Indonesia Macro Update - Inflation 01 Feb 2023

Jan '23 consumer (CPI) inflation softened to +0.34% (mom) or +5.28% (yoy), from +0.66% (mom) or +5.51% (yoy) in Dec '22, largely in line with KBVS expectations of +0.41% (mom)/+5.36% (yoy). We hope this will lead into possibility of an initial BI7DRRR ease in the next two months. However, the continued inflation pressure in the food group – especially Rice (+0.24%, mom); Red Chili and Shallots (each +0.17%, mom); and Fresh Fish (+0.10%, mom) – during the last two months due to unfavourable weather, should be solved soon in order to maintain the inflation expectation within the BI's target range of 3% (±1%, yoy). Meanwhile, the 10% excise tax hike on cigarettes that took effect since 1 Jan ‘23 has driven the inflation of Filter Cigarettes +0.17% (mom) and White Cigarettes +0.06% (mom) this month. On the other hand, a potential decrease in subsidized fuel prices in the near future, as global energy prices fall thus will bring mobility cost to a lower level, will help to reduce the inflation of the Transportation group in near futures, which reached -0.15% (mom) in Jan ‘23. We anticipate that the decline in the future CPI price index will be derived from the decrease in the wholesale price index (WPI), which in Jan '23 already soften to +0.57% (mom) or +5.59% (yoy), from +0.76% (mom) or +5.78% (yoy) in Dec '22. Moreover, the decline is supported by the Agriculture Group which dropped from +2.48% (mom) to +1.54% (mom), as well as the Industrial Group which dropped from +0.39% (mom) to +0.34% (mom) this January. Thus, the inflationary concerns stemming from the Mining and Quarrying Group, which increased from +0.75% (mom) to +1.34% (mom) this January, can be better offset. The softened inflation trend of both CPI and WPI has pushed Indonesia's real yield widen to 151.20 bps in Jan ’23, from 140.50 bps in Dec ‘22. Even with the note that the 10Yr SBN yield has decreased from 6.92% to 6.79% on average during the same period. Therefore, we still see SBN as attractive to investors, especially foreign ones - indicated by the increasing foreign ownership of tradeable SBN at IDR48.85 tn in the SBN market in Jan ‘23; which we expect to continue - especially seeing the stable Rupiah at IDR15,264/USD and the average 5Yr CDS at 90.12 in the period. We anticipate that inflation in Feb '23 will remain subdued, in line with the weather conditions and the possibility of rice harvest in the seven main provinces. However, the possibility of an increase in demand for imported consumer goods, particularly in the lead up to Ramadhan which will take place in mid-March 2023, needs to be anticipated.

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