Indonesia's Current Account Deficit Expected to Ease Further in Q1-2014

The higher import income tax that is estimated to curb imports involves an income tax on 502 types of durable goods (such as motorcycles, smartphones, furniture and mobile phones). This tax was raised from 2.5 percent to 7.5 percent for all importers. Previously, importers with an importer identification number (API, Angka Pengenal Importir) given by Indonesia's Trade Ministry paid income tax of 2.5 percent, while companies without API paid 7.5 percent. Therefore, the new policy implies an end of the tax break of API-holders.

The sharply depreciated rupiah exchange rate also positively affects the current account balance as it makes Indonesia's manufacturing products more competitive in terms of export. During 2013, Indonesia's currency depreciated over 21 percent against the US dollar.

| Source: Bank Indonesia

Finance Minister Chatib Basri explained that Indonesia's current account deficit tends to show a specific traditional pattern: in the first quarter it tends to ease, then the deficit increases in the second quarter, while in the last two quarters of the year it eases again. Basri estimates that the country's current account deficit will be in the range of 2.0 to 2.5 percent of GDP throughout 2014.

Last week, Indonesia's central bank announced that the current account deficit had eased significantly by the end of 2013. The deficit reached a record high of USD $9.9 billion (4.4 percent of GDP) in the second quarter of 2013 but eased to USD $8.4 billion (3.8 percent of GDP) in the third quarter, and to USD $4 billion (1.98 percent of GDP) in the fourth quarter of 2013. In 2013, this deficit had been a major concern of international investors and triggered significant capital outflows from Southeast Asia's largest economy amid the looming end of the Federal Reserve's quantitative easing program between May (when Ben Bernanke started to speculate about the end of to program) and December 2013 (when tapering was announced).

The current account deficit improved in the last quarter of 2013 particularly due to an improved surplus in the country's non-oil & gas sector, while the deficit in the oil & gas sector moderated. Exports in Indonesia's non-oil & gas sector increased 3.8 percent (yoy) amid increased demand from the USA and Japan. Moreover, ahead of the implementation of the ban on export of unprocessed minerals, miners have been eager to export as much raw materials as possible.

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