B

ank Indonesia (BI) last week revealed second quarter figures for the 2009 balance of payments (BOP), a macro indicator based on the external trade and capital outflow, recording a Q2 surplus of US$1.1 billion, but down 73 percent quarter-to-quarter compared to the first quarter's $3.9 billion.

This is mainly caused by a 59 percent q-q drop in foreign direct investment (FDI), to the lowest level since quarter two of 2007, caused by the global economic slowdown.

On the flip side, it is worth noting that foreign short-term portfolio investment grew 7.7 percent q-q to $2 billion, increasing for the third consecutive quarter.

On Tuesday, the government of China stated that Indonesia-China trade dropped 20 percent y-y to $11.7 billion, higher than the $9.6 billion reported by the (Indonesian) Central Bureau of Statistics, down from $11.4 billion in the first semester of 2008, pulled down by commodity results like rubber, as well as textiles and footwear.

On the flip side, support stemmed from exports of coal, copper and crude palm oil coupled with net non-oil and gas exports in the first semester of 2009 that grew 24% y-y to $6.6 billion.

It is also worth mentioning that Indonesia as of Q2 of 2009 has now become a positive net oil exporter of $69 million, the first time this has happened since 2001, from a negative of $155 million in Q1 of 2009.

Going forward, Indonesia's BOP could still be weighed down by uncertainties in the US and China economies, although we have seen some positive progress in economic performance in some countries including Japan, Singapore, France and Germany in Q2 of 2009 .

Since rebounding in February, China's July manufacturing index has remained relatively stable in the last four consecutive months, while fixed asset investment y-y growth slightly dropped to 33 percent in July from 34 percent in June.

Moreover, headline investment growth was also weaker than expected with nominal fixed investment increasing 30 percent y-y in July, down from 35 percent in June.

However, investments in China in H1 of 2009 are likely to be overstated as many state-owned firms were eager to demonstrate the speed of their recovery, reporting the full value of intended investment projects underway.

Moreover, July's other data was mixed up with industrial production, weaker than expected, while retail sales were slightly stronger.

Similar mixed figures have persisted in the US showing industrial y-y growth still in negative territory (-13 percent drop in July) while US m-m retail sales were relatively stable, up 0.6 percent, the highest growth since January 2009.

Additionally, June's new residential sales showed the third consecutive increase in sales of newly constructed US family units bringing seasonally adjusted annual sales to 384,000 units, or just slightly under the level seen in November 2008.

Based on the Indonesian export data, the US and China year-to-date contributed around 20 percent of total non-oil and gas exports.

Thus, we believe that the progress of the two countries would affect the performance of Indonesia's BOP, especially the direct investment figure.

We expect that the export and import figures in 2009 would still contract 13.2 percent y-y and 15.2 percent y-y respectively and continue to grow by 8.2 percent and 9.5 percent respectively in 2010.

For investment, we expect y-y growth of 3.7 percent in 2009 and 4.8 percent in 2010, assuming stable economic performances in China and the US.