Bank Indonesia: Current Account Deficit at 2.2% of GDP in FY-2016
Bank Indonesia, the central bank of Indonesia, expects the country's current account deficit to increase to USD $4.8 billion - or about 2.2 percent of gross domestic product (GDP) - in full-year 2016. Although the deficit remains high - and is forecast to go higher - there is optimism that this increase is caused by rising imports of capital goods and raw materials. These goods and materials are used to manufacture new products (that may be exported from Indonesia) and therefore have a positive impact on the economy (in contrast to consumer product imports that bring few future economic value).
Agus Martowardojo, Governor of Bank Indonesia, informed that - although Indonesia's trade balance showed a surplus in August (USD $293.6 million) - the country's trade surplus narrowed on a month-to-month basis due to a smaller non-oil & gas trade surplus and a growing oil & gas deficit. The narrowing non-oil & gas surplus is caused by a surge in imports of raw materials and capital goods, such as mechanical and electrical machinery equipment as well as plastic (articles). This points at "gains in terms of domestic economic activity".
For the short-term, however, it implies some additional pressures on Indonesia's current account balance. Therefore, Bank Indonesia expects the nation's current account deficit to touch 2.4 percent of GDP - or about USD $4.9 billion) - in the third quarter of 2016. Although the economies of the USA and China are remain bleak (curtailing demand for Indonesian export products), Martowardojo said markets have somewhat calmed after the Federal Reserve and Bank of Japan meetings last week (in fact opening the door to capital inflows on the short-term), while the oil price has shown a cautiously rising trend (hence encouraging other commodity prices to go up as well). This should have a positive impact on Indonesia's current account balance.
The current account balance, the broadest measure of a country's international trade, indicates whether a country is a net lender or net borrower from the rest of the world. Although a current account deficit is not necessarily bad (for example when the temporary deficit is caused by imports that will lead to future revenue streams), in the case of Indonesia the current account deficit (that started in late-2011) has a more structural nature. Indonesia is a country that is highly dependent on (raw) commodity prices for its export performance and foreign exchange earnings. However, after the 2000s commodities boom ended, commodity prices went downhill and so did Indonesia's export performance. One of the consequences was a sharply rising current account deficit.
Generally, a current account deficit below the 3 percent of GDP mark is considered sustainable although the country does continue to accumulate net foreign liabilities and this may pose risks over time. Earlier, Bank Indonesia stated that it does not see Indonesia's economic stability in jeopardy with the current account deficit around 2.2 percent of GDP in full-year 2016, although this figure would be slightly higher compared to the deficit in the preceding year. In 2015 the current account deficit was recorded at USD $17.8 billion (2.06 percent of GDP), improving from a USD $27.5 billion deficit (3.09 percent of GDP) in 2014.
Current Account Balance Indonesia:
In the second quarter of 2016 Indonesia’s current account deficit narrowed to USD $4.7 billion, or 2 percent of GDP, from USD $4.8 billion, or 2.2 percent of GDP in the first quarter. A positive side-effect is that the improving current account balance makes the rupiah less vulnerable to global market volatility.
Juda Agung, Executive Director at the Economic and Monetary Policy Department of Bank Indonesia, stated that in terms of the services balance the negative trend persists, primarily due to pressures stemming from the maritime sector, including the fisheries and shipping sectors. He said the maritime sector contributes 80 percent to the nation's services account deficit. This situation is caused by the high degree of input from abroad (foreign credit or insurance, and the renting of equipment).