2008-2009 DATA CONSULT. All rights reserved.
INDONESIAN COMMERCIAL NEWSLETTER
November 2010

FOCUS


INFLATION THREAT TOWARD THE END OF 2010


Toward the end of 2010, the  general optimism, which was higher for 2011 that the global economy would  fully recover, was slightly blurred with the rising inflation. Fears were growing that the inflation would rise higher with the rising prices of essential goods like rice, red pepper and other food spices. The fears were reflected in the fall of the Jakarta Composite Index (JCI) in November 2010 after showing healthy growth earlier.

The decline in the JCI was a reflection of the market  expectation  that  Bank Indonesia  and the government will raise interest rates in a bid to curb inflation. However, the central banks and the finance ministry have not seen it necessary to raise interest rates.  Until Nov. 2010, Bank Indonesia still maintained the BI rate at 6.5%, which had remained unchanged  from 2009. The central bank  seemed to see that  supply was the factor causing the rise in inflation, therefore,  increasing inflation rate would not help much in serving the purpose.  The central bank hopes that the inflation would be normal  if  problem in supply  could be coped with.

Inflation  up  in  November

In November 2010, inflation was 0.60 percent with Consumer Price Index (IHK) at 124.03.  Out of  66 IHK cities  61 recorded inflation  and 5 other had a deflation.

In October 2010 , inflation was recorded at 0.06%  and in September it was  044%. Inflation in calendar year,  therefore,  was 5.98% in the first 11 months of 2010  with year-on-year inflation at 6.33% in November 2010.


The inflation was attributable to price hike increase of 1.49%  in foodstuff sector, 0.46%  in manufactured food, beverages, cigarettes and tobacco sector, 0.2% in housing, water, electricity, gas and fuels sector, 0.89% in clothe sector, 0.09%  in health sector, 0.08% in education, recreation and sport sector and 0.01% in transport and  communications  and  financial sectors.

Foodstuff  prices up

Increases in the prices of rice  and food spices  such as  chili had been the main drivers of inflation  late 2010. The rice prices scaled up  from Rp 7,000 per kg of medium quality IR 64 types of rice  in October  to Rp 7.200 per kg by the end of November. Meanwhile, the price of chili rose from Rp 11.000 per kg in October to Rp 20.000 per kg by the end of November 2010.

It is expected the rising trend  will continue  until  February 2011.  Supplies of rice and chili  were hampered  extreme weather that caused harvest failure in some areas. Indonesia was not the only country hit by bad weather, but also almost all other countries  in the world.  Raging  floods  destroyed extensive wheat  crops in Australia,  which is one of the world 's major suppliers of wheat grains. Russia and Ukraine  began to cut their exports of  wheat  grain to  the world  market.

Shortfall in wheat supplies  in the world market had its impact on supplies of rice  triggering price hikes.

JCI down

Fears of inflation  until 2011,  resulting in  a decline in the  composite share price index  Until 2010, the Jakarta Composite Index (JCI)  continued to scale up  mainly on the market confidence in the country's economy, that continued to grow amid the global  economic slowdown and financial crisis. The market confidence was reflected in strong inflow of foreign capital to the country's capital market.  The JCI rose  strongly by 13.6%  to 3,501   in September 2010  from 3,081 in August. The trend  continued to reach 3635 points in October, 2010.

The optimism, which was high  in 2010 in the market, began to fall  when inflation began to rise. In mid November 2010, the JCI shrank 99.425 points (2.72%) to  3,531.211.  Negative sentiment  in the world triggered the fall. In early trade on 30 November 2010, investors even sold consumer, mining and banking blue chips .

Normally the JCI  improved toward the end of a year.

No cause for too much concern

The inflation threat has prompted call for an increase in the central bank key rate (BI rate). However,  there are also fears  that an increase in the BI rate would trigger an increase in lending rates  that would weaken  the economic growth in  2011.

Scarcity in rice supply, which was the real cause of inflation should  be the first problem  to be sorted out.  The only  immediate solution is imports.

In November, the government licensed the  state owned Board of Logistics (Bulog)  to import 300,000 tons of rice . The imports were made  until the end of 2010,  bringing the country's total rice imports to 600,000 tons  that year.

Earlier Bulog  already held the license to imports 300,000 tons of rice  from the trade ministry  to  increase the stock held by Bulog  to 1.5 million tons  by the end of  2010.  Imports have been made from Vietnam  and  Thailand.

Certainly not everybody is pleased with the decision to import rice. Local farmers, which  already complained about the price hikes  of other basic necessity  are worried that their income would shrink with possible fall in the price of their rice.  Leaders of farmers' association said,  imports were not necessary as  according to BPS, the country's rice production  rose 2.46% in 2010  leaving  surplus in supply.

The weather phenomenon  La Nina, however, was still a threat until the end of 2010.  Some observers warned  that if  the government failed to immediately act  to  import rice , the country will likely experience  a condition as faced by the Philippines in 2008  when  that country  had to import rice  when the price  was at its peak level. 

The fear of the rice price  would shoot up  in the country in November, 2010, might be normal as harvest was just over, and the rice price in the world market was rising.  However, harvest is expected to take place in February  and the price  should fall again, therefore, there is no cause for much concern  that inflation may soar in 2011.

Certainly the government needs to choose the right time for imports. Imports should be made  before harvest  and should  be stopped  when harvest is taking place.


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