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Current account deficit not always bad thing: Analysts
The current account deficit is expected to widen in the coming months as the country’s trade deficit is likely to continue to increase, but a large current account deficit does not necessarily have to be translated as a bad omen for the economy, analysts have said
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span>The current account deficit is expected to widen in the coming months as the country’s trade deficit is likely to continue to increase, but a large current account deficit does not necessarily have to be translated as a bad omen for the economy, analysts have said.
International ratings agency Standard & Poor’s (S&P) Global Ratings said while the current account deficit might appear worrisome, stakeholders should consider what actually negated the current account balance.
Earlier this month, Bank Indonesia (BI) reported that the current account deficit had widened to US$6.96 billion in the first quarter or 2.6 percent of gross domestic product (GDP), much wider than in the same period last year at $5.19 billion or 2.01 percent of GDP.
Bank Indonesia forecast that the current account deficit could reach the 3 percent threshold by the end of this year as the escalating trade war between the United States and China could further slow global economic growth.
“[However], in the short-term, a current account deficit is necessary because there is a very strong commitment to building infrastructure, which requires a lot of investment that goes beyond [domestic] savings,” S&P Global Ratings economist for Southeast Asia Vincent Conti told The Jakarta Post.
“The general message is that the current account deficit is here to stay [but] as long as it is the result of spending on infrastructure, then it is a good quality current account deficit,” Conti added.
Developing infrastructure could generate greater productivity that would reduce the current account deficit, even if the effects of better infrastructure would not be immediate and take several years to bear fruit, which meant there was virtually no short-term solution to deal with the current account deficit, he said.
A current account deficit is when a country imports more goods, services and capital than it exports.
Finance Minister Sri Mulyani Indrawati once said the current account deficit was not a “sin” for developing countries as they needed to import raw materials to produce goods for export. In addition, they need foreign capital to finance infrastructure projects, which can help boost the economy.
It would become a serious problem, however, if the current account deficit exceeded the maximum limit of 3 percent of GDP, because it would create negative sentiments among foreign portfolio investors, which could in turn trigger capital outflows, Sri Mulyani said.
Bhima Yudhistira Adhinegara, an economist at the Institute for the Development of Economics and Finance, said a widening current account deficit would lead to more demand for foreign exchange and thus undermine the rupiah.
By the time the second quarter concludes, a widening current account deficit could drag the rupiah down to 14,700 against the US dollar from the current 14,495, he told the Post.
“The current account deficit could also drive higher interest rates,” said Bhima. “If the cost of finance increases, debt maturity [of both the government and corporations] would be heavier and thus increase risks to monetary stability.”
Separately, the National Economic and Industry Committee (KEIN) does not expect the current account deficit to recover in the second quarter as imports would continue to increase while exports remain weak.
“High imports and production in the second quarter as well as volatile commodity prices means our current account deficit will have a hard time recovering,” KEIN member Telisa Aulia Falianty said.
Center of Reform on Economics Indonesia executive director Mohammad Faisal agreed that the current account deficit could suppress economic growth.
He expected the current account deficit to widen in the second quarter because of the historic trade deficit recorded in April.
