Thursday, March 4, 2010
RI & Asia Pacific: Well Placed to Face Headwinds Ahead
Source: The Jakarta Post
Harry Su , BAHANA SECURITIES

The economic upswing in the Asia Pacific region has accelerated and inflation has increased. As a result, more central banks have indicated the need for tighter monetary policies ahead. Two days ago, Australia's central bank, following a one-meeting pause, resumed raising interest rates to 4 percent from 3.75 percent previously, reflecting a stronger economy, improved employment and rising housing prices.

It is worth pointing out is that this is happening in spite of the ongoing concerns in Europe, suggesting that the Asia Pacific region is relatively well insulated, supported by the growing economies of China and India.

In March, we also expect rates will move up in Malaysia, particularly given stronger than expected growth of 4.5 percent in the fourth quarter, 2009. In China, the government has begun raising reserve requirement ratios while pressure is also mounting on central banks in India and Indonesia to raise borrowing costs later in the year.

On the latter, it is worth highlighting that Indonesia's February inflation at 3.81 percent y-y (year on year) is at a nine-month high (please see chart for details). The culprit? Rising raw and processed food commodities such as rice and sugar.

This is in line with Bahana's findings. Based on our recent survey (please see table for details) on a basket of 19 popular consumer items conducted in six different supermarkets and hypermarkets in Jakarta, Indonesian consumers are having to fork out an average of 4.9 percent more for 19 selected goods, that is, up to Rp 231,137 in February 2010, up from Rp 220,422 in June 2009. Items that have increased the most are sugar (+34 percent), rice (+18 percent) and Coca Cola (+10 percent).

On the flip side, Rinso detergent (-16 percent), Lux soap (-11 percent) and Kunci Biru flour (-8 percent) have decreased the most, suggesting lack of pricing power on those brands on the back of intense competition. The household names of Rinso and Lux belong to listed company Unilever Indonesia (UNVR) while the Kunci Biru flour brand is owned by listed Indofood Sukses Makmur (INDF).

In our view, Indonesia's annual inflation could climb above our 5.6 percent expected target by the third quarter, 2010, if commodity prices were to continue gaining ground. Meanwhile, politics is slowing the implementation of new reforms required to raise GDP growth trends. However, we still expect moderately higher GDP growth of 5.2 percent in 2010, up from 4.5 percent in 2009 on continued relatively robust domestic consumption.

Further away, markets will continue to worry about possible damages stemming from the various government withdrawals of stimulatory policies. Global issues are also likely to suppress risk appetites in the region. Nevertheless, we believe that most Asian policy makers, including Indonesia, will find the proper balance of sufficient tightening to adequately curb inflation without completely choking off growth prospects. For example, the Indonesian government is planning to come up with Rp 10 trillion in soft commodity price stabilization in the 2010 budget.

Thus, in Indonesia, domestic consumption and prudent policy implementation should ensure that the country is well positioned to face headwinds, which could pick up speed during the course of 2010.