Market strategy, Inflated expectations, CLSA

Inflation risks have heightened in Indonesia on the back of very
aggressive accommodative monetary policy, expectations of a hike in the
subsidized fuel price & firm core inflation. While these concerns have
drawn parallels to India (where inflation pressures have been persistent)
our case study shows structural differences supporting the view that
inflation pressures in Indonesia will be temporary versus chronic.


Indonesian inflation concerns heightened – but not another India
 Inflation risks have heightened in Indonesia on the back of aggressively
accommodative monetary policy by BI, a likely 33% increase in the subsidized fuel
price and firm core inflation.
 BI looks like it was caught off-guard by the government’s move to ease fuel
subsidies and is now looking at potential rate increases & tightening of the RRR.
 It is important however to note that Indonesia has positive real-rates.
 While these inflation concerns have drawn parallels to India (where inflation has
remained stubbornly high) our case-study shows many differences between the
countries supporting our view that inflation will not be a chronic structural problem.

Difference 1: Politics & policy a hindrance in India
 In India a number of gov’t policy initiatives have directly contributed to inflation.
 Various social programs have increased aggregate demand without a corresponding
supply response. This is a major reasons core inflation has remained elevated.
 In Indonesia such social programs do not exist on a mass level and hence have not
been such a contributing factor to inflation.
 In Indonesia the private sector plays the critical role in driving economic growth.

Difference 2: Indonesia a net energy exporter
 One of the issues for Central Banks globally is inexorable oil prices – which are up
around 15% YTD.
 Indonesia is impacted as a net oil importer (due to declining domestic production)
but not as badly as India which is much more heavily reliant on imported oil.
 More importantly Indonesia is a net energy exporter (oil, coal, gas). Hence
Indonesia is less impacted given coal & gas are correlated to oil.
 This helps protect Indonesia’s current account unlike in India where their current
account deficit is heavily sensitive and vulnerable to global oil prices.

Difference 3: Investment cycle got whacked in India
 Indonesia is currently enjoying an investment renaissance – with FDI and GFCF
setting new highs and now amongst the strongest in the region.
 This has added much needed capacity & supply while FDI has supported the IDR. A
stable/strong IDR is critical for limiting inflation in Indonesia’s dollarized economy.
 Conversely in India the reverse has been the case with FDI and investment stalling.
 An unstable political environment & corruption scandals have been a deterrent for
FDI and also put the Rupee under pressure exacerbating inflationary pressures.

Difference 4: Fiscal position a lot stronger in Indonesia
 India unlike Indonesia has had to deal with the issue of twin-deficits (CA and
budget) which have pressured the currency and hence inflation.
 Conversely in Indonesia the country has enjoyed a CA surplus and its budget deficit
has been manageable.
 Income levels are also higher in Indonesia (GDP/Capita US$3,572) versus India
(GDP/Capita US$1,483) making them less vulnerable to short-term shocks in price
increases in key staple items.

Download file : Indonesian vs India Inflation