The current account deficit of Indonesia, which is expected to have improved slightly from 3.3 percent of the country’s gross domestic product (GDP) in 2013 to about 3 percent of GDP in 2014, is forecast to continue to improve in 2015 hence placing less pressures on the rupiah exchange rate and the economy in general. A wide current account deficit makes the country vulnerable to capital outflows in times of global shocks (for example looming higher US interest rates) as the deficit signals that Indonesia relies on foreign funding.
Although it may be difficult to push the current account deficit to a more sustainable level in 2015 there is one important structural change detectable: Indonesia’s current account deficit in 2015 is not so much caused by costly oil imports (to supply subsidized fuels to Indonesians) as had been the case in recent years, but rather by government spending in productive sectors. The Joko Widodo-led government is eager to invest heavily in infrastructure projects (partly financed by public funds saved by reducing the country’s generous fuel subsidies) and these projects require a large amount of imported raw materials. As such, the current account deficit will turn into a productive deficit that will boost the economy of Southeast Asia’s largest economy in the future (multiplier effect). For investors in the capital and financial markets this will be a reassuring thought as they have been concerned about the country’s fiscal and financial stability. However, despite becoming a more productive deficit, it is still important for the government and central bank to remain committed to push the current account deficit to a more sustainable level. Generally, a deficit below 3 percent of GDP is considered sustainable.
Although Indonesia’s non-oil & gas exports have improved in 2014, weak global commodity prices continue to limit the export performance of Indonesia. In combination with increasing raw material imports for infrastructure, energy and maritime projects the country’s current account deficit is expected to improve slightly to 3.02 percent of GDP in 2015 (Bank Indonesia estimate).
Current Account Balance Indonesia (% of GDP):