Thursday, January 16, 2014

Indonesia’s Deficit to Ease

There is a good chance Indonesia’s current account deficit may narrow to below 3% of GDP in 2014 from a projected 3.4% of GDP in 2013. The November trade balance released ear¬lier this month has sur¬prised to the upside, with surplus recorded at US$780 million,
the highest since March 2012. Excluding oil and gas, trade surplus has improved to US$2 billion, the highest since August 2011.
Part of the improvement in the trade balance is a result of further mod¬eration in import growth, which registered a double-digit decline for the first time since late 2009. But we are also beginning to see signs that the worst may be over for export growth. In sequential terms, both total vol¬ume and value of exports have been gaining grounds since the September quarter. A relatively weak rupiah and a somewhat stronger global economy are also likely to bolster ex¬port growth going forward.
The relaxation of the mineral export ban may also help improve the outlook. The government has decided to allow the exports of copper, iron ores, lead, zinc and manganese concentrates until 2017 while keeping the bans on exports of nickel and bauxite. This would result in a projected fall of export earnings of about US$2 billion in value for the year, compared to the US$5.5 billion if the original full list were to go ahead.
A narrowing current account deficit is positive for market sentiment. This in turn allows the central bank to play a balancing role in containing market pressure on the rupiah while ensuring that monetary policy will not be overly restric¬tive for GDP growth. While Bank Indonesia has suggested that it will keep to a tight policy bias, this does not necessarily mean higher interest rates as long as the rupiah remains supported going forward.