I

ndonesia posted a staggering US$6.6 billion deficit in its balance of payments (BOP) in the first quarter this year on the back of low global demand and a surge in capital outflow, Bank Indonesia (BI) said on Wednesday.

'Inflationary pressure has caused capital reversal. Foreign fund inflows to the country in the first quarter were also not as robust as expected,' BI Deputy Governor Perry Warjiyo told reporters here on Wednesday.

The last time Indonesia posted such a large BOP deficit was in the fourth quarter of 2008, during which it swelled to $6.5 billion. The BOP deficit in the first quarter this year reversed the surplus of $3.18 billion that Indonesia posted in the fourth quarter of last year.

BOP comprise two main components: current account and capital account. In the former, Indonesia recorded a $5.27 billion deficit, or 2.4 percent of gross domestic product (GDP), narrowing significantly from last quarter's figure of $7.64 billion, or 3.5 percent of GDP.

Indonesia has been running a current account deficit for six consecutive quarters, as strong investment growth has sucked up high imports of oil and capital goods, while exports remain weak due to a stalling global economic recovery.

Indonesia could strengthen its current account position by increasing the price of subsidized fuel, Citi Research economist Helmi Arman wrote in a research note released on Wednesday.

He argued the government's plan to increase prices of subsidized fuel by 33 percent might narrow the current account deficit by 0.2 percent of GDP, lessening the risk that Indonesia's credit rating would be downgraded, as international rating agencies had expressed fears of the country's deteriorating external imbalances.

Meanwhile, on the capital account side, Indonesia also posted a deficit of $1.4 billion. The deficit was considered a surprise, given that the country posted a massive $11.4 billion surplus in the last quarter.

Perry, however, reassured that the weak capital account position would not persist.

'Our capital account will see a huge surplus in the second quarter, thanks to the $3 billion issuance of global bonds,' he said, expressing optimism there would be more foreign inflows entering the country going forward.

'That, coupled with more improvements in the current account, will turn the balance of payments into a surplus again. Hopefully, it will assist us in our mission to stabilize the currency,' Perry went on.

Indonesia recently saw its credit rating outlook downgraded by Standard & Poor's (S&P) to BB+ stable from BB+ positive, but economists believe the situation will not limit foreign inflows to the country.

'Our capital account will depend on developed countries' interest rates ' if they still apply low interest rates like presently, I'm optimistic there will still be fund inflows to Indonesia,' said Fauzi Ichsan, an economist with the UK-based Standard Chartered bank.

'And with quantitative easing policies implemented by the US, Europe and Japan, there will still be excess liquidity that can be pumped into emerging market economies, especially Indonesia, which investors still consider relatively attractive,' he added.

Robust fund inflows to Indonesia would ultimately lead to a possible strengthening of the rupiah, Fauzi said, predicting that the currency would hover at 9,500 to 9,600 per US dollar by year's end.