The central bank of Indonesia (Bank Indonesia) announced on Friday (14/08) that the country’s current account deficit narrowed to USD $4.48 billion, or 2.1 percent of gross domestic product (GDP), in the second quarter of 2015. In the same quarter last year the deficit stood at USD $9.59 billion). As such, the current account deficit (CAD) has become more sustainable and this may provide some support for the rupiah which is currently facing tough times (ahead of a looming US interest rate and China’s yuan devaluation).
Current Account Balance Indonesia (in USD million)
However, the narrowing CAD is particularly caused by easing imports amid the country’s economic slowdown (GDP growth was recorded at a six-year low of 4.67 percent y/y in Q2-2015) and heavily depreciating rupiah (making imports more expensive). Indonesia’s non-oil & gas imports fell 15.8 percent (y/y) in Q2-2015, while the country’s non-oil & gas exports only contracted by 5.3 percent (y/y) amid soft commodity prices. Bank Indonesia expects that the CAD will improve in the near future as export growth is estimated to outperform import growth.
Indonesia has had to deal with a structural CAD since late 2011, primarily on China’s economic slowdown (dragging down commodity prices). Investors’ concern about the CAD was partly responsible for massive capital outflows from Indonesia in the second half of 2013 when the US Federal Reserve started to prepare for monetary tightening (winding down its quantitative easing program).
However, Indonesia’s overall balance of payment swung to a USD $2.93 billion deficit in Q2-2015 in anticipation of an interest rate hike in the USA.