Indonesiaâs current-account deficit is expected to be lower than Bank Indonesiaâs forecasts as the sluggish realization of government projects and lackluster economic growth will further dampen imports, analysts have said
ndonesia's current-account deficit is expected to be lower than Bank Indonesia's forecasts as the sluggish realization of government projects and lackluster economic growth will further dampen imports, analysts have said.
The current-account deficit ' the broadest measurement of international trade that includes exports, imports, services and transfers ' might fall to 1.4 percent of gross domestic product (GDP) in the first quarter this year, analysts from Citibank and Mandiri Sekuritas have predicted, while those from Credit Suisse see it at 1 percent of GDP.
Their estimates compare with the 1.6 percent forecasted by the central bank, which predicts that the narrowing of the deficit would strengthen the rupiah in the short run.
'The infrastructure story line still holds, but the magnitude of lift-off risks are softer than initial expectations,' noted Helmi Arman, the chief Indonesian economist at Citigroup.
'We expect infrastructure groundwork to begin gradually, starting first with small-scale budget-funded projects in the second half of 2015 that do not require lengthy preparation,' he explained.
Helmi was among the most optimistic forecasters on Indonesia's current-account deficit, predicting the full-year shortfall this year to stand at 2.3 percent, lower than BI's estimate of 3 percent.
Indonesia recorded a US$1.1 billion trade surplus in March, making a total trade surplus in the first quarter of $2.5 billion, the biggest quarterly trade surplus in three years. However, the increase in the surplus was mainly driven by a plunge in imports, rather than more exports.
The government's capital expenditure (capex) spending, which includes funding allocations for infrastructure projects, fell 49.8 percent year-on-year in the first quarter this year.
The sluggish government spending realization might limit imports, but consequently it could push down GDP growth in the first quarter to below 5 percent in the first quarter this year, said Aldian Taloputra, the chief economist of Mandiri Sekuritas.
'The government holds the key for faster GDP growth,' said Gundy Cahyadi, an economist with DBS Bank in Singapore. 'The government needs to start showing real progress on its infrastructure promises.'
Still, the lower-than-expected growth, coupled with a narrowing current-account deficit, might offer 'some comfort' for BI to ease its monetary policy, said Credit Suisse economist Santitarn Sathirathai.
BI wished to be conservative in its estimates because it remained vigilant on external risks, Senior Deputy Governor Mirza Adityaswara said when asked why the central bank's prediction on the current-account deficit was significantly higher than the market's consensus.
Despite the narrowing current-account deficit, BI might have room to ease and cut interest rates only in the fourth quarter this year, given the risks on the domestic and external fronts, said Euben Paracuelles and Lavanya Venkateswaran, economists from Japan-based funds manager Nomura.
'We believe the current-account deficit will widen in the second and third quarter owing to seasonal factors and a weak export growth outlook. These factors will likely be complicated by a Fed [US Federal Reserve] lift-off,' they wrote in a research note. Analysts have predicted that BI could cut its interest rate by between 25 and 50 basis points from the current level of 7.5 percent.
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