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Current account deficit: Peril or promise?
The government needs to keep a watchful eye on the CAD with anticipatory measures in place to prevent its widening further to result in a weaker rupiah and more volatility in the financial market.
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Ships are docked on July 26, 2023 at the container terminal at Tanjung Priok Port in North Jakarta. According to Statistics Indonesia, the country recorded a trade surplus of US$3.45 billion in June 2023. (Antara/Hafidz Mubarak A)
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purring economic growth in “autopilot” at 5.17 percent year-on-year has created a current account deficit (CAD) of US$1.9 billion, or 0.5 percent of Indonesia’s GDP.
Financial markets have been punished by their volatility and steadily weakening exchange rates. If the focus of stabilization policies is only on reducing the current account deficit, economic growth could get stuck in the autopilot range.
When the CAD is financed by direct investment in export-oriented sectors, it is actually not a problem. The problem is when portfolio investment is also in a deficit while direct investment is declining. The current account balance was even in the red before 2021 and 2022.
This “old disease” in which the trade surplus in goods is no longer well heeled to offset the trade deficit in services, apart from showing that the economy is growing, however, also indicates structural and fundamental problems that have not been suitably addressed.
The impression is that the trade deficit in services has not been dampened so far. For example, export-import activities have long depended on container ships from other countries.
Still, travel services and export-import sea transportation are the key contributors to the deficit. In addition to the sea transportation services sector, there are no strategic and concrete steps to work on downstreaming non-mining and other leading sectors as buffers to the current account deficit.
While higher import growth than exports will continue because the magic of rising commodity prices is fading, demand from trading countries is weakening. Consequently, the trade surplus in goods showed moderation. Not only is the surplus shrinking, but the trade balance has the potential to turn into a deficit, given that the weakening demand is orchestrated by two world economic powers that are also main export destinations for Indonesia: China and the United States.
