Indonesia's October 2013 Trade Surplus Provides a Glimmer of Hope

The country's trade deficit - and in particular the current account deficit (which has been in deficit since the fourth quarter of 2011) - forms an ongoing cause of concern to investors and the Indonesian government. The Federal Reserve's monthly USD $85 billion quantitative easing program caused a large capital inflow (of cheap US dollars) into lucrative capital markets of emerging economies, including Indonesia. However, when the QE program finishes, this money flow will reverse drastically, particularly in those emerging markets that are assessed as most risky. Indonesia with its wide current account deficit (USD $8.4 billion in the third quarter of 2013) - which is partly responsible for the sharply depreciated Indonesian rupiah exchange rate - is one of the most vulnerable markets to foreign capital outflows. In fact, Indonesia's vulnerability has already been exposed since May 2013 when Ben Bernanke, chairman of the Federal Reserve, started speculating about an end to QE3. Promptly, investors pulled money out of Indonesia's capital markets, resulting in a sharp correction of the country's benchmark stock index (IHSG) as well as the rupiah exchange rate.

After March and August, October was only the third month in 2013 that showed a trade surplus. A major factor was that in October imports were curbed significantly from one year ago. In October 2013, imports fell 8.9 percent (yoy) to USD $15.67 billion from USD $17.21 billion in October 2012. A decline of imports of three product categories contributed considerably to the fall in total imports. These are machinery and electrical equipment, iron and steel, and plastic and plastic goods.

Indonesia's Trade Balance 2013 (in billion US Dollar):

2013	Export			Import
Month	Oil & Gas	Non Oil & Gas	Total	Oil & Gas	Non Oil & Gas	Total
January	2,66	12,72	15,38	3,97	11,48	15,45
February	2,57	12,45	15,02	3,64	11,67	15,31
March	2,93	12,09	15,02	3,90	10,99	14,89
April	2,45	12,31	14,76	3,63	12,83	16,46
May	2,92	13,21	16,13	3,43	13,23	16,66
June	2,80	11,96	14,76	3,53	12,11	15,64
July	2,28	12,81	15,09	4,14	13,28	17,42
August	2,72	10,36	13,08	3,67	9,34	13,01
September	2,41	12,29	14,70	3,72	11,79	15,51
October	2,73	12,99	15,72	3,47	12,20	15,67
Jan-Oct	26,47	123,19	149,66	37,1	118,92	156,02

^{Source: Statistics Indonesia}

Exports in October 2013 rose 2.59 percent to USD $15.72 billion (yoy), particularly supported by an increase in the value and volume of commodities (particularly coconut copra, crude palm oil as well as oil derivatives and gas). The rise in volume and value of commodity exports is partly brought on by the improvement of the US economy. Also the depreciating rupiah exchange rate gave rise to the increased volume of commodity exports, while at the same time making imports more expensive.

The government is eager to continue curbing imports and stimulating exports in order to secure a trade surplus in the remaining months of 2013 as well as reducing the current account deficit to USD $7 billion by the end of the fourth quarter. After the August package, the government will implement two more policies to improve the trade balance. Firstly, it will raise the income tax on imports from 2.5 percent to 7.5 percent. Secondly, it will ease import facilities for export purposes (KITE), thus making it easier for export-oriented industries to import raw materials and capital goods.

Further Reading:

• Analysis of the Indonesian Rupiah Exchange Rate in November 2013
• Indonesia Financial Market Update: Indonesia's Current Account Deficit
• ADB Report: Asia Should Strengthen Economies and Financial Systems

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