Indonesia’s current account deficit is expected to widen to the range of 3.30 – 3.40 percent of the country’s gross domestic product (GDP) in the third quarter of 2018, above the 3.0 percent of GDP threshold that is usually considered to separate a sustainable from an unsustainable deficit.
The current account balance is a key concept in macroeconomic analysis. It involves exports and imports of currently produced goods, services as well as income flows to and from foreign residents. The balance therefore captures the extent to which a country is either accumulating net foreign assets or issuing foreign liabilities. In other words, it illustrates whether a country is a net borrower or lender to the rest of the world.
Indonesia has been coping with a structural current account deficit since late-2011 when its export performance was affected by falling commodity prices, while crude oil and fuel imports rose markedly amid declining national oil production. Besides oil imports, imports of capital goods, raw materials and consumer goods into Indonesia also surged rapidly in recent years. While this can be labelled a positive development (because it points at rising investment, rising economic activity and strengthening purchasing power), it does put pressure on the current account balance.
Current Account Balance Indonesia:
International investors tend to rapidly ditch assets in those economies that show a wide current account deficit. After all, when a country runs a current account deficit, it is building up liabilities to the rest of the world that are financed by flows in the financial account and – at some point – these need to be paid back. Therefore, generally, countries that run current account deficits are regarded more fragile.
However, despite the fact that protectionist leaders are always eager to run a surplus, it is also important to point out that a current account deficit is not necessarily bad. For example, if the cash flow of a company is negative for a specific period, it does not mean that the company is in trouble. In case the company is currently undertaking costly investments to raise production capacity, then it eyes a bigger flow of sales and profit in the future. A similar mechanism is at work with respect to countries and current account balances: the key question therefore is whether the current account deficit is used for productive purposes in the future. If not, then the country’s ability to repay comes into question (its basic solvency).
Current Account and Foreign Exchange Reserves Indonesia:
|Current Account Balance
(% of GDP)
|Foreign Exchange Reserves
Sources: World Bank, Statistics Indonesia, Bank Indonesia
The text above is the introduction to the article that is included in the October 2018 edition of our research report. The article discusses the (1) causes of Indonesia's widening current account deficit, (2) strategies to improve the deficit, and (3) a forecast for the future.
Read the full article in the October 2018 edition of our monthly research report. You can purchase this report by sending an email to email@example.com or a WhatsApp (WA) message to the following number: +6287884106944
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