DBS Economy

August trade and September inflation data are the focus this week

August trade and September inflation data are the focus this week (Friday). CPI inflation is likely to ease to 5.8% YoY from 6.4% in August and 6.2% in July, as the high base effects emerge (the Ramadan fasting month fell in September last year). This may not represent a stabilizing trend in inflation. We forecast that inflation numbers will bounce back to 6-6.5% in 4Q10, in accordance with the macro picture of strong consumption demand, lingering supply constraints and elevated inflation expectations. That said, we also notice that the core inflation numbers for August have been revised down to 4.2% from 4.5%. The demand-side price pressures are building up more gradually than the original data showed, which provides scope for the central bank to maintain interest rate policy unchanged for another few months. In our interest rate forecast, we currently look for only one rate hike of 25bps in the remainder of this year.

On the trade front, August data should also be distorted by festival effects. The YoY growth in exports is likely to fall to the 10-20% range in August from 29.0% in the previous month, while imports may slow even more sharply to 20-30% from 45.3%. Merchandise trade balance could return to surpluses after posting a small deficit of USD 0.1bn in July, helping explain the USD 2.5bn increases in foreign reserves during the month of August. From the fundamental perspective, we believe that growth in domestic import demand is still holding up better than growth in exports, and the risks to the trade balance are tilted towards the downside. One positive note is that commodities demand from China has bounced back recently. China's custom data shows that its imports from Indonesia increased a strong 9.3% MoM in August after falling for four consecutive months in April-July (China is among Indonesia's top five export markets and accounts for 10% of Indonesia's overall exports).