Bank Indonesia: Current Account Deficit Will Continue to Ease in 2014

Large capital outflows from Indonesia's capital markets have been an important factor behind the sharply depreciated Indonesia rupiah exchange rate. Up to 14 December 2013, the rupiah depreciated almost 25 percent against the US dollar in 2013.

| Source: Bank Indonesia

The current account deficit is caused by imports that exceed exports. Indonesia's robust economic growth in the last decade has triggered rising per capita GDP and rising consumptive behavior among Indonesia's expanding middle class. This gave rise to significantly increased imports. Moreover, as Indonesia's crude oil production has been slowing in recent decades due to falling investments in this sector, the country needed to import an increasingly large quantity of expensive oil to meet domestic fuel demand.

Exports - on the other hand - have fallen considerably, mainly due to a decline in global commodity prices as the global financial crisis caused weak global demand. Around 60 percent of Indonesia's total exports involve commodities (particularly unprocessed ones). Therefore, when commodity prices plunge (such as coal, crude palm oil and rubber), then the value of Indonesia's exports are reduced dramatically. For this reason, the government intends to make the country less vulnerable to commodity price downswings by developing value- added industries. In early January 2014, exports of unprocessed minerals will be banned instead requiring mining companies to process the products domestically first.

This situation led to a record high current account deficit of USD $9.8 billion in the second quarter of 2013. This deficit was equivalent to 4.4 percent of GDP, an alarmingly wide deficit and regarded as not sustainable. For the Indonesian government and central bank the deficit in the second quarter was a wake up call. Both institutions implemented policy packages that basically aim to limit imports and support exports (for example by using taxes). The government also raised prices of subsidized fuels in order to limit domestic demand (which subsequently led to high inflation between June and August). In the third quarter of 2013, the current account deficit eased to USD $8.4 billion, or 3.8 percent of GDP. This is a positive development but still too far from the government's target range of below 3 percent of GDP (which is considered sustainable). Governor of Bank Indonesia, Agus Martowardojo, expects that - with the ongoing impact of the current structural fiscal policy packages - the deficit will moderate to 3 percent in 2014.

‹ Back to Financial Columns

Discuss

Please sign in or subscribe to comment on this column