CLSA Don’t see deflation anywhere in Indonesia

Seriously, I just don’t see deflation anywhere in Indonesia. With the exception of maybe LCD TVs, prices of pretty much everything is going up. From electricity, rice, chicken, rental, properties…..even stocks! Maybe we are too sheltered looking at Indonesia but from reading our regional emails and talking to our colleagues, there is nothing that suggests prices of goods and services are going down in the region. Even our colleagues in the US complaining that their bills are going up – from taxes to Medicare. Surely taxes is not included in CPI computation but yet probably makes the biggest dent to ones disposable income. That is surely one form of inflation eating away purchasing power.

Contrary to Bank Indonesia playing down the risk of inflation, we believe this may be the number one short term risk to the economy. Instead of “output gap”, we have what I would call “output deficit” everywhere here. Investors were surprised after a 1% MoM spike in inflation last month but be assured it would be trending up and up. Some economist estimate that July will see another 1%-1.5% MoM inflation. Why is that so?

Electricity rate hike – Although officially up only 13% earlier this month but anecdotal evidence tells us that in reality, the original plan would have made the hike closer to 30-40%. Govt dialed back and opted for the official average hike of 18%. If we want premium service (guaranteed no blackout), 40% more is what you would be paying. I can tell you no industries will opt for the “might blackout” service and the cost will just be passed on to consumers.

Soft commodity prices up: Extreme weather patterns all over the world pushing up prices from wheat, corn, sugar. Indonesia CPO yield first hit by El Nino and now immediately heavy rainfall possibly triggering La Nina. This is at time when we are heading into the festive season and Ramadhan where consumption picks up significantly. With surge of wheat prices, Indofood also looking to raise noodle prices.

Elimination of fuel subsidies for private cars. The government has been socializing the idea not allowing private car owners to fill up on subsidized gasoline. Last 3 times the govt socialized the idea followed by 3 price hikes. March 2005, Oct 2005 and May 2008 followed by 1.9%, 8.7% and 2.4% MoM inflation and subsequent rate hikes.

All these will no doubt hurt discretionary spending of consumers. With such huge performance of the consumer and banking names (interest rate sensitives), I would be looking to take some profit as a tactical call. Risk/reward of commodities especially coal and CPO looking especially interesting at this point.

A recent piece by our China guru, Andy Rothman, lays out a compelling argument as to why he thinks China is about to end their tightening policy. That will be very positive for commodities – see attached.