TheJakartaPost
Please Update your browser
Your browser is out of date, and may not be compatible with our website. A list of the most popular web browsers can be found below.
Just click on the icons to get to the download page.
CAD to remain high this year as escalating trade war will affect exports: Analysts
Indonesia’s current account deficit is expected remain wide this year as uncertainties as a result of the escalating Sino-American trade war will continue to hamper exports
Change Size
I
span>Indonesia’s current account deficit is expected remain wide this year as uncertainties as a result of the escalating Sino-American trade war will continue to hamper exports.
The current account deficit widened to US$ 8.4 billion or 3.04 percent of GDP in the second quarter of 2019, according to the latest data issued by Bank Indonesia (BI). The figure is higher than $7.9 billion or 3.01 percent of the GDP in the same period last year.
The second quarter figure slightly surpassed the 3 percent level that BI considers to be sustainable. The currency account deficit continued to widen despite a number of policies introduced by the government last year to improve the country’s balance of payment.
The government projects this year’s current account to hover between 2.5 percent and 3 percent of GDP. But analysts estimate that it will be difficult to reduce the deficit to the government’s target.
In order to narrow the deficit, the government imposed a higher withholding import tax for 1,147 consumer goods items, postponed infrastructure projects with high import content and implemented the mandatory use of 20 percent blended biodiesel (B20), among other policies.
The main driver of the deficit is an increase in the primary income deficit, which rose to $8.7 billion in the second quarter this year from $8 billion in the same period in 2018. The deficit was in line with a seasonal trend of dividend repatriation for multinational companies operating in Indonesia, as well as payments of both the government and private sectors’ external debt.
While the seasonal factor contributed to the widening primary income deficit in the second quarter, UOB Indonesia economist and senior vice president Enrico Tanuwidjaja said growing uncertainties had also prompted investors to repatriate more dividends this year compared to last year.
“People may frontload US dollar repatriation in the fear that the dollar will get stronger because of trade war,” said Enrico, adding that the increase in dividend repatriation in the second quarter this year was also driven by uncertainties in businesses’ expansion strategy amid a potential slowdown in global growth.
The International Monetary Fund had revised its projection of global GDP growth to 3.2 percent this year and 3.5 percent next year, both a 0.1 percentage point lower than a previous outlook, as the ongoing trade spat between the United States and China had contributed to the disruption of supply chains and clouded the outlook of global trade, among other factors.
Reflecting on the latest development, Enrico expected the current account deficit to be recorded at around 2.8 percent of the GDP this year, slightly narrower compared to a 2.98 percent deficit in the current account booked in 2018.
A current account deficit is a trade measurement that indicates a country imports more goods, services, and capital than it exports.
Indonesia’s capital and financial account was recorded at $7 billion in the second quarter of this year as the foreign capital in portfolio and direct investments flowing into the country more than double from $3.1 billion booked over the same period last year.
Samuel Sekuritas economist Lana Soelistianingsih said the trend of capital inflows into Indonesian assets (bonds and stocks), which started in the fourth quarter of last year amid dovish signs given by the United States’ Federal Reserve, could be reversed because profit took time when uncertainties were still high.
“Indonesia received high [foreign] capital inflows in the fourth quarter of last year, at a time when the [stock market] index was not so good,” said Lana. “It is possible now that foreign [investors] have already booked profits, they could exit [the Indonesian market] amid uncertain external conditions.”
Indonesia booked a $15.7 billion surplus in its capital and financial account in the fourth quarter last year.
She projected that the current account deficit would reach 2.9 percent of the GDP this year, arguing that imported capital goods for the government’s infrastructure project, pointed as one cause of the swelling of the trade deficit last year, will naturally decline as the projects were being completed.
BI Governor Perry Warjiyo separately said he was optimistic that the surplus in the capital and financial account would continue in the remainder of the year and be enough to plug the current account deficit, which he predicted will be recorded at around 2.8 percent of GDP this year.
To improve Indonesia’s current account position in the coming months, Lana said the government needed to attract investments in industries that can substitute raw materials local manufacturers usually had to import.
“All of the fiscal incentives should be given more to investors whose production can reduce our dependency on imported raw materials,” said Lana, arguing that such a focus was warranted, given that trade tensions had clouded the outlook on global trade.
Enrico of UOB Indonesia, meanwhile, said the government needed to provide an incentive scheme to encourage foreign investors to reinvest their profits rather than send them back home in order to increase the foreign exchange reserves.
