ECONOMIC UPDATE - BoP review - Indonesia’s BoP turns a deficit

 

 

BoP deficit amidst weakening Rupiah

Bank Indonesia (BI) recorded a balance of payments (BoP) deficit of -USD7.4 bn for 2Q23, a reverse from the previous period's of USD6.5 bn in 1Q23. This was mainly driven by the current account deficit, and the capital and financial account deficit. As a result, the position of foreign exchange reserves shrank from USD145.2 bn in March-23 to USD137.5 bn in June-23. This amount is equivalent to 6.0 months of import financing and payment of government foreign debt, surpassing the international adequacy standard of 3 months of import. We think the forex reserves position is sufficient to support a relatively stable rupiah in 2023. Furthermore, BI should anticipate further depreciation through triple intervention. The triple intervention refers to the BI interventions in the spot, Domestic Non-Deliverable Forwards (DNDF), and government securities (SBN) markets. Rupiah was reported at Rp15,325/USD as of 21 August-23, higher than the macroeconomic assumption on APBN 2023 at Rp14,800/USD.

 

Current account deficit on thin trade surplus

The current account deficit stood at -USD1.9 bn in 2Q23, equivalent to -0.5% of the GDP, showing a decline from USD3.0 bn (0.90% of GDP) in 1Q23. The decline in current account performance was primarily driven by a decrease in the trade balance surplus, and an increase in the service account deficit and the primary account deficit.  The trade balance surplus amounted to USD10.4 bn in 2Q23, lower compared to USD14.7 bn in 1Q23. Additionally, the services account deficit widened up to -USD4.7 bn in 2Q23, compared to -USD4.6 bn in 1Q23. Moreover, the deficit of the primary income account deepened from -USD8.6 bn in 1Q23 to -USD9.1bn in 2Q23. Meanwhile, the surplus in the secondary income was stable at USD1.5 bn in 2Q23. The government should anticipate the further narrowing of the trade surplus due to the normalization of commodity prices and global economic slowdown. In July-23, the price of export commodities such as CPO and coal dropped significantly by -13.3% YoY and -66.4% YoY to USD3,775/MT and USD137.3/ton, respectively.

 

FA deficit although direct investment remains surplus

The capital and financial accounts (FA) posted a deficit of -USD5.0 bn in 2Q23 (-1.4% of GDP), showing a significant decrease from the previous quarter's surplus of USD3.4 bn (1.1% of GDP). Although there was a surplus in the flow of direct investment, it wasn't sufficient to offset the deficits observed in portfolio and other investments.. The net inflow of direct investment reached USD3.3 bn in 2Q23, slightly lower than the previous quarter's figure of USD3.4 bn. Meanwhile, the net flow of portfolio investment reversed its direction, shifting from a surplus of USD2.3 bn in 1Q23 to a deficit of -USD2.6 bn in 2Q23.Besides, the deficit of other investments deepened from  -USD3.4 bn in 1Q23 to -USD5.6 bn in 2Q23.  We attribute the surplus in direct investment to the positive perception of investors regarding the promising domestic economic outlook. Meanwhile, the deficits in portfolio and other investments can be attributed to the increasing uncertainty in global financial markets, along with payments related to maturing foreign loans and global bonds.

 

BoP deficit seems in 3Q23 

Looking ahead, it is anticipated that export performance will continue to decline, driven by the decrease in commodity prices, which is a result of weakening global demand. Additionally, major central banks are maintaining a "higher for longer" global policy rate to address inflation concerns. This stance presents challenges for attracting inflows to the bond market. Fortunately, the government is expected to maintain the inflation rate within the target range of 2–4% YoY. The managed inflation rate will help maintain a positive spread of real interest rates (the nominal interest rate minus the inflation rate), making Indonesia's financial instruments relatively more attractive compared to those of other countries, thereby attracting inflows. Taking everything into account, we project that the balance of payments will continue to be in deficit in 3Q23. Meanwhile, the current account may exhibit a slight deficit of -0.5% of GDP in 2023, which is a shift from the surplus of 1.0% of GDP in 2022.