However, compared to Q1-2017 Indonesia's CAD widened significantly. In the first quarter of 2017 Indonesia's CAD was recorded at USD $2.4 billion (1.0 percent of GDP). Thus, the CAD more than doubled in Q1-2018. This development is due to rapidly rising imports of capital goods.

Based on a statement from Indonesia's central bank (Bank Indonesia), the easing CAD (compared to Q4-2017) is primarily attributed to the lower services account deficit and higher secondary income surplus. The drop in the services deficit was mainly caused by an increased surplus of travel services as the number of foreign tourist arrivals into Indonesia grew, while there occurred a decrease in imports of freight services.

The increase in the secondary income surplus was in line with the rising receipts of remittances from Indonesian migrant workers. Meanwhile, the non-oil & gas trade surplus narrowed as non-oil & gas exports declined. Non-oil & gas imports also decreased albeit at a moderate pace, with imports of capital goods and raw materials remaining at a high level in line with increased production and investment activities at home.

Indonesia's capital and financial transactions in Q1-2018 still managed to register a surplus amid high uncertainty in global financial markets. The Q1-2018 capital and financial account surplus was recorded at USD $1.9 billion, mainly supported by growing direct investment inflows, thus reflecting investors' positive perceptions regarding Indonesia's economic prospects. Nevertheless, the capital and financial account surplus in Q1-2018 was lower than the surplus that was recorded in the preceding quarter. This decline is related to the impact of heightened uncertainty in global financial markets. Therefore, foreign investors made adjustments to the foreign fund placements in the stock market and government bond market. The lower surplus was also affected by a deficit in other investment, primarily due to the increase in private sector deposit placements in overseas banks.

Read also: Analysis of Indonesia's Current Account Balance

Indonesia's Q1-2018 balance of payments (BoP) showed a deficit in line with the decrease in the capital and financial account surplus. The Q1-2018 BoP deficit was recorded at USD $3.9 billion. The country's foreign exchange reserves were recorded at USD $126.0 billion per 31 March 2018. This amount is equivalent to 7.7 months of financing of imports and government external debt (well above international standards of adequacy).

Indonesia's CAD is expected to widen in Q2-2018 due to seasonal factors including dividend payouts, foreign debt payments, and the rising crude oil price. Overall, the full-year 2018 CAD of Indonesia may reach 2.1 percent of GDP, up from our earlier forecast of 1.8 percent of GDP.

Current Account Balance of Indonesia: