ASIA-6 WEEKLY FUNDS FLOW FLOW STABILIZING - BNPP

Foreign flow on track to stabilizing
In the past week, more foreign outflow exited Asia-6, recording USD1.8b in outflow on the back of similar outflow of USD1.9bn in the preceding week. The continued outflow was expected given the elevated levels of the VIX and the uncertainty clouding policy outlook in the US. YTD inflow as of last week to Asia-6 is now firmly in the red, recording an outflow of USD11.8bn. The 25-week average foreign equity flow that we monitor closely has begun to stabilize, rising from -USD263.1m to -USD239.5m. (Exhibit 1) BNP now views a US recession as more likely than not. Compared to the Fed’s current GDP forecasts in 2H11, our growth forecasts are more pessimistic and our US economists are expectant of a QE3 announcement at some point
in 2H11 if the outlook continues to deteriorate. This would be supportive of a floor to equities from now till then, with more equity inflow to Asia if QE3 is passed. Meanwhile, the VIX has retreated to 35.6 at last Friday’s close from a high of 43.1 in the previous week. Notably, the VIX fell last Friday following Bernanke’s speech at Jackson Hole despite the lack of specifics on further policy steps and that fiscal policy will have to play a larger role going forward. The latest moderation in the VIX points to welcome relief from the wave of foreign outflow.

Korea and Taiwan flow momentum stabilizing
From a flow momentum perspective, short term momentum indicators show signs of stabilizing especially Korea and Taiwan. Taiwan ST momentum indicators are pointing to foreign flows bottoming out with Taiwan as the only country to record an inflow (albeit small) of USD64.3m and the TAIEX rose 1.4% w-w last week. Korea’s foreign outflow is also slowing, recording USD296m compared to an average outflow of
USD855.3m since May-11. India, Indonesia and Thailand on the other hand, appear some way from a rebound in foreign flow, as ST and LT momentum indicators are on a downtrend. In the past week, Thailand experienced heavy outflow of USD611m (more than four times its average outflow since-04), exacerbated by the BOT hiking the key policy rate.

Indonesia: CPI (Aug 11) and Trade (Jul 11) - BNPP

Key Facts
‰ Inflation rose by 4.8% y/y in August up from 4.6%y/y in July.
‰ Food prices rose by 5.84% y/y in August up from 5.21% y/y in July.
‰ Core CPI rose 5.15% y/y in August, quickening from 4.55% y/y in July.
‰ July’s exports continued to grow at a robust pace, up 40% y/y from 49% in June.

While inflation picked in August, it remains within our expectations. The faster pace is due to the seasonal effect of Ramadan festivities. We expect BI to keep the policy rate at 6.75% for the remainder of the year.

The pick up in inflation with the CPI rising 4.8% y/y in August was in line with a seasonal rise in food prices given the Ramadan festivities. This was above market
expectations of a 4.7% y/y increase but below our 4.9% y/y forecast. On a m/m basis inflation rose 0.93% in August up from 0.67% in the previous month. Inflation in August on a y/y basis continues to be well behaved, coming from high base effects of a rise in chilli prices in 2010 – well within BI’s inflation target of 4-6% in 2011.

As previously argued, there are three key reasons for our more sanguine view of inflation in Indonesia. First is the strength of the IDR which helps to dampen
imported inflation. Foreign reserves reached a new peak of USD 122.7bn in July. which should continue to underpin the IDR and help keep imported inflation
at bay. Second, the economy is not overheating as evidenced by our output gap analysis which shows the economy running near trend. Third, the government has repeatedly argued food inflation is unlikely to accelerate this time round given its rice harvest will be ample and the build-up in its stockpile of rice following massive purchases of rice from neighbouring Thailand and Vietnam. The country is
expecting its first cargo of rice from Thailand in September to ease upward pressure on food prices. Food prices rose by 5.84% y/y in August, higher than
the trough of 5.21% y/y in July due to Ramadan when traders raise prices.

Notably, core inflation rose to 5.15% y/y in August, higher than the 4.55% y/y recorded in July. This wasa 1.1% m/m increase, the largest increase since June
2008. While the y/y rate is above the 5% threshold set by BI earlier, this was largely due a rise in gold jewellery prices. This large increase to core inflation is likely to be one off once the annual festivities end.

According to BPS data, gold jewellery was the highest sole contributor to inflation, contributing around 4.5% of the increase in the consumer price index in July. Gold rose 10% in August, according to statecontrolled gold miner Antam. The end of the festivities should see domestic prices of gold coming off in the
coming months according to government officials.

On the external front, July’s exports rose by a robust 39.5% y/y against 27.2% y/y for imports. The result is the trade balance recorded a surplus of USD 1.4bn in
July or USD 16.4bn in the first seven months of the year. This compares with just USD 9.4bn in the same period a year ago. We believe the robust export growth is a reflection of both the country’s buoyant commodity exports and labour-intensive exports as investments in the latter come on stream and translate into higher output. Meanwhile, the domestic economy continues to hum along at a healthy clip as
evidenced by rising non-oil imports such as iron and steel materials used in construction, vehicle auto parts for domestic consumption and machinery parts.