Financial Update Indonesia: Rupiah, Forex & Current Account
The central bank of Indonesia (Bank Indonesia) said the country's current account deficit remained under control, albeit widening in the last quarter of 2017. Indonesia's current account deficit reached USD $5.8 billion or 2.2 percent of gross domestic product (GDP) in Q4-2017 (up from a deficit of USD $4.6 billion or 1.7 percent of GDP in the preceding quarter).
The increase in the nation's current account deficit was partly due to a decrease in Indonesia's trade surplus. This sliding trade surplus was caused by rising imports into Indonesia amid growing domestic demand for investment and production activities.
However, in full-year 2017 Indonesia's current account deficit was recorded at USD $17.3 billion or 1.7 percent of GDP. This is an improvement from a USD $16.95 billion, equivalent to 1.8 percent of GDP, in the preceding year.
Bank Indonesia targets a current account deficit of between 2 - 2.5 percent of GDP in 2018. The current account balance is the broadest measure of a country's international trade. It covers transactions in goods, services, factor income (income derived from selling the services of factors of production), as well as transfers.
Indonesia's balance of payments surplus rose to USD $11.6 billion in full-year 2017 on the back of an increasing surplus in the capital and financial accounts (thanks to rising direct investment and portfolio investment as investors are increasingly positive about the prospects of Indonesia). The balance of payments surplus in full-year 2017 was lower than the surplus of USD $12.1 billion in the preceding year, but is still a good result, especially considering Indonesia's balance of payments had a deficit of USD $1 billion in 2015.
Meanwhile, Indonesia's capital and financial account surplus in Q4-2017 was recorded at USD $6.5 billion, primarily caused by direct investment and portfolio investment surpluses. However, the nation's capital and financial account surplus was lower than the surplus in the preceding quarter. The lower surplus in Q4-2017 was attributed to a decrease in the direct investment surplus, in line with outflows of direct investment in the country's oil & gas sector, and a decrease in the portfolio investment surplus as a result of foreign capital outflows from rupiah-denominated security instruments amid global uncertainties.
The balance of payments surplus also strengthened on the back of rising foreign exchange reserves. Indonesia's official reserve assets reached USD $131.98 billion at the end of January 2018, up from USD $130.2 billion at the end of 2017. The current level is the highest level of foreign exchange assets that Indonesia has ever recorded. The increase in foreign exchange reserves was primarily attributed to foreign exchange receipts, among others from tax revenues and government oil & gas export proceeds, as well as the withdrawal of government foreign loans and the auction of Bank Indonesia foreign exchange bills.
The current level of foreign exchange reserves can adequately cover 8.5 months of imports or 8.2 months of imports and servicing of government external debt repayments, well above the international standard of reserve adequacy of three months of imports.
Commenting on the recent weak performance of the rupiah, Bank Indonesia stated that this is a normal performance and in line with the overall trend of Asia's emerging currencies. Markets are increasingly expecting a Fed Funds Rate hike (in March) as economic data from the USA shows a strengthening economy. Meanwhile, rising long-term US yields currently cause high demand for safe haven assets.
On Friday (09/02) the Indonesian rupiah depreciated 0.17 percent to IDR 13,628 per US dollar (Bloomberg Dollar Index). Meanwhile, Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.30 percent to IDR 13,643 per US dollar on Friday (09/02).
Indonesian Rupiah versus US Dollar (JISDOR):| Source: Bank Indonesia