Indonesia’s Inflation Slows to Near 10-year Low

Asean manufacturing Purchasing Managers’ Index (PMI) slowed slightly further by 0.1 points to 49.6 in February from 46.7 in January, its lowest level since July 2017, and its second consecutive month below the 50-level. Out of the seven countries in the survey, Myanmar (53.1) and Indonesia (50.1) were the only countries to register higher PMIs, while Thailand (49.9), Malaysia (47.6) and Singapore (45.7) fell in February. According to IHS Markit, new orders had fallen in February leading to a weaker rise in production across the region. Furthermore, export orders continued to weaken, possibly due to trade war between US and China, due to the region’s trade exposure to both countries, where in December 2018, Asean-5’s exports to China accounted for 13.4% of its total exports (14.2% in Dec 2017) while exports to US made up 9.8% of the region’s total exports (8.7% in Dec 2017). If the trade tensions between US and China are able to be resolved, we believe this will be favourable for manufacturing and export expansion in Asean region. The OECD, in its recent outlook report, downgraded the world economy GDP growth by 0.2 ppt to 3.3% in 2019 and by 0.1 ppt to 3.4% in 2020, also citing high policy uncertainty, ongoing trade tensions, and a further erosion of business and consumer confidence due to trade disputes.

Seperately, Indonesia’s headline inflation eased for the third straight month to 2.6% yoy in February from 2.8% in January, its lowest inflation rate since November 2009. Inflation had been weighed down mainly by lower food prices, which slowed significantly to 0.7% yoy from 2% in January, its weakest growth since its decline of 0.5% in November 2017. Core-inflation was steady at 3.06% in February, similar to January 2019. Despite the slower headline inflation, now at the lower-end of Bank Indonesia’s (BI) target corridor of 2.5- 4.5%, we believe BI will wait before deciding on a possiblle cut its benchmark 7-day reverse repo rate this year. The benchmark policy rate has been held at 6% since December 2018, following its total of 175bps rate hike last year in its effort to support the Rupiah against the stronger US dollar. However, we believe BI will also be taking into considerations the country’s large current account deficit, which widened to US$31.1bn in 2018 (3.0% of GDP) from US$16.2bn in 2017 (1.6% of GDP), and the upcoming general elections on 17 April 2019, before deciding on a possible cut in policy rate towards later part of 2019.

Meanwhile, in Thailand, inflation rose for the second consecutive month in February to 0.7% yoy from 0.3% in January, making this its fastest rate since November 2018. The increase in inflation was due to higher prices of food and non-alcoholic beverages, which increased by 1.9% yoy as well as apparel and footwears, which rose by 0.6% in February (1.3% and 0.2%, respectively, in January). At the latest monetary policy meeting, Bank of Thailand (BoT) had left its benchmark policy rate unchanged at 1.75%, after its 25bps rate hike in December.

Source: Affin Hwang Research - 8 Mar 2019