Current Account Balance Update Indonesia: Deficit is Improving
The central bank of Indonesia (Bank Indonesia) expects Indonesia's current account deficit to have improved to below 2 percent of the country's gross domestic product (GDP) in the third quarter of 2016. This is good news as a wide (and structural) current account deficit is considered a financial weakness because it means the country is building up liabilities to the rest of the world. Ever since late-2011 Indonesia has been suffering a wide current account deficit. This is particularly attributed to the globe's low commodity prices after 2011.
Juda Agung, Executive Director at the Economic and Monetary Policy Department of Bank Indonesia, informed that the improvement in Indonesia's current account balance is caused by the rising trade balance surplus. Since 2015 Indonesia's trade balance has recovered from the structural deficit in the years 2012-2014. This surplus comes on the back of modestly improving commodity prices and - more importantly - a sharp decline in imports. The trade balance surplus of Indonesia amounted to USD $2.09 billion in the third quarter of 2016.
In the first quarter of 2016 Indonesia's current account deficit was recorded at 2.2 percent of GDP, then improving to 2.0 percent in the second quarter. Regarding full-year 2016 the current account deficit is expected to remain around 2 percent, improving modestly from the 2.1 percent of GDP deficit in 2015.
A current account deficit that is largely under control provides room for Bank Indonesia to ease its monetary policy and thus step on the gas pedal for accelerated economic growth. At the latest Board of Governor's meeting (19-20 November), Bank Indonesia cut its key interest rate to 4.75 percent, the sixth time this year the central bank cut its benchmark rate. Agung added that Bank Indonesia may consider to cut rates again in the remainder of 2016 as markets may have already priced in the looming decision of the US Federal Reserve to hike its key Fed Funds Rate. Besides global conditions and the current account balance, the central bank also looks at Indonesia's rupiah exchange rate and inflation to determine its monetary policy.
Indonesia’s balance of payments will also continue to improve on the back of the improving current account balance and capital inflows. Based on the latest data from Bank Indonesia, non-residents booked a net capital inflow of USD $12.1 billion into financial markets of Indonesia, exceeding the overall total for 2015.
Macroeconomic Indicators Indonesia:
| 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016¹ | |
| • Gross Domestic Product² (annual percent change) |
6.4 | 6.2 | 6.0 | 5.6 | 5.0 | 4.8 | 5.0 |
| • Consumer Price Index (annual percent change) |
5.1 | 5.4 | 4.3 | 8.4 | 8.4 | 3.4 | 3.1 |
| • Current Account Balance (percent of GDP) |
0.7 | 0.2 | -2.8 | -3.3 | -3.1 | -2.1 | -2.0 |
| • Foreign Exchange Reserves (in billion USD) |
96.2 | 110.1 | 112.8 | 99.4 | 111.9 | 105.9 | 115.7³ |
¹ indicates a forecast
² Statistics Indonesia (BPS) shifted the basis of the computation from the year 2000 to 2010 and adopted a significantly updated methodology, hence GDP growth results between 2010 and 2014 have been revised in early 2015
³ per late-October 2016
Sources: World Bank, Statistics Indonesia, Bank Indonesia and International Monetary Fund (IMF)