7). Indeed, if higher food prices are here to stay for the
medium-term (as organizations like the World Bank have concluded), then the
downward adjustment in food PCE growth could drag out for longer than
compared to non-food spending.
Investment will slow on higher input, borrowing costs
Public-private
projects will keep
investment growth
decent
In contrast to consumption, investment growth will be stronger than last year,
at 11% versus 9.2%. Nevertheless on a quarterly basis it looks to us like investment
growth may have already peaked in 1Q08. Spending on building and equipment
surged 13.3% YoY in the first quarter, having accelerated at an almost uninterrupted
pace since 3Q06. However, in the coming quarters private firms are likely to
increasingly postpone their investment decisions, amid a more benign growth
outlook, surging input costs and rising borrowing costs (Charts 8, 9). That said,
the slowdown in investment growth is not going to be drastic (we’re still talking
nearly 9% YoY by year-end), thanks in part to the continuance of public-private
infrastructure projects.
104