Indonesia’s Inflation Quickens in December, as Weak Exports Cloud Economic Outlook


JANUARY 02, 2015

Jakarta. Indonesia’s annual inflation accelerated to its fastest pace in almost six years in December, while exports fell more sharply than expected, raising concerns about economic growth prospects.

Southeast Asia’s largest economy has been wrestling with bringing down a worryingly large current account deficit, but a move to cut burdensome oil subsidies has been countered by weak commodities that have hit the country’s exports.

“We’ll be lucky to get 5.1 percent growth” in the fourth quarter, said Wellian Wiranto at OCBC bank in Singapore.

“For 2105 as a whole we see things picking up to 5.4 percent. It’s still quite low, given how Indonesia should be able to perform, but nevertheless an improvement from 2014.”

Manufacturing activity also contracted for the third straight month in December, a private survey showed on Friday. The batch of weak data highlighting slower growth and a spike in costs pushed the rupiah down 1 percent to two-week lows.

Consumer prices rose by 8.36 percent, the statistics bureau said, compared with November’s increase of 6.23 percent and a Reuters poll forecast of 7.92 percent. December’s year-on-year increase was the sharpest since February 2009.

But economists were not overly concerned as cost pressures will likely ease.

“I don’t think inflation will be that big an issue,” said Wiranto. “We know there will be quite a bit of disinflationary pressure in the months ahead.”

Inflationary pressures have built up since mid-November, when President Joko Widodo’s government raised gasoline and diesel prices by more than 30 percent to reduce spending on subsidies. The impact of the fuel-price hikes - the first since June 2013 - continued to push inflation upwards last month.

Seasonal factors also nudged prices higher in December, with the cost of chilli, a staple in many local dishes, rising sharply as people celebrated the holidays.

On a month-on-month basis, consumer prices rose by 2.46 percent in December. Transportation costs were up by 5.55 percent on the month and by 12.14 percent on the year.

Inflation to cool

Price pressures are likely to recede this month as the fall in global oil prices has allowed the government to cut subsidies without causing prices to rise, as it has in the past.

On Jan. 1, Widodo’s government cut the price of a liter of gasoline by 10.5 percent to Rp 7,600 (61 US cents) as part of the most far-reaching reform to fuel subsidies for decades.

Coordinating Economics Minister Sofyan Djalil told a news conference on Wednesday that the government would scrap gasoline subsidies altogether and let pump prices rise and fall in line with market forces on a monthly basis.

International oil prices have plunged by around 50 percent since mid-June.

Even though inflationary pressures will likely lessen, Bank Indonesia is not expected to cut interest rates in a hurry.

“They continue to have to maintain a fairly tight monetary policy,” said Wiranto, from the possible impact on the rupiah when US interest rates rise, possibly in mid-2015.

Bank Indonesia, which raised its reference rate by 25 basis points the day after November’s fuel-price hike, is scheduled to hold its next meeting on Jan. 15. This year the central bank aims to keep inflation at between 3 and 5 percent.

Separately, Indonesia posted a merchandise trade deficit of $425.7 million in November.

Exports fell 14.57 percent from a year earlier to $13.62 billion, while imports were down by 7.31 percent at $14.04 billion. A Reuters poll had predicted exports would fall only 4.31 percent and imports rise 0.07 percent.