Indonesia Macro Update - BI7DRR 06 Jun 2023

The inflation (core and headline) in May '23 was lower than expected. Specifically, the headline inflation was recorded at 0.09% mom or 4.00% yoy (Cons: 4.23% yoy, KBVS: 4.25% yoy, Prev: 4.33% yoy), while the core inflation was low at 0.06% mom or 2.66% yoy. This condition was accompanied by a deflation of 0.25% mom in the Administered Price component, particularly air transport tariffs and intercity transport tariffs. This also contributed to stagnant energy inflation (0.00% mom), as well as a modest food inflation recorded at 0.50% mom. Based on expenditure groups, these conditions were reflected in the deflation observed in the Transportation group, as well as the Clothing&Footwear group, which experienced deflation of 0.56% mom and 0.46% mom, respectively. The same condition is also evident in the Wholesale Price Index (WPI) inflation, which experienced a decrease in inflation to 4.43% yoy (Prev: 4.56% yoy) in May ‘23. The monthly price increases observed in commodities such as Broiler Chickens, Eggs, Garlic, Shallots, Broiler Chicken Meat, and Marble/Granite were offset by deflation in various construction material groups (e.g., Plywood, Diesel Fuel, Lubricating Oil, Asphalt, PVC Pipes, Roofing Materials, Cement, Gypsum, Wire and Similar Products, Zinc-based Building Materials, Ready-to-use Aluminum Products). This is reflected in the deflation of 0.23% mom; 0.20% mom; and 0.14% mom in the Public Works Building for Roads, Bridges & Ports group; Other Buildings group; then Buildings&Installations for Electricity, Gas, Drinking Water&Communication group, respectively. Unfortunately, the decrease in inflation rates (both CPI and WPI) was accompanied by a decline in farmers' exchange rates, particularly the Received Price Index by Farmers. Furthermore, the decline originated from the Exchange Rate for Smallholder Plantation Farmers (specifically due to the decrease in prices of palm oil and rubber commodities) and the Exchange Rate for Fishermen and Fish Cultivators - both for Fishermen and Fish Cultivators (specifically due to the decrease in prices of seaweed and milkfish commodities). In addition, Indonesia's Manufacturing PMI declined to 50.3 (Prev: 52.7) in the same month, marking the lowest level since Nov '22. Therefore, we anticipate that it could be one of the factors contributing to a pivot in the Bi7DRRR in the upcoming quarter in order to maintain purchasing power and stimulate growth in the real sector. Furthermore, the Rupiah has remained relatively stable at IDR 14823.8 per USD, and the 10-year SUN yield stands at 6.44% during the same period. Although we expect the Fed Rate to remain at a high level until the end of 2023.

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