Update COVID-19 in Indonesia: 266,845 confirmed infections, 10,218 deaths (25 September 2020)
25 September 2020 (closed)
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Indonesia's current account balance is expected to show a deficit for the next five years. The central bank of Indonesia (Bank Indonesia) does not rule out a surplus within that period but it would require some serious work in terms of structural reform-making. Indonesia started to record current account deficits in late-2011 due to the ballooning oil import bill (before the government slashed energy subsidies) and weak commodity prices after 2011.
The current account balance is the broadest measure of a nation's international trade. It covers transactions in goods, services, factor income (income derived from selling the services of factors of production), as well as transfers. In other words, when a country posts a current account deficit it has become a net borrower from the rest of the world.
Bank Indonesia Governor Agus Martowardojo said Indonesia's current account deficit is expected to be in the range of 2 - 2.5 percent of the country's gross domestic product (GDP) in 2018, rising from the estimated 1.65 percent deficit this year. In fact, Bank Indonesia expects the current account deficit to continue weakening slightly above 2 percent of GDP up to 2019.
By 2022 Bank Indonesia expects to see an improvement and expects the deficit to fall below the 2 percent of GDP level. Although this is still a high level, it is not in the danger zone as occurred in 2013 and 2014 when the deficit touched a record of 4.2 percent of GDP. Generally, a deficit below 3 percent is regarded sustainable.
However, a current account deficit is not necessarily bad. Similar to a company's negative cash flow, a deficit can be useful provided imports and funds are used for productive investment purposes (meaning they will trigger future domestic revenue streams). Examples of productive investment purposes are industrial or infrastructure development.
When the deficit is merely used for consumption, on the other hand, it causes a structural imbalance as no future revenue streams are generated. Indonesia's ballooning oil imports (encouraged by generous government fuel subsidies) prior to 2014 were therefore a big problem as it was not a productive investment purpose. Indonesian President Joko Widodo's decision to cut fuel subsidies drastically was therefore widely applauded by analysts.
Despite Indonesia's under-control current account, Martowardojo calls for caution because compared to the ASEAN-5 countries (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) Indonesia is the only country that has a current account deficit. Thailand even posted a 11.5 percent of GDP surplus in 2016, followed by Vietnam with a 4.7 percent of GDP surplus.
Deputy Bank Indonesia Governor Mirza Adityaswara added that Indonesia can post current account surpluses again if not only the country's traditional export items (such as coal and palm oil) rise sharply, but also new strong export products are found. Meanwhile, the services balance needs to improve as this has shown a structural deficit. Lastly, Indonesia needs to attract more foreign investment that focuses on export-oriented sectors.
Thus, in the views of Bank Indonesia's top officials, it will take many years before Indonesia can again record a current account surplus. Secondly, it will require extra effort from the government.
Current Account Balance Indonesia 1981-2016 (% of GDP):