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Analysis: RI current-account deficit: Volatile and risky for rupiah
In line with market estimates, Indonesiaâs current-account deficit (CAD) in the first quarter this year (Q1 2015) improved to US$3
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In line with market estimates, Indonesia's current-account deficit (CAD) in the first quarter this year (Q1 2015) improved to US$3.8 billion or 1.8 percent of gross domestic product (GDP), from $5.7 billion or 2.6 percent of GDP in the fourth quarter last year (Q4 2014). This was supported by a lower oil and gas deficit of $1.2 billion (Table 1), down 47.7 percent year-on-year (yoy) (Q1 2014: -$2.8 billion; -4.7% yoy). As a comparison, the current-account deficit in Q1 2014 was $4.1 billion, 1.9 percent of GDP.
Improved CAD in the first quarter was affected by seasonality, as business activities and government expenditure were relatively slow in the first quarter. However, we note that current account data is volatile from one quarter to the next with the deficit likely to rise again in the second quarter as we expect higher raw-material requirements in the lead up to Ramadhan and Idul Fitri. This, coupled the government's infrastructure drive kicking in during the second and third quarters this year, and imports will undoubtedly accelerate.
On the flip side, relatively low commodity prices should keep exports under pressure despite a weak rupiah. That said, lower global oil prices and a less than optimal capital expenditure (capex) due to the government's aggressive tax drive will play a role in narrowing the country's CAD.
Hence, we expect Indonesia's 2015 CAD to reach 2.3 percent of GDP from 2014's level of 3 percent, before increasing to 2.5 percent in 2016, in line with increased imports based on more government projects and GDP growth.
For Indonesia, a big risk to the forecast is the outlook on the rupiah. Note that the rupiah has been the worst performing currency in the region in the year-to-date (ytd) (Table 2). Due to the country's CAD, Indonesia is likely to be one of the worst hit countries in the event the US Federal Reserve starts monetary tightening.
This could lead to renewed turmoil in emerging currency markets and a sharp sell-off in the rupiah would make it difficult for the central bank to cut rates.
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The writer is senior associate director/head of research at Bahana Securities.
