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Trade balance boosted by weak rupiah

Publication Date : 03-12-2013


Indonesia posted an unexpected trade surplus with the central bank’s strategy of tolerating rupiah weakness proving to be effective in boosting exports and reining in imports, in addition to further support from the improvement in global commodity prices.

The Central Statistics Agency (BPS) reported on Monday that the country recorded a trade surplus of US$42.4 million in October, compared to a $657.2 million deficit a month earlier. The surplus was a surprise, given that the market had earlier expected a monthly deficit of $775 million, according to median estimates among economists surveyed by Bloomberg.

BPS head Suryamin attributed the surplus to the weaker rupiah that boosted the competitiveness of Indonesia’s goods overseas, while at the same time discouraging local businesses from absorbing too many imported goods. “The fact that the dollar has strengthened while the rupiah has declined has helped increase our exports and reduce imports,” he told a press briefing.

Total exports increased 2.5 per cent year-on-year to top $15.7 billion in October - the first growth in exports in 19 months. Meanwhile, total imports decelerated 8.9 per cent to stand at $15.6 billion.

“Prices for some exported commodities have also shown signs of an upward trend,” Suryamin said, referring to the recovery in prices of commodities such as coconut copra, palm oil, shrimps and rubber.

Indonesia’s trade balance has been in deficit in seven out of 10 months this year, a situation that has been blamed primarily on the deficit in the current account - the broadest measurement of a country’s international trade - which is now the major worry among foreign investors.

In the third quarter, the current-account deficit narrowed to $8.4 billion, or 3.8 per cent of gross domestic product (GDP), from its historic high of $9.8 billion in the previous quarter.

The local equity and currency markets rallied on expectations that the trade surplus would eventually lead to a further improvement in the current account. The Jakarta Composite Index (JCI) rose 1.5 per cent to close at 4,321.97, the biggest daily advance in more than two months.

The rupiah appreciated on Monday as much as 2.2 per cent to 11,705 per dollar - its biggest gain in 18 months - before trading at 11,755 as of 4:28 p.m. in Jakarta, according to prices from local banks compiled by Bloomberg.

Despite deliberately allowing the rupiah to depreciate, Bank Indonesia (BI) said the rupiah’s present level was far too weak and reflected “currency overshooting”, maintaining that a rate of around 11,500 per dollar would be a more accurate reflection of the country’s economic fundamentals.

“I have said many times that if the problem in our current account can be addressed, then the rupiah will strengthen,” Finance Minister Chatib Basri said on Monday in a phone interview, adding that he believed the current-account deficit would narrow further to $7 billion in the fourth quarter.

A revision to the Finance Ministry’s regulations on the tax payment scheme for exporters, known as KITE, would be issued in December, Chatib said. The revision to KITE would make it easier for export-oriented industries to import raw materials and capital goods, ultimately strengthening Indonesia’s trade balance, he explained.

DBS Bank economist Gundy Cahyadi argued that the better-than-expected trade data would encourage the central bank to hold its BI rate at 7.5 per cent at its next monetary meeting on Dec. 12, after the rate was hiked by 25 basis points last month due to concerns over the current-account deficit.

“The risk is that excessive tightening of monetary policy may do more harm than good if the central bank’s aim is to really improve the current-account gap – especially if exports increase from here onward,” Gundy said via an email on Monday.


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