RHB Indonesia - August Inflation Remains Moderate After Holiday Season (Inflation, Money Supply, Cement, Oil and Gas) Unknown Selasa, 05 September 2017




Good morning,

August Inflation Remains Moderate After Holiday Season

Headline inflation remains moderate at 3.8% YoY in August (+3.9% in July). This was attributed mainly to stable increases in the price of raw food and clothing categories after the scholld holiday and Aidilfitri festivities. For the full year, as volatile food prices remain manageable, we revised down our headline inflation estimate from 4.2% to 4% in 2017, from +3.5% last year, on account of:

1. Higher energy prices as a result of elevated crude oil prices;
2. Electricity tariff hikes;
3. Modest pick-up in volatile food prices.
¨ Key policy rate to be maintained. As inflation would likely continue to be manageable, we expect Bank Indonesia (BI) to keep its monetary and macro-prudential policies stable.
¨ Raw food was the biggest contributor to stable inflation in August. This was due to the harvest season in horticultural plants which triggered price decreases in some items such as shallot, garlic and tomatoes but offset mainly by price increases in red chilies and salt.
¨ Clothing prices held up. In addition, price inflation in clothing prices remained stable during the month.
¨ Housing & utility, processed food, and health price inflation exerted downward pressure in July. This was due to price normalisation and after a third electricity tariff hike for post-paid customers in May anf pre-paid costomers in June.
¨ A pick-up in transport & communication inflation, however, partly offset lower inflationary pressures. This was led by price increases in some items such as cellular data tariffs.
¨ Core consumer price index (CPI), likewise, stabilised at 3.1% YoY in July, from the same pace in the previous months, on stable currency and domestic demand. (Rizki Fajar)

Link to daily report: Indonesia Morning Cuppa 050917

Economics Update:

July Loan Growth Picks Up, M2 Growth Moderates
Indonesia’s money supply (M2) growth edged down to 9.2% YoY in July (June: +10.3%) due to a slowodwn in net domestic claims. Going forward, we expect broad money supply to grow at a faster pace of 11% in 2017 (2016: +10%), underpinned by stronger economic growth.

¨ Private credit picked up. Total loan growth, however, picked up in July, due to stronger growth in working capital and household loans. Going forward, we expect demand for private credit to pick up to 10% in 2017 (2016: +7.8%), aided by:
i. A more accommodative policy environment following monetary policy easing in 2016;
ii. Stronger projected economic growth.
¨ Meanwhile, investment credit sustained in July after a slowdown during Aidil Fitri festivities.
¨ Deposit growth, moreover, eased, as time and demand deposits recorded slower increases in July.
¨ The key policy rate is likely to be maintained. We expect Bank Indonesia (BI) to maintain its key policy rate at 4.5%, as inflation is likely to remain manageable while external uncertainties linger.
¨ IDR held stable against USD. The domestic currency held stable against its US counterpart. This was after a slight weakening in June due to profit taking action after a huge inflow following Standard & Poor’s (S&P) upgrade of Indonesia’s credit rating. However, we expect IDR to remain steady and trade towards 13,300/USD by end-2017. (Rizki Fajar)
Sector Update:

Cement Sector: Ground Checks - Lower August retail selling price in Jakarta
Based on our ground checks in Jakarta, we found that cement retail selling price are commonly declined, such as Semen Gresik and Tiga Roda lowered its retail selling price by 7-11% MoM, and Holcim retail selling price declined by 4% MoM. While cement retail selling price in Bali and Makasar were relatively flat. This indicated tough competition in Jakarta and Western Java area, Indocement home-based market.

We maintain Sell on Indocement with IDR12,800 TP (implying 14x FY18F P/E) and Neutral on Semen Indonesia with IDR9,800 TP (implying 14x FY18F P/E). (Andrey Wijaya)

Regional Oil & Gas – Fire And Fury
Political tensions between the US and North Korea have been ongoing for some time and, at this point, it remains uncertain whether it would escalate further. Should tensions escalate, the impact on crude oil would be on seaborne crude oil. This is because China, South Korea and Japan import around one-third of the world’s seaborne crude oil. On another note, Tropical Storm Harvey continues to positively impact refinery and petrochemicals spreads. The main beneficiaries of the downstream price uptick are the refineries and petrochemical players under our coverage, ie SPRC, Bangchak, Thai Oil, IRPC, PTTGC and Petronas Chemicals. Finally, we will keep a close watch on the 22 Sep OPEC meeting, which may result in a possible further extension of the production cut. Our crude oil price forecasts remain at USD54/bbl and USD60/bbl for 2017 and 2018 respectively.

*Fire and fury. Political tensions between the US and North Korea have been ongoing for some time and, at this point, it remains uncertain whether it would escalate further. However, it may be worth noting, in terms of the potential impact on crude oil markets. The three countries that would be most affected would be China, South Korea and Japan, which import around one-third of world’s seaborne crude oil (ie 13.3mpbd or c.14% of global demand). If political tensions escalate, this could result in higher transportation costs and the re-rerouting of some of the vessels. However, the impact on China may not be as severe as that on South Korea and Japan. China has pipelines/land links that can bring in oil, gas and coal into the country. It can also re-reroute the tankers to other ports. US Secretary of Defense General James Mattis indicated that the US has not exhausted all diplomatic options, while President Donald Trump has refused to rule out military options and cutting off trade with any country doing business with North Korea. It would seem that crude oil prices have not yet factored any geopolitical risk as a result of the tensions between the two countries yet.
*Tropical Storm Harvey update. A total 624kpbd of crude oil was affected (c 324kbpd of offshore and c. 300kbpd of onshore shale oil). However, the impact was more on the refining capacity, where about 4.4mbpd was affected, while around 900kbpd of refining capacity is in the process of starting operations. Note that most of the idle refining capacity uses heavier crudes (from Venezuela, Mexico and Saudi Arabia). The US Energy Department has released about 4.5mbbls of strategic petroleum reserves to help keep the refinery running. The Strategic Petroleum Reserve is on a swap agreement, where the refiners will replace the oil once supplies start to flow again. Around 11mtpa of ethylene capacity has been affected (37% of US ethylene capacity). At the moment, the scale and duration of total damage remains uncertain. The main beneficiaries of the downstream price uptick are the refiners and petrochemical players, under our coverage: Star Petroleum Refining (SPRC), Bangchak, Thai Oil (TOP TP, NEUTRAL, TP: THB 79.60), IRPC (NEUTRAL, THB5.50), PTT Global Chemical (PTTGC) (PTTGC TB, NEUTRAL, TP: THB72.40) and Petronas Chemicals.
*Next Organization of the Petroleum Exporting Countries (OPEC) meeting is on 22 Sep. Saudi Arabia and Russia are now discussing the possibilities of extending the production cut for another three months, to Jun 2018, according to Wall Street Journal. At the next meeting in Vienna, scheduled for 22 Sep, members are expected to discuss compliance issues and a possible extension of the deal. More discussions about the possible production cut extension amongst the producers are expected prior to this meeting. The production cut agreement between OPEC and non-OPEC, as it stands, ends in Mar 2018. After that, we may enter a low demand and refinery maintenance period during Apr-Jun. If all producers produce at full capacity after March, we can expect additional supply to be around 1.9mbpd (OPEC, non-OPEC and US producers). This is against additional demand of about 1.2-1.4mbpd. As such, we are looking at another year of oversupply, should there be no production cut extension. This was our concern in our 23 May report, Regional Oil & Gas: A Peek Into 2018. If OPEC and non-OPEC agree to extend the production cut agreement, this should alleviate the oversupply concerns until 3Q18. With such prospects, we believe that production cuts may need to be of a permanent fixture. It is possible that producers may have to revert back to a quota system – without such a mechanism, markets may collapse once again. We do not rule out such a possibility going forward. (Kannika Siamwalla, CFA)
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Best regards,

Andrey Wijaya
Senior Vice President
Research Analyst – Auto, Consumer, Cement
PT RHB Sekuritas Indonesia


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