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Indonesian currency at risk of slipping further in the coming week
Publication Date : 19-08-2013
The Indonesia's current account deficit swelled far beyond initial forecasts with both Bank Indonesia (BI) and local economists voicing concern that the imbalance would drag the already weak rupiah further down.
In the second quarter (Q2), the current account deficit topped its historic-high level of US$9.8 billion, or 4.4 percent of gross domestic product (GDP), as languid exports could not compensate for the high level of imports needed to support the robust economic expansion, BI announced last week.
“It’s a structural problem,” BI Governor Agus Martowardojo said recently, citing the underdevelopment of local industries as the reason the nation depended heavily on imports to support its robust economic boom.
Agus previously estimated that the current account deficit in Q2 would top US$9 billion, while BI Deputy Governor Perry Warjiyo had predicted it would stand in the range of US$8 billion.
Agus explained that the slowdown in China Indonesia’s largest trading partner had put pressure on the archipelago’s export earnings. However, imports of oil and capital goods remained high due to strong consumption and investment growth.
A study from the central bank shows that it is okay for a developing country to post a current account deficit as long as it stays in the so-called “sustainable range” of between minus 2 to 2.5 percent.
“When deficit soars beyond its sustainable level, it will put pressure on our currency,” warned Agus, who vowed to implement measures to ensure that the annual current account deficit would stay below 3 percent this year.
The performance of a currency is reflective to its current account position as the latter reflects dollar supply and demand in the economy.
The current account deficit has been running for seven consecutive quarters, with the latest deficit of 4.4 percent of GDP being twice higher than the first quarter of 2.4 percent.
A combination of domestic problems and external factors weakened the rupiah beyond the psychological threshold of Rp 10,000 per dollar last month, but the higher-than-forecast current account deficit means stronger pain for the rupiah in the future, economists have warned.
“The impact will be on the currency. With the worsening current account, the rupiah may still weakening pressure in the months ahead, likely by 3 to 5 percent,” Bank Danamon economists Dian Ayu Yustina, Anton Hendranata and Anton Gunawan wrote in a research paper.