CURRENT ACCOUNT DEFICIT HAS HAUNTED INDONESIA’s ECONOMIC CONDITION

Jakarta. The June 2019 trade balance surplus of US$196.0 million has improved the trade balance deficit in January-June 2019, Minister of Trade Enggartiasto Lukita has revealed. The non-oil and gas trade balance in June 2019 recorded a surplus of $1.2 billion, while the oil and gas balance was a deficit of $966.8 million. “The decline in the oil and gas trade balance deficit is the cause of the June 2019 trade balance surplus. This surplus improves the trade balance during January-June 2019,” the Trade Minister said through his statement.
However, the cumulative deficit during January-June 2019 was still quite large, nearly $1.9 billion, he continued. The deficit was due to the large deficit in the oil and gas trade balance which reached $4.8 billion.
Meanwhile, in the same period, the non-oil and gas trade balance contributed a surplus of $2.8 billion. The trading partner countries contributing the largest non-oil and gas trade surplus during June 2019, are the United States, India, the Philippines, the Netherlands and Malaysia. The surplus reached $12.9 billion.
Meanwhile, China, Thailand, Australia, Japan and Argentina became partner countries which contributed to the largest non-oil and gas trade deficit totaling $14.3 billion. An export performance in June 2019 reached $11.8 billion, down 9.0 percent compared to exports in June 2018 (Year on Year/YoY). The decline was due to the decrease in oil and gas exports by 54.7 percent (YoY) and a drop in non-oil and gas exports by 2.3 percent (YoY).
Cumulatively, non-oil and gas exports in the first half of 2019 amounted to $80.3 billion, down 8.6 percent compared to that in the same period in 2018. This decline was slightly deeper than the export growth in the January-May 2019 period which fell 7.3 percent. During the first semester of 2019, exports from all sectors also weakened.
The export value of the mining sector fell 15.4 percent, while last year it rose 36.2 percent. The industrial sector fell 4.6 percent, while last year it was up 5.4 percent, and the agricultural sector fell 1.0 percent, while last year it also fell 7.8 percent.
The oil and gas sector was the sector that experienced the largest decline in exports. It was down 27.7 percent (YoY), while the first semester of last year exports increased 11 percent (YoY).
The weakening of the export performance from January to June 2019 was due to the price pressure of some of Indonesia’s main commodities in the international market, such as coal and crude palm oil (CPO), even though the export volume had increased.
Previously, the recent rate cut by Bank Indonesia (BI), which has hinted at more cuts in the future, combined with improvements to government investment policies, is expected to boost investment growth, Finance Minister Sri Mulyani Indrawati has said.
The minister said the government’s policies on boosting investment included the issuance of fiscal incentives to attract investment, such as the recently issued tax deductions for research and development and skills training.
Investment, the second-largest contributor to gross domestic product, grew 5.03 percent year-on-year (yoy) in the first quarter this year, considerably lower than the 7.94 percent yoy growth recorded over the same period last year, according to Statistics Indonesia (BPS) data.
The central bank slashed its policy rate, the seven-day reverse repo rate, by 25 basis points to bring the rate down to 5.75 percent in the latest monthly policy meeting on July 18, the first since September 2017.
Meanwhile, BI Governor Perry Warjiyo separately hinted that there might be more cuts in the future, considering the low inflation and the need to encourage domestic growth. The governor of Bank Indonesia, Perry Warjiyo, has given a signal that the central bank may lower its benchmark interest rate again this year to boost the country’s economic growth. Speaking in front of lawmakers during a session at the House of Representatives in Jakarta on Monday, Perry said the room for monetary policy easing remains open as long as inflation stays manageable.
The bank cut its benchmark interest rate by 25 basis points to 5.75 percent last Thursday in anticipation of expected policy easing by the United States and other developed countries.
This was the central bank’s first cut in nine months as it strives to balance interest rate level that can support a faster economic growth amid uncertainty in the global economy.
Perry also said some of Indonesia’s economic indicators, including results of business as well as banking surveys, showed an improvement in activity since the third quarter last year. He said economic growth is expected to improve in the second half of this year as long as inflation stays tame. The rupiah, meanwhile, is likely to strengthen.
The head of the Finance Ministry’s fiscal unit, Suahasil Nazara, told Antara he expected the latest central bank rate cut would trigger more investment to flow into the country as the cost of borrowing by banks is now more likely to fall.
Indonesia’s central bank cut its benchmark interest rate for the first time in nearly two years on Thursday, as it expects a similar move by the U.S. Federal Reserve at its July policy meeting.
Bank Indonesia’s seven-day reverse repo rate now stands at 5.75%, down 25 basis points from 6%. The decision came after the rate was left unchanged for seven consecutive meetings. Of the 33 analysts polled by Reuters, 23 had predicted the bank would ease policy.
Last year, the central bank raised its benchmark rate by a combined 175 basis points, as it looked to shore up the rupiah. The currency had fallen to a 20-year low against the dollar, hit by America’s monetary tightening as well as global uncertainties stemming from the U.S.-China trade conflict.
Now, the U.S. Federal Reserve is expected to cut its benchmark rate later this month, prompted in part by the same uncertainties. The prospect of a weaker greenback and stronger rupiah gave Bank Indonesia room to ease its policy in advance, despite lingering concerns about its currency amid the trade war.
Indonesia is the latest Asian central bank to ease policy. South Korea lowered rates earlier Thursday, as have Australia, India, Malaysia, and the Philippines over the past few months. U.S. Federal Reserve Chairman Jerome Powell has hinted at a cut later this month.
Improved political and economic stability at home have also helped give Indonesia room to maneuver. The Constitutional Court’s confirmation that President Joko Widodo won the April election, and opponent Prabowo Subianto’s acceptance of defeat, have eased fears of political unrest over the coming months.
Inflation, meanwhile, remains within the central bank’s target range, increasing 3.28% year on year in June. And the country has posted a trade surplus for two consecutive months, further supporting the rupiah, which is currently at a near five-month high against the dollar. The currency has surpassed the bottom of the central bank’s exchange rate forecast for this year, of 14,000 to 14,400 rupiah per dollar.
Before Bank Indonesia’s decision, HSBC said in a report that it expects a further 50 basis points of rate cuts in the fourth quarter of 2019 and 25 basis points in the first quarter of 2020. “For a more substantial rate-cutting cycle, we believe [Bank Indonesia] will need to see improvement in the current-account deficit” toward the lower end of its 2.5% to 3.0% forecast.
Alternatively, HSBC suggested, the bank would need “a vigorous acceleration in reforms to attract [foreign direct investment], which can more sustainably finance the current-account deficit.” (Red/many sources)