Indonesia’s Trade Deficit Widens to Record High in April

Bank Indonesia (BI) decided to maintain its policy rate at 6%, in line with market expectations. This was its sixth consecutive meeting where the benchmark interest rate has been left unchanged since its last 25bps rate hike in November 2018. The lending and deposit facility rates were kept at 6.75% and 5.25%, respectively. BI guided that its decision was in line with its efforts “to maintain the external stability of Indonesia’s national economy amidst the re-emergence of global financial market uncertainty”. Despite the recent narrowing of the country’s current account deficit to a one-year low of US$7bn (2.6% of GDP) from US$9.2bn in 4Q18 (3.6% of GDP), we do not expect BI to make any policy moves soon.

Previously, it was believed that BI has room to cut its policy rates due to the absence of further policy tightening by the US Fed. However, following the recent revival of trade threats between US and China, the rupiah has weakened against the US Dollar by 1.3% since the start of May 2019 (depreciated by 0.4% year-to-date). We believe this may have caused BI to refrain from cutting rates in this meeting. Recall in 2018, BI hiked policy rates by a total of 175bps in order to alleviate the weak rupiah.

In the same week, it was reported that Indonesia’s trade balance returned to a deficit of US$2.5bn in April from a surplus of US$0.7bn in March, making this its widest deficit on record. This was also its first trade deficit since January 2019. Year-to-date, the trade deficit had widened to US$2.6bn compared to US$1.4bn in the same period last year. Meanwhile, export growth declined for the sixth consecutive month in April to 13.1% yoy from a drop of 9.4% in March, its largest decline since July 2016. As for imports, it fell albeit at a slower pace of 6.6% yoy from 7% in March. Export growth was weighed down by mainly by the fall in exports of oil and gas, which declined by 37.1% yoy (-14.8% in March). Besides that, exports of non oil and gas had also contracted by 11% yoy from -8.9% in March.

Going forward, we believe the decline in the trade balance may likely deter BI from cutting rates as BI has targeted for the current account deficit to narrow to 2.5% of GDP in 2019 from 3% in 2018. The recent escalation of trade tensions between the US and China does not bode well the country’s trade performance as well. There is downside risk to growth, especially against a weaker global growth backdrop, export growth may also be slower in the months ahead and could also weigh on the country’s economic growth. However, amid uncertainties on the external front, BI noted that it will continue to monitor the global financial market dynamics and external stability “with due consideration to the space available for accommodative monetary policy in line with low inflation and the need to stimulate domestic economic growth.”

Source: Affin Hwang Research - 17 May 2019