Indonesia's current account balance - the sum of the balance of trade (goods and services exports less imports), net income from abroad and net current transfers - showed a deficit of 1.7 percent of gross domestic product (GDP) in 2017, narrowly improving from a 1.8 percent deficit in the preceding year and constituting the lowest deficit since 2012.
According to a statement released by Indonesia's central bank (Bank Indonesia), the improving current account balance in 2017 was caused by a rising surplus in the country's non-oil & gas trade balance. This growth comes on the back of rising commodity prices and growing global demand. Although Indonesian imports are also rising amid growing domestic demand, thus putting some pressure on the current account, they were outperformed by Indonesian exports, hence the current account somewhat improved.
Meanwhile, rising imports of oil & gas, a deficit in the services balance, and profit repatriations conducted by foreign investors also put pressure on Indonesia's current account balance last year.
However, the current account deficit of Indonesia is expected to widen again in 2018 due to expectations of rising imports of raw materials and capital goods. Bank Indonesia put its forecast in the range of 2.0 - 2.5 percent of GDP for 2018.
Economy-watcher Tony Prasetiantono said he has mixed opinions about Indonesia's improving current account deficit. One the one hand it is a good thing that the deficit improves further away from the 3 percent of GDP deficit level that is usually considered the line between a safe deficit and an out-of-hand deficit.
On the other hand, the 1.7 percent of GDP deficit could be a sign of non-optimal absorption of state funds by ministries and other government agencies. This could also be behind Indonesia's bleak economic growth pace of 5.07 percent (y/y).
Prasetiantono also expects to see rising imports into Indonesia in 2018. However, this is no concern because the country's exports are also bound to rise further this year, particularly on the back of rising commodity prices.
But to improve the current account balance of Indonesia in a structural manner, there is one key solution: the development of export-oriented industries.