Worse than market estimates, May exports declined 15.24 percent year-on-year (yoy) and 4.11 percent month-on-month (mom) to US$12.6 billion. This followed a decline of 8.32 percent yoy for April, mainly due to continued weak global demand and lower oil prices, which resulted a decline in oil and gas exports, down 42 percent yoy (April: -45 percent yoy).

On the non-oil and gas side, May figures remained subdued but relatively better compared to oil and gas exports and only decreased 10.1 percent yoy and 3.9 percent mom to $11.2 billion, due to slower exports for mineral products (-15.7 percent mom), vehicles (-10.8 percent mom) and rubber (-10.1 percent mom).

Worse than the street'€™s estimates, May imports saw a persistent decline, down 21.4 percent yoy and 8.1 percent mom, mainly on continued rupiah weakness and lower oil prices, which led aggregate average prices of Indonesian imports, dipping 16 percent yoy to $1,015/ton in May 2015 (May 2014: $1,211/ton).

Despite the upcoming Ramadhan and Idul Fitri festivities and expected pick-up of government projects in the second quarter of 2015 (2Q15), both consumer goods and raw materials imports continued to fall 14.5 percent yoy and 18.9 percent respectively (Table 1). In addition, May imports (two months prior to Idul Fitri) decreased 8.05 percent mom and 21.40 percent mom, bucking previous trends in the last five years when imports accelerated two months prior to Idul Fitri (Table 2). Thus, we think this suggests continued weak domestic demand and slow economic growth with our revised-down 2015 forecasted gross domestic product (GDP) growth of 5.02 percent yoy remaining intact.

Trade figures were much better than the market'€™s estimates with the May trade balance having booked a surplus of $955 million (April: $477 million), bringing the trade surplus in the first five months (5M15) this year to $3.86 billion (5M14: -$0.84 billion), the highest January-May surplus since 2012, mainly caused by lower oil and gas imports (Table 3).

Looking ahead, we expect the foreign trade balance to remain in surplus for the first half of 2015, but expect the June import figure to start to accelerate on higher raw materials and capital goods demands for several sizable government projects starting in 2Q15.

On the flip side, we expect exports to remain sluggish amid continued low commodity prices and weak global economies. Additionally, this improved trade balance should help to improve the 2Q15 current account deficit (CAD), which we estimate to reach 3.2 percent of GDP (2Q14: 4.27 percent of GDP), before improving to 2.3 percent by the end of 2015.

However, we believe this expected improvement in 2Q15 CAD will not be sufficient for the central bank to cut its 7.5 percent policy rate due to expected higher inflation in the medium term, continued rupiah weakness and future US Federal Reserve rate hikes.

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The writer is senior associate director/head of research at Bahana Securities.

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