Current Account Indonesia in Check, Worry about Import and Capital & Financial Account
Indonesia's current account deficit eased to USD $4.01 billion, or 1.86 percent of the country's gross domestic product (GDP), in the third quarter of 2015. The central bank (Bank Indonesia) said this improvement is particularly caused by a stronger non-oil & gas trade balance. However, Indonesia's capital and financial account surplus declined to USD $1.2 billion, causing the balance of payments deficit to widen to USD $4.6 billion from USD $2.9 billion in the preceding quarter.
Although a smaller current account deficit is good news, there remain concerns as declining imports into Indonesia are the main reason that explain the smaller deficit. Bank Indonesia said there was a 18.2 percentage point (y/y) drop in imports in the first nine months of the year. This figure shows reduced domestic economic activity in Southeast Asia's largest economy. Indonesian exports declined too - due to weak commodity prices and sluggish global growth - but this drop (at 11 percent y/y) was less severe.
The country's oil & gas deficit stayed at (roughly) the same level as in the preceding quarter.
| 2010 | 2011 | 2012 | 2013 | 2014 | Q1 2015 |
Q2 2015 |
Q3 2015 |
|
| Balance of Payments (in USD billion) |
30.29 | 11.86 | 0.22 | -7.33 | 15.25 | 1.30 | -2.93 | -4.57 |
| Current Account Balance (in USD billion) |
5.14 | 1.69 | -24.42 | -29.11 | -27.52 | -4.18 | -4.25 | -4.01 |
| Current Account Balance (in % of GDP) |
0.67 | 0.19 | -2.65 | -3.19 | -3.10 | -1.96 | -1.95 | -1.86 |
Source: Bank Indonesia
The shrinking capital and financial account surplus in Q3-2015 was mainly caused by a portfolio investment deficit and smaller direct investment surplus. A net sell of Indonesian government debt securities and local stocks by foreign investors contributed to the portfolio investment deficit. On the other hand, government withdrawal of foreign debt as well as declining private sector foreign debt repayments turned the investment deficit into a surplus, while preventing a deeper decline in the capital and financial account surplus.
Bank Indonesia Governor Agus Martowardojo warned that the shrinking capital and financial account surplus may cause excess demand for the US dollar, implying heavy pressures on the Indonesian rupiah. The Governor considers the lower capital and financial account surplus a new trend and also regards it a wake-up call as previously authorities and markets have been focusing on the current account, and not on the capital and financial account. Martowardojo said the capital and financial account surplus may fall to USD $14.3 billion, from USD $45.3 billion last year.
The rupiah has depreciated 9.6 percent against the US dollar so far this year.
Indonesian Rupiah versus US Dollar (JISDOR):
Regarding the capital and financial account surplus, Martowardojo says to expect a larger surplus (perhaps up to USD $4.7 billion) in the last quarter of 2015. Meanwhile, he expects the current account deficit to widen to about USD $5.0 billion in Q4-2015.
Overall, the current account deficit of Indonesia is expected to reach USD $17.5 billion in full-year 2015. This would be a major improvement from the USD $27.5 billion current account deficit in 2014. In 2013 and 2014 Indonesia saw a current account deficit just above 3 percent of GDP. Generally, the 3 percent of GDP level is regarded the boundary between a sustainable and unsustainable current account deficit. The current account balance, the broadest measure of a country’s international trade, is an important statistic for foreign investors. A current account deficit implies that a country is a net borrower from the rest of the world and thus needs capital or financial flows to finance this deficit. Particularly when the deficit is not being used for productive investment purposes (such as infrastructure development) but merely for unproductive consumption (for example Indonesia's recently scrapped generous gasoline subsidy program), investors consider a country that is plagued by a current account deficit as risky and will quickly pull money out of the country's assets in times of (global) economic turmoil.