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Jakarta Post

Falling import demand, reduced foreign bond holdings narrows Q2 deficit

  • Adrian Wail Akhlas

    The Jakarta Post

Jakarta   /   Wed, August 19, 2020   /   04:20 pm
Falling import demand, reduced foreign bond holdings narrows Q2 deficit Indonesia has posted a trade surplus in the second quarter of 2020, primarily due to a decline in import demand. (Antara/Rosa Panggabean)

Indonesia’s current account deficit (CAD) narrowed in the second quarter of the year as import demand fell and foreign ownership of government bonds declined, Bank Indonesia (BI) announced on Tuesday.

The CAD narrowed in the second quarter to US$2.9 billion, down from 1.4 percent of gross domestic product (GDP) in the first quarter to 1.2 percent of GDP in quarter two.

Southeast Asia’s biggest economy also recorded a $9.2 billion balance of payments (BOP) surplus in the second quarter, whereas it had recorded a $8.5 billion BOP deficit in the first quarter.

“The narrowing CAD was driven by a trade surplus as a result of declining imports amid weakening domestic consumption and decreasing yield payments to foreign investors, with the domestic economy contracting in the second quarter,” the central bank said in a statement.

Indonesia’s total imports fell $9.7 billion year-on-year in April-June to $31.74 billion to book a trade surplus of $2.88 billion in the second quarter, according to Statistics Indonesia (BPS) data.

Meanwhile, foreign investors reduced their holdings of domestic financial instruments, including government bonds, in quarter two. The Finance Ministry recorded a fall in foreign ownership of sovereign debt papers from 39 percent at the beginning of the year to 29.6 percent in July, which also reduced dividend payments to foreign investors.

BI also noted that the service trade deficit increased slightly due to a significant drop in foreign tourist arrivals as a result of COVID-19 travel restrictions and a decline in remittances from Indonesia’s migrant workers.

Meanwhile, the central bank said that portfolio capital inflows were restored in the second quarter with $10.5 billion in portfolio investment and foreign direct investment, following significant outflows in March when COVID-19 was declared a pandemic. 

In contrast, the country recorded a $3 billion deficit in its financial and capital accounts in January-March.

Government and corporate issuance of global bonds, as well as purchases of sovereign debt papers, had contributed to restoring inflows in the second quarter.

“Capital inflows were driven by increasing global liquidity, the attractive yields of domestic instruments and sustained investor confidence in the Indonesian economy,” the central bank said.

Separately, Bank Mandiri chief economist Andry Asmoro said: “Going forward, we see import growth will remain weaker than export growth due to the halt in some domestic investment and production activities amid the uncertainties related to the COVID-19 pandemic."

“This may maintain a surplus in the trade balance and will hence result in a shrinking CAD, which in turn will support the balance of payments and ultimately foreign reserves,” he added, saying that he estimated the annual CAD to be at around 1.49 percent of GDP.

Similarly, Fitch Solutions also forecast that Indonesia’s CAD would amount to 1.5 percent of GDP this year, down from its initial projection of 1.9 percent of GDP.

“Import demand in Indonesia is likely to continue suffering due to the COVID-19 outbreak, which has hit the domestic economy significantly,” said a research note dated Aug. 18 from Fitch Solutions country risk and industry research.

Service exports are projected to collapse by at least 25 percent this year due to the closure of Indonesia's tourist industry.

Fitch Solutions said that Indonesia remained well placed from a funding perspective, despite its less sanguine view on investment inflows. It also said it was "likely that investors’ sentiment will remain weak throughout the year and as such, much of the funding of the current account deficit will be dependent on the country’s ability to furnish its foreign exchange reserves".

Indonesia has posted a trade surplus in the second quarter of 2020, primarily due to a decline in import demand.