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Indonesia's central bank warns of rise in capital outflows

Publication Date : 16-07-2014

 

Bank Indonesia (BI) has warned that the local financial market might experience a rerun of the severe shock it endured last year, as Indonesia's current-account deficit is likely to further widen.

Agus Martowardojo, governor of Indonesia's central bank, forecast that imports might exceed exports by at least US$300 million in June, with improvements in the country’s trade balance apparently showing a “worrying” lack of progress.

The situation will exacerbate the deficit in the current account, which measures a country’s international trade including exports, imports, services and transfers.

The current-account deficit might reach 4 per cent of gross domestic product (GDP) in the second quarter of the year, Agus said.

This level is twice that which the country posted in the first quarter and much higher than BI’s sustainable level of 2.5 per cent, a figure which could spook investors.

“There could be a continual weakness in the currency if we cannot sustain the health of our current account,” Agus told reporters on Tuesday evening in a breaking-the-fast event at BI headquarters.

Last year, Indonesia’s high current-account deficit earned the country a place in Morgan Stanley’s “Fragile Five”; a list of emerging economies most vulnerable to capital outflows.

The situation has been made worse by the US Federal Reserve’s tightening of its monetary policy — a move that many fear could drain liquidity in the global economy — prompting investors to ditch Indonesian assets in the financial markets, resulting in broad-based outflows.

In 2013, the rupiah weakened 26 per cent against the US dollar, the steepest fall in Asia, while BI’s foreign exchange reserves declined by $12 billion.

“An increase in the Fed Funds Rate is putting countries with weak fundamentals at risk — unfortunately, Indonesia is now included in that list of countries,” said Agus.

“Therefore, if we do not undertake efforts to strengthen our current account, then Indonesia will suffer an onerous impact from normalization in the US’ monetary policy.”

The BI governor cited the high deficit in Indonesia’s oil-trade balance as the main culprit in the deterioration of Indonesia’s current account.

Latest data from the Central Statistics Agency (BPS) shows that Indonesia posted a $5.5 billion deficit in its oil and gas trade balance in the January-May period, compared to a $4.6 billion surplus in the non-oil and gas sector.

The combined effect of a weak rupiah and higher oil prices have ballooned the cost of the government’s fuel subsidies.

“With the political transition, the outgoing government is leaving the decision on fuel subsidies to the next president. Responsibility for managing the current-account deficit in the interim falls on BI,” said Chua Hak Bin, an economist with Bank of America Merrill Lynch.

Bank Mandiri chief economist Destry Damayanti believes that Indonesia should not be seen as “fragile” again this year.

She argued that an improvement in the country’s external balance — though sluggish — would still be noticeable among investors nonetheless, as policy makers were shifting their priority to pursuing stabilisation rather than growth throughout 2014.

“It’s also a different situation today; last year, we were hit by many unanticipated things, from the hike in BI rates, the adjustment in fuel prices, political uncertainty, to the suggestion of an end to quantitative easing,” she said on Tuesday in a phone interview.

“This year, however, I think almost all the possible economic developments have already been priced-in by the market.”

 

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