Indonesian June CPI spurs to revise growth prospects for H2 2015

MoM CPI of Indonesia was the main highlight of this week, Inflation rose subtly to 7.26% YoY in June versus 7.2% in May and 6.8% in Apr, below both market expectations at 7.4%. On a sequential basis, prices rose 0.54% MoM, largely reflecting higher food prices on the back of the Ramzan fasting period, which began on 18 June. As a result, food prices rose 8.6% YoY in June, up from 7.9% YoY in May, and 6.3% in April. Apart from food, prices of most items and services are rising at a stable pace.

As such, core inflation held steady at 5.0% for the sixth consecutive month. Given the risks of higher food prices on the back of the warmer and drier weather as well as the ongoing Ramzan festival, we recently revised up our inflation forecast for 2015 to 6.1% from 5.4%. Inflation averaged 6.8% YoY in 1^st half of 2015.

The GDP in Indonesia shrank 0.18% in the Q1 of 2015 over the last Q4 as reported by Statistics Indonesia, while Indonesia recorded a Current Account deficit of 3800 USD mlns in the Q1 of 2015.

We also revised our 2015 growth forecast down recently to 5.1%. In its latest monetary policy statement in June, the central bank took a more circumspect view of the US and China which implies some downside risks to growth.

We also think the central bank is likely to draw greater comfort from news that the government is speeding up infrastructure spending which should drive growth in H2.

To us, the growth dividend from infrastructure spending will make a significant contribution from 2016 onwards, but will keep growth in 2015 marginally above 5%.