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ECONOMIC UPDATE - BoP review - Twin deficit amidst global uncertainty

BoP reverses to deficit

Bank Indonesia (BI) reported a balance of payments (BoP) deficit of -USD6.0 bn in 1Q24, a sharp turnaround from the previous quarter's surplus of USD8.6  bn. This deficit is the highest since 2Q23. The BoP deficit was mainly driven by a widening deficit both the capital and financial account (FA) and the current account (CA). As a result, foreign exchange (forex) reserves down from USD146.4 bn in Dec-23 to USD140.4 bn in Mar-24. Nevertheless, these reserves still exceed international adequacy standards, amounting to 6.4 months of import financing or 6.2 months of imports and government foreign debt payments, compared to the standard of 3 months of imports. Furthermore, recent data indicates that forex reserves stood at USD136.2 bn in Apr-24, marking the lowest level since 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 6.1 months of imports or 6.0 months of imports and debt payments, surpassing the international adequacy standard. The decrease in foreign exchange reserves coincided with Rupiah depreciation (-2.56% MtD to Rp16,260/USDin Apr-24), driven by a shifted FFR’s cut expectation from 1Q24 to 2H24, and geopolitical escalation in Middle East. Looking ahead, we anticipate a easing of Rupiah pressure in the second half of 2024, driven by the BI rate hike in Apr-24, political stability following the presidential inauguration, and FFR rate cut in 2H24. Currently, we expect the Rupiah to be Rp15,806/USD by the end of the year.

Narrowed trade surplus leads to deep CAD

The current account deficit (CAD) stood at –USD2.2 bn (-0.6% of GDP) in 1Q24, maintaining deficit from the previous quarter at –USD1.1 bn (-0.4% of GDP) in 4Q23, marking the lowest current account (CA) since 2Q23. This deficit was mainly driven by a narrowed trade surplus and increased deficits in the primary income account. On the other hand, the service account and the secondary income account performed better. Specifically, the trade surplus decreased to USD9.8 bn in 1Q24, from USD11.4 bn in 4Q23. This was due to a decrease in the non-oil and gas (NoG) balance surplus, despite an improvement in the oil and gas (OG) balance deficit. Breaking it down, the NoG trade surplus dipped to USD14.8 bn in 1Q24 from USD17.3 bn in 4Q23, while the OG trade deficit improved from –USD5.9 bn in 4Q23 to –USD5.0 bn in 1Q24. We attribute the lower NoG trade surplus to the normalization of main export commodities and slower demand from China, while the improvement in the OG trade deficit was driven by lower OG imports. Moreover, the deficit in the primary income account widened from –USD8.8 bn in 4Q23 to –USD8.9 bn in 1Q24, driven by increased payments to foreign investors. On a positive note, the service account deficit improved to –USD4.4 bn in 1Q24, compared to –USD5.0 bn in 4Q23, bolstered by higher tourism receipts. Meanwhile, the surplus in the secondary income account rose from USD1.2 bn in 4Q23 to USD1.4 bn in 1Q24, largely due to higher remittance transfers from migrant labor. Looking ahead, it is crucial for the government to anticipate further decreases in the trade surplus. Based on the latest trade balance data, the trade surplus slightly decreased by -1.02% MoM and -0.38% YoY to USD3.56 bn in April 2024. Cumulatively, the trade surplus declined to USD10.97 bn in 4M24, down from USD16.05 bn in 4M23. Furthermore, the government should prepare for a potential slowdown in China’s economy. The Manufacturing PMI in China fell to 50.4 in Apr-24 from March's 12-month high of 50.8. Meanwhile, the Non-Manufacturing PMI decreased to 51.20 in Apr-24 from 53.00 in the previous month.


FA deficit driven by portfolio and other investments

The capital and financial accounts reported a deficit of –USD2.3 bn (-0.7% of GDP) in 1Q24, a significant shift from the previous quarter's surplus of USD11.0 bn (3.3% of GDP in 4Q23). This deficit was driven by negative balances in portfolio and other investments, while direct investment recorded a surplus. Portfolio investment showed a deficit of –USD1.8 bn in 1Q24, reversing from a surplus of USD4.9 bn in the previous quarter. This change was mainly driven by foreign capital outflows from domestic debt securities due to increasing global financial market uncertainty. Other investments also recorded a deficit of –USD4.4 bn in 1Q24, swinging from the previous quarter's surplus of USD2.8 bn. This was driven by higher private investment in various financial instruments abroad. On the other hand, direct investment surplus increased from USD3.3 bn in 4Q23 to USD4.3 bn in 1Q24, reflecting sustained positive investor perception of the promising domestic economic outlook and investment climate. Currently, we expect economic growth to reach 5.1% YoY for FY24, surpassing the world economic growth rate of 3.1% YoY.