Indonesia rates: Stance on palm oil export ban eases
After an initial surprise ban on palm oil exports which was due to take effect on Thursday, the stance might have softened. Bloomberg cited industry participants saying that Indonesia might only halt exports of bulk and packaged palm olein, which is a processed derivative, accounting for about 30-40% of total palm oil exports, and allow crude palm oil shipments/sub-varieties. The country accounts for 60% of global palm oil production, with a third consumed locally and India, China, EU as well as Pakistan, ranked as the top four importers of the commodity, according to the USDA. Authorities intend to resolve a domestic shortage in cooking oil supplies, as well as cap prices, as companies opt to export crude products to tap high global international prices. Higher local supplies will help moderate inflationary expectations. To recall, Mar inflation had jumped to 2.6% YoY (Indonesia rates: Inflation to bother the central bank) and inflation is likely to quicken beyond 3.0% YoY further in April-May on festive led demand and imported price pressures. Separately, Governor Perry Warjiyo said yesterday that the central bank’s policy normalisation path will be under review in May-June, around the time when the fiscal team takes stock of the 2022 Budget, and decisions on price adjustments in subsidised fuel/ LPG/ utilities becomes clearer.
This partial ban follows a string of administrative changes since the start of the year, which included an increase in the DMO i.e., domestic market obligation on palm oil to 30% to nudge companies to prioritise domestic sales, which was later replaced with an exports levy. Coal supplies had also come under scrutiny earlier, which led to a ban on their shipments, but has since been lifted. Given the significance of Indonesia in the global supply mix, timing of the move and usage of the commodity’s derivatives across sectors such as consumer products including cosmetics and FMCGs, concerns are that lower supplies might spur price pressures in import-dependent countries. UN’s FAO (food price index) is already up 19% by Mar22 vs Dec21. In our view, these restrictions are likely to be temporary, given that domestic demand makes a third of production and once inventories are built up and prices stabilise, restrictions are likely to be lifted.
In the meantime, from an external balance perspective, palm oil was one of Indonesia's biggest export earners last year, besides coal. The prospect of exports being impacted bodes negatively for export earnings (current account) and thereby weighing on the rupiah – the unit broke out of recent range trade and fell 0.7%/US$ yesterday, to levels last seen in Aug21. The negative impact on trade will be diluted if CPO is indeed left out of the ban, allowing the currency to stage a relief rally today. Our current forecast path for the USDIDR outlined by our FX Strategist already factors in a depreciating bias for the rupiah, on the back of heightened volatility, hawkish Fed, and firm dollar/weak CNY; we maintain our projections for now.
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