Indonesia Macro Update - Inflation 02 Aug 2023

Jun ‘23 Headline Inflation increased to 0.21% MoM, but came lower than our expectation (Cons: 0.22% MoM; KBVS: 0.48% MoM; Prev: 0.14% MoM), while on an annual basis, it eased to 3.08% YoY (Cons: 3.10% YoY; KBVS: 3.36% YoY; Prev: 3.52% YoY). The lower-than-expected headline inflation was driven by Core Inflation that eased to 2.43% YoY (Cons: 2.52% YoY; KBVS: 2.55% YoY; Prev: 2.58% YoY) and Volatile Foods which experienced deflation of 0.03% YoY, despite Administered Prices surged 8.42% YoY. Jun ’21 figure was primarily driven by inflationary pressures in the Education group (due to the school holidays and the new academic year, leading to an increase in school fees); the Transportation group (particularly air transportation tariffs); and the Food and Beverage group (including Broiler Chicken, Red Chili, Garlic, Chicken Eggs, and Potatoes). The school holiday season also boosted the number of domestic tourist travels in Indonesia, reaching 77.58Mn and 73.77Mn trips in May and Jun ‘23. This seems to be in line with the government's decision to transition into the endemic phase of Covid-19 since Wednesday (21 Jun ‘23). Various tourism promotions appear to have a positive impact, with domestic tourist destinations becoming more diverse, reflected in the increase of domestic tourist travels to West Nusa Tenggara by 158.84% (ctc, Jan-Jun), East Kalimantan +73.72% (ctc); North Kalimantan +47.55% (ctc); Bali +44.78% (ctc), and Papua +31.92% (ctc). This is also supported by an increase in the number of foreign tourist visits, particularly from the Middle East (+246.92% YoY); non-ASEAN Asia (+122.88% YoY); and the Americas (+110.16% YoY). The improvement in the domestic economy is also evident in the continuous expansion of manufacturing activity for the 23rd consecutive month. In Jul '23, Indonesia's Nikkei Manufacturing PMI increased to 53.3 (Prev: 52.5), indicating higher levels of production, employment, and export sales. This was accompanied by the record high output in the past 10 months, a notable increase in new orders, and a rise in export sales; all of which contributed to the overall improvement. Employment also continued to grow for the 6th consecutive month, although at a slower pace compared to the rapid increase in business spending. Vendor performance showed improvement despite slightly shorter lead times. However, there was an upturn in costs, primarily due to an increase in input price inflation caused by rising raw material expenses. We anticipate favorable developments in the real sector and annual inflation will continue to ease, allowing for a potential reduction in the Bi7DRRR in the next couple of months, ceteris paribus. This is projected to be achievable if the implementation of DHE (Foreign Exchange Export Proceeds) on 1 Aug ‘23, proves to be effective with an expected minimal addition of USD3.0 Bn to foreign exchange reserves every month. With these expectations, we project that the Rupiah will close at IDR15,043 per USD by the end of 2023.

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