B

ank Indonesia (BI) expects there will be a more stable rupiah going forward as a significant increase in the country'€™s trade surplus during the January to March period will significantly improve the outlook of the current account deficit.

BI'€™s senior deputy governor, Mirza Adityaswara, said on Thursday that Indonesia'€™s current account deficit, which has become a major worry among foreign investors, shrank to 1.6 percent of the gross domestic product (GDP) in the first quarter of this year.

If accurate, the figure would be significantly lower than BI'€™s earlier estimates of it being 2 percent of GDP, with the lower deficit figure consequently improving confidence among investors toward Indonesia'€™s macroeconomic stability.

'€œWe are now walking the same path as India, which has successfully pushed down its current account deficit by a considerable amount,'€ Mirza said at the central bank'€™s headquarters on Thursday.

Financial services company Morgan Stanley once included the currencies of Brazil, India, Indonesia, South Africa and Turkey in a '€œFragile Five'€ list of those that were most vulnerable to outflows because of the size of their current account deficits.

BI said recently that the Indian rupee and the Indonesian rupiah may no longer deserve to be included in the infamous group, citing the successes of various economic reforms undertaken by the two countries.

Despite a sluggish growth in exports, Indonesia enjoyed a significant increase in its trade surplus during the January to March period. The Central Statistics Agency (BPS) announced Wednesday that exports exceeded imports by US$1.1 billion in March, taking the total trade surplus in the first quarter of this year to $2.5 billion, the biggest quarterly surplus in three years. The increase in the surplus was caused by a decrease in the country'€™s imports rather than because of a healthy growth in exports.

On Thursday, Bloomberg currency rates showed the rupiah had risen to its strongest level since February, at 12,858 per dollar, on expectations that the trade surplus will bring down Indonesia'€™s current account deficit.

The current account is the broadest measurement in international trade that includes exports, imports, services and transfers. For Indonesia, a healthier current-account position means there would be more balanced dollar supply in the market, thus stabilizing and strengthening the rupiah.

Mirza predicted the rupiah would experience less pressure and become more stable in the upcoming months. '€œBI would remain in the market to safeguard the rupiah, but we could become thriftier in regards to our intervention,'€ he said.

Despite recent improvements in domestic fundamentals, however, Mirza stressed the need for the central bank to maintain a cautious monetary policy stance. '€œWe would remain focused on stabilization,'€ he said. '€œFor BI, it'€™s better to be prudent and conservative in our monetary policy.'€

Analysts have said that the significant improvement in the current account deficit would provide an opportunity for BI to cut its interest rates and spur economic growth.

Analysts from Barclays Bank, Citibank, HSBC, Mandiri Sekuritas and Nomura all predicted that BI could cut its interest rate by at least 25 basis points from the current level of 7.5 percent, while those from Credit Suisse said it could be lowered by 50 basis points.

BI'€™s latest policy statement, released after a board of governors'€™ meeting on April 14, showed that the central bank was '€œless upbeat'€ about the country'€™s growth outlook this year, noted Euben Paracuelles and Lavanya Venkateswaran, analysts from Nomura, which is a fund manager based in Japan.

'€œA swelling trade surplus will alleviate current-account anxiety and enable Bank Indonesia to get back into the business of cutting interest rates,'€ said ING Group economist Tim Condon, who forecast the BI rate would be lowered to 6.75 percent at the end of this year.