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ECONOMIC UPDATE – Inflation - Yearly inflation rate eases to lowest level since Oct-23

Two consecutive months of deflation

According to Statistics Indonesia (BPS), the monthly inflation rate slowed to -0.08% MoM in Jun-24, down from -0.03% MoM in May-24, marking two consecutive months of deflation. This rate was below both our expectations and the consensus forecasts of 0.03% MoM and 0.02% MoM, respectively, and represents the slowest rate since Oct-22. The slowdown was primarily due to the harvest season and normalization of prices after Eid al-Fitr. The food, beverages, and tobacco basket deflated by -0.49% MoM, contributing -0.14% to the headline inflation rate. Conversely, the personal care and other services basket became the biggest contributor to the inflation rate, increasing by 0.27% MoM and contributing 0.02% to the monthly inflation rate, driven by higher jewelry prices. In June 2024, volatile food prices fell by -0.98% MoM, continuing the deflation trend for three consecutive months. Administered prices increased by 0.12% MoM in Jun-24, up from -0.13% MoM in May 2024, mainly due to higher air ticket prices during Eid al-Adha. Meanwhile, core inflation decelerated slightly to 0.10% MoM in Jun-24 from 0.17% MoM in May-24. Looking ahead, we expect inflation to rise this month, mainly due to the beginning of the school year and student holidays. We expect education and transportation to be the main contributors to July's inflation rate.


Volatile food and core inflation lead annual inflation to ease

The annual inflation rate eased to 2.51% YoY in Jun-24, down from 2.84% YoY in May-24, marking its lowest level since Oct-23. This figure was below both our estimate of 2.73% YoY and the consensus forecast of 2.70% YoY. It remains well within Bank Indonesia's target range of 1.5% to 3.5% YoY. Notably, the food, beverage, and tobacco basket emerged as the highest contributor to the inflation rate at 1.40% YoY. However, this basket's price decelerated to 4.95% YoY in Jun-24, compared to the previous month at 6.18% YoY. Meanwhile, volatile food inflation slowed to 5.96% YoY in June-24 (vs. 8.14% YoY in May-24), driven by a decrease in foodstuff prices to 5.11% YoY in Jun-24 (vs. 6.80% YoY in May-24). Furthermore, core inflation slightly decelerated to 1.90% YoY compared to the previous month at 1.93% YoY, falling below both our estimate and the consensus estimate of 1.94% YoY and 1.96% YoY, respectively. On the other hand, administered prices slightly rose to 1.68% YoY in Jun-24 (vs. 1.52% YoY in May-24), driven by Eid-Al-Adha holiday. Looking ahead, we have revised down our inflation rate projection for the end of 2024 to 2.80% YoY (from 3.00% YoY). This adjustment is driven by the continuation of social aid through December and the impact of high interest rates. However, this rate is still above last year's inflation rate of 2.60% YoY, primarily due to the depreciation of the Rupiah, which has triggered a higher imported inflation rate.


Government keeps fuel prices amidst fiscal deficit

Coordinating Minister for Economic Affairs, Airlangga Hartarto, announced that fuel prices for both subsidized and non-subsidized fuels will remain unchanged for July 2024, maintaining stable prices since February 2024. However, the minister could not confirm how long these fuel prices will be maintained. The government needs to monitor oil prices and the Rupiah exchange rate closely. As of May 2024, the Indonesia Crude Oil Price (ICP) stood at USD79.78/bbl, with the average price for the year at USD81.67/bbl. Both figures are below the ICP assumption in the 2024 State Budget (APBN) of USD82.0/bbl. Conversely, the Rupiah has depreciated beyond its assumption in the APBN 2024. The Rupiah stood at Rp16,398/USD in June 2024, with the average exchange rate for the year at Rp15,879/USD, surpassing the APBN 2024 assumption of Rp15,000/USD.

Furthermore, the state expenditure  rose by 14% YoY to Rp1,145.3 tn as of May-24, driven by  energy subsidies at Rp 56.9 tn. On the other hand, state revenue declined by 7.1% YoY to Rp1,123.5tn, driven by moderating commodity prices. Consequently, Indonesia's State Budget (APBN) registered a deficit of Rp 21.8 tn in May-24, equivalent to -0.10% of GDP. Looking ahead, we anticipate the fiscal deficit to reach 2.5% of GDP in 2024, which is deeper than last year's deficit of 1.7% of GDP. The government should maintain the fiscal deficit below 3% of GDP to sustain investor optimism.


Inflation rate by expenditure groups

On a yearly basis, most of the expenditure groups rose in May, namely: food, beverages, and tobacco group of 4.95% YoY; clothing and footwear group of 1.09% YoY; housing, water, electricity, and household fuel group of 0.47%YoY; furnishings, household equipment, and routine household maintenance group of   0.95% YoY; health group of 1.89% YoY; transportation group of 1.61% YoY; recreation, sport, and culture group of 1.50% YoY; education group of 1.69% YoY ; food and beverage serving services/restaurant group of 2.31% YoY; and personal care and other services group of 5.24% YoY. Meanwhile, the information, communication, and financial services group edged down to -0.18% YoY.


BI maintains its rate and launches new instrument to strength Rupiah

The Bank Indonesia Board of Governors meeting on June 19-20, 2024, decided to maintain the BI Rate at 6.25%, indicating a stable rate for the second consecutive month. The Deposit Facility (DF) and Lending Facility (LF) rates also remained constant at 5.50% and 7.00%, respectively. This decision aligns with a pro-stability monetary policy as a proactive step to control inflation within the target of 2.5 ± 1% for 2024 and 2025. Furthermore, Bank Indonesia issued a new instrument to attract capital inflow, namely the foreign bank funding ratio (RPLN), effective from August 1, 2024. This policy aims to strengthen the management of foreign funding for banks in accordance with economic needs. The maximum limit for short-term foreign funding of bank capital (RPLN threshold) is set at 30%, with a countercyclical parameter of 0% or ±5%.Furthermore, the Rupiah depreciated by 0.42%MoM to Rp16,321/USD. We attribute this depreciation to both global and domestic factors. The Dollar Index (DXY) increased from 104.7 in May-24 to 105.9 in Jun-24, driven by the European Central Bank (ECB) rate cut. Domestically, increased demand for foreign exchange by corporations for dividend repatriation and rumors about the debt-to-GDP ratio reaching 50% triggered Rupiah depreciation. Looking ahead, we expect the Rupiah to appreciate to Rp15,950/USD, driven by a potential Federal Reserve rate cut and political stability following the presidential inauguration in the 4Q24.