Thursday, September 22, 2011

Analysis: All-time high rice price: Inflation threat

After winning Thailand’s general election in July, Yingluck Shinawatra, the nation’s first woman prime minister, has implemented a popular move to cement her rural support by planning to buy November’s harvest of unmilled rice from farmers at THB15,000 (US$502) per ton, 51 percent higher than previously.

Today, global rice prices have risen 13 percent to $629 per ton — not a surprise given Thailand’s 32 percent share (9.7 million metric tons) of 2010 global rice exports (Chart 1), making it the world’s largest exporter. Thus, we expect Thailand’s policy shock to apply inflationary pressures across Asia, which accounts for 87 percent of global rice consumption.

At this stage of the cycle, it is worth pointing out that Indonesia’s domestic rice price has reached
Rp 7,700 per kilogram (87 US cents), up 9 percent year-to-date (ytd) and 10 percent year-on-year (y-o-y), reaching an all-time high. This is undoubtedly a source of concern, and is high time for the government to ensure sufficient domestic rice supplies, leading up to Thailand’s higher rice prices in November.

Note that the Thai government has not set a target on how much rice would be purchased, with the amount dependant on how close prices rise “close to or above” the guaranteed level. Going forward, we expect rice price volatility ahead to threaten our domestic food inflation in the first semester of 2012, particularly given Indonesia’s falling rice production growth (Chart 2).

Separately, from the domestic side, we note that government plans to raise electricity base rates (TDL) by 10 percent in April 2012 to help ease the electricity subsidy from Rp 65 trillion to Rp 45 trillion in the draft 2012 State Budget. This will increase inflationary pressure as electricity rate weighting is 3.5 percent of CPI’s calculation (Chart 3).

Thus, we expect 2012 inflation to rise to 5.7 percent y-o-y, even without accounting for electricity and rice price hikes. This means that the central bank will remain vigilant on the prospect of higher inflation, making it unlikely that Bank Indonesia’s 6.75 percent benchmark rate will fall from the current level in our view.

Leading up to this, we provide a sensitivity analysis (Chart 3) on the effects of our inflation forecast, assuming several possible shocks ahead, such as higher global rice prices, increased TDL and subsidized fuel prices, although the latter is unlikely to occur given current low oil prices.

Our sensitivity analysis reveals that every 10 percent increase in global rice price would add 0.48 percent to our current 2012 inflation rate of 5.66 percent. On TDL, a 10 percent electricity rate increase would result in 0.35 percent higher towards our 2012 inflation.

On the back of a lower global economic growth outlook, we believe oil prices will be well contained, allowing the government to retain its current fuel subsidy policy into 2012, particularly as political campaigns start in 2013 for the 2014 elections. Nevertheless, we show that for every 10 percent hike in subsidized oil prices, inflation will rise by 0.24 percent.

Finally, inflationary pressure could also stem from the recent sudden weakness in rupiah against the dollar, which broke through the Rp 9,000 level on Monday. With all of the rupiah’s gains wiped out, a stronger dollar does not bode well for imported inflation going forward, unless the central bank can imbue confidence in the local currency. On this note, we believe that the government should consider revising its exchange rate assumptions for the 2012 State Budget, which displayed a depreciating rupiah trend of Rp 8,800 at the end of 2012, down from Rp 8,700 per dollar at end 2011. This is necessary to restore confidence in our exchange rate, particularly given recent BI rulings restricting foreign borrowing, which might be perceived as some sort of a soft capital control on the foreign investment community.

The writer is an economist at PT Bahana Securities




No comments: