The improvement in the current account deficit has been driven primarily by a widened non-oil and gas trade surplus as non-oil and gas imports fall more rapidly than non-oil and gas exports, in addition to shrinking deficits in the services and income accounts. While oil and gas exports continue to fall in value due to lack of recovery in world prices, export volumes have reported positive growth bolstered most importantly by the mounting volume of mining exports, such as coal, copper ore, nickel and bauxite. In the services account, deficit reduction was supported by lower payments for transportation services in line with the decline in non-oil and gas imports and rising net inflows from travel services driven by higher numbers of inbound travellers and also various international-scale events held in Indonesia. During the same period, the income deficit also eased in line with the schedules for interest payments on external debt and dividend payments to foreign investors. However, the upbeat non-oil and gas trade balance was not matched by improved performance in the oil and gas trade balance. The oil and gas trade deficit mounted further over the preceding quarter, due to higher imports driven not only by persistently high consumption of oil-based fuels, but also surging demand over the Eid-ul-Fitr holidays during August 2013. It is also important to note that the current account deficit to GDP percentage figure in Q3-2013 was affected also by the release of lower than expected data on nominal GDP by Statistics Indonesia (BPS).

Bank Indonesia's policy responses and the strategy for fiscal financing in the face of the manifold risks on global financial markets have bolstered the capital and financial account. During Q3-2013, the capital and financial account recorded a USD $4.9 billion surplus mainly on inflows of foreign direct investment (FDI) that climbed to USD $5.4 billion from USD $4.7 billion in the preceding quarter, in keeping with improvements in the domestic investment climate. Foreign portfolio investment was positive on renewed inflows of foreign capital for investment in rupiah-denominated portfolio instruments, which represents a heartening response to Bank Indonesia's anticipatory measures to curb rising expectations of inflation by increasing the BI Rate and managing the exchange rate in line with fundamentals. Also supporting this were government issuances of foreign currency bonds for financing of its fiscal needs. In total, the modest level of portfolio inflows early in the quarter resulted in the overall capital and financial account surplus in Q3-2013 slipped below the level of the preceding quarter. Nevertheless, Q3-2013 witnessed some improvement in the composition of capital inflows, given that private sector inflows of capital were dominated by rising inflows of FDIs.

Indonesia’s balance of payments recorded a deficit on par with the preceding quarter. Despite the improvement in the current account during Q3-2013, the reduced surplus in the capital and financial account over the same period resulted in an overall Q3-2013 balance of payments deficit of USD $2.6 billion, largely unchanged from the previous USD $2.5 billion. As a result, Indonesia's international reserves at end-September 2013 were recorded at USD $95.7 billion, although this improved by USD $1.3 billion to USD $97.0 billion at end-October 2013. At this level, the international reserves were equivalent to 5.5 months of imports or equivalent to 5.3 months of imports and servicing of government external debt. Bank Indonesia regards this as a comfortably safe level that supports external sector resilience and is above the international standard for adequacy.

During Q4-2013, the process of recovery in Indonesia's external balances is projected to carry forward in keeping with an improvement in the global economic and financial conditions alongside a slowing trend in the country's domestic economy. Indonesia's balance of payments is expected to strengthen further, mainly on the expanding capital and financial account surplus. The improving trend in the current account is similarly forecasted to continue in response to reduced non-oil and gas imports and a narrowing in the services deficit due to slowing domestic demand. Even so, the improvement of Indonesia’s balance of payments requires continued policy coordination between the government and Bank Indonesia, e.g. the oil and gas sector which needs policies to further curb oil-based fuel consumption to decrease the current account deficit from the high level of oil imports.

The next publication regarding Indonesia's Balance of Payments statistics is scheduled for 12 February 2014 (tentatively one day after the February 2014 Board of Governors' Meeting).

Communication Department
Bank Indonesia

Difi A. Johansyah
Executive Director