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ECONOMIC UPDATE - BoP Review Indonesia’s BoP surplus but CA deficit

BoP hits the highest level since 3Q21

Bank Indonesia (BI) reported a balance of payments (BoP) surplus of USD8.6 bn in 4Q23, a sharp turnaround from the previous quarter's deficit of -USD1.5 bn. This surplus is the highest since 3Q21. The BoP surplus was mainly driven by a widening capital and financial account surplus, while the current account deficit remained low. As a result, foreign exchange (forex) reserves rose from USD134.9 bn in Sep-23 to USD146.4 bn in Dec-23. Furthermore, these reserves still exceed international adequacy standards, amounting to 6.7 months of import financing or 6.5 months of imports and government foreign debt payments, compared to the standard of 3 months of imports. Overall, the BoP performance in 2023 demonstrated robust external sector resilience despite heightened global economic uncertainty. Throughout 2023, the BoP registered a surplus of USD6.3 bn, up from USD4.0 bn in 2022, primarily driven by strong capital and financial account performance at USD8.7 bn (vs current account deficit at -USD1.6 bn FY23, equivalent to -1.6% GDP). However, recent data indicates that forex reserves stood at USD145.1 bn in January 2024, marking an end to the upward trend in forex reserves that began in October 2023. This decrease in reserves was attributed to the need to pay off maturing foreign government debt. Nevertheless, Indonesia's forex reserves remain strong, equivalent to financing 6.6 months of imports or 6.4 months of imports and debt payments, surpassing the international adequacy standard. The decrease in foreign exchange reserves coincided with Rupiah depreciation (-2.49% MtD to Rp15,780/USD in Jan-24), driven by a shifted FFR’s cut expectation from 1Q24 to 2H24, and election uncertainty. Looking ahead, we anticipate a easing of Rupiah pressure in the second half of 2024, driven by the dovish tone and political stability following the presidential inauguration. Currently, we expect the Rupiah to be Rp15,200/USD by the end of the year, appreciating compared to the close of 2023 at Rp15,399/USD.

CAD on service and primary income account

The current account deficit (CAD) stood at -USD1.3 bn (-0.4% of the GDP in 4Q23), maintaining deficit from the previous quarter at -USD1.0 bn (-0.3% of GDP). This deficit was mainly driven by increased deficits in both the service account and primary income account. Specifically, the service account deficit rose to -USD4.8 bn in 4Q23, (vs.-USD4.0 bn in 3Q23), primarily due to a higher deficit in the transportation account resulting from increased imports during the holiday season. Meanwhile, the deficit in the primary income account widened from -USD8.5 bn in 3Q23 to -USD9.1bn in 4Q23, driven by increased payments to foreign investors. Additionally, the surplus in the secondary income decreased from USD1.3 bn in 3Q23 to USD1.2 bn in the 4Q23, largely due to higher remittance payments to foreign labor. On a positive note, the trade balance surplus increased to USD11.3 bn in 4Q23, up from USD10.2 bn in 3Q23, driven by the strong export of Non-Oil and Gas (NOG) trade although deficit of oil and gas (OG) account. However, the trade balance surplus dipped to USD46.3 bn FY23 (vs USD62.7 bn FY22) driven by moderating commodity price. Looking ahead, it is crucial for the government to prepare for a potential global economic slowdown. England recently reported entering a recession, with its GDP recording a -0.1% YoY in 4Q23 and a -0.3% YoYin 3Q23. Similarly, Japan has also entered a recession, with its GDP showing a deficit for two consecutive quarters at -0.4% YoY in 4Q23 and -3.3% YoY in 3Q23 .According to Statistics Indonesia (BPS), NOG exports to Japan decreased by -18.59% YoY to USD18.9 bn, contributing  7.63% of of the total exports. Given these circumstances, the government must actively seek out new markets to replace Japan and mitigate the impact of this decline in exports.


FA jumps significantly

The capital and financial accounts (FA) reported a surplus of USD9.8 bn, (2.8% of GDP in 4Q23), marking a significant improvement from the previous quarter's deficit of –USD0.1 bn (-0.02% of GDP). This positive was propelled by direct, portfolio, and, other investment. The net inflow of direct investment increased to USD3.1 bn in 4Q23, (vs. USD2.8 bn in 3Q23). Moreover, the deficit of portfolio investment significantly jumped to USD4.9 bn in 4Q23 (vs. -USD3.0 bn in 3Q23).  Besides, other investments gained to USD1.7 bn in 4Q23 (vs. -USD 0.1 bn in 3Q23). The surplus in direct investment can be attributed to the positive perception of investors regarding the promising domestic economic outlook. Meanwhile, the surplus in portfolio investment is related to the decreasing uncertainty in global financial markets. Currently, we expect economic growth to reach 5.1% YoY for FY24, surpassing the world economic growth rate of 2.4% YoY.