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BoP deficit falls sharply thanks to inflow of foreign funds

Foreign funds: A money trader shows United States banknotes in a foreign currency exchange in Jakarta

Marchio Irfan Gorbiano (The Jakarta Post)
Jakarta
Mon, November 11, 2019

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BoP deficit falls sharply thanks to inflow of foreign funds

F

oreign funds: A money trader shows United States banknotes in a foreign currency exchange in Jakarta. According to Bank Indonesia’s latest report, the surplus in its capital and financial accounts rose in the third quarter of this year thanks to the increase in foreign investors holding onto government bonds.(JP/Dhoni Setiawan)

Indonesia posted a narrower balance of payments (BoP) deficit in the third quarter of this year on the back of a decline in the current account deficit, driven by lower oil imports due to the mandatory use of B20 biodiesel.

In the same period, the surplus in the capital and financial accounts increased due to the influx of foreign funds into government bonds, which offer attractive returns.

Bank Indonesia’s (BI) latest data reveal that the deficit in the balance of payment narrowed to US$46 million in the third quarter, a significant decline from the $4.3 billion deficit recorded in the same quarter last year and from the $1.97 billion deficit booked in the second quarter of this year.

The balance of payments consist of two accounts, namely the current account, which is the widest trade and services indicator that records imports and exports of goods, services and income, and the capital and financial account, which records the amount of foreign funds invested in a country.

In line with the narrower deficit in the balance of payments, Indonesia’s current account deficit also fell in the third quarter, namely to 2.66 percent to the GDP, equal to $7.66 billion. The figure was lower than to the $8.47 billion current account deficit posted in the same period last year, equal to 3.22 percent to the GDP.

A current account deficit indicates that a country imports more goods, services and capital than it exports, which has to be financed by a surplus in the capital and financial account. The central bank considers a current account deficit equivalent to no more than 3 percent of the GDP sustainable and healthy for Indonesia’s developing economy.

Meanwhile, the capital and financial accounts recorded a surplus of $7.62 billion in the third quarter, higher than $3.9 billion surplus recorded over the same period last year or $6.46 billion surplus recorded in the second quarter of this year.

The increase in the surplus of capital and financial accounts was driven by inflows of foreign capital to the country as global investors sought assets that offer higher returns at a time when central banks in the developed economies were taking a dovish stance to stimulate growth amid sluggish global growth prospects, BI Deputy Governor Dody Budi Waluyo said.

As of Thursday, foreign capital inflows had reached Rp 226 trillion ($16.13 billion), Rp 175 trillion of which went to government debt paper (SBN), according to the latest BI data.

Dody said he was confident that Indonesia’s current account position would improve in the final quarter of the year, driven by positive market expectations on the central bank’s previous rollout of several accommodative policies.

“We are confident that, in the fourth quarter, [the current account position] will improve. Although the [effect of] central bank and government accommodative policies will be significantly felt in 2020, positive sentiment [from the policies] will already be reflected in the fourth quarter, according to our calculation,” said Dody in Jakarta on Friday.

BI, he went on to say, would continue to cautiously monitor possible uncertainties stemming from latest external developments to mitigate any external risks while also taking a pro-growth stance to boost domestic economic activity.

“The current situation enables BI, together with the government, to encourage economic growth,” he said.

The central bank has cut its policy rate, the seven-day reverse repo rate, by a total of 100 basis points (bps) to 5 percent between July and October this year. It has also rolled out several accommodative macroprudential policies, such as relaxing the loan-to-value (LTV) ratio for auto loans and mortgage.

Bahana Sekuritas economist Satria Sambijantoro said the recent balance of payments data indicated that the central bank was more cautious in its monetary policy than in the previous months, with BI looking to focus on supporting the surplus in the capital and financial account to cover the deficit in the current account.

“In terms of monetary policy, BI would focus on how to support the surplus in the [capital and] financial account,” said Satria. “If [BI] wants to strengthen the [capital and] financial account, it needs to maintain a cautious sense in monetary policy.”

Satria projected the balance of payment position would turn into a surplus of around $2 billion this year, with the surplus in the capital and financial account expected to reach $32 billion and the deficit in the current account to reach $30 billion, equivalent to between 2.6 percent and 2.8 percent of GDP.

Enrico Tanuwidjaja, head of economic research of UOB Indonesia, said the pace of the current account deficit narrowing “remained measured” and forecasted the deficit to stay at 2.8 percent of the GDP this year and 2.6 percent to the GDP in 2020.

Enrico said BI would have limited room to further cut its rates amid hits by the United States Federal Reserve to pause its cutting cycle for now. He projected BI would slash another 25 bps to bring the rate to 4.75 percent sometime in the first quarter of next year but then cut it no further for the remainder of 2020.

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