Bank Indonesia Headquarters at Central Jakarta - Photo: Privacy

JAKARTA (TheInsiderStories) – Warning for Indonesia. The country’s current account deficit (CAD) exceeds is safe limit in the third quarter (3Q) of 2018. The central bank (BI) reported Indonesia’s CAD recorder of US$8.8 billion or 3.37 percent of gross domestic product (GDP) in 3Q, higher than the previous quarter’s deficit of $8 billion, equal with 3.02 percent of GDP.

Cumulatively, the current account deficit as of the third quarter of 2018 recorded at 2.86 percent of GDP. This figure is still within safe limits.

Based on BI’s information, the increase in the CAD was affected by decline in the performance of the goods trade balance and increase in the service balance deficit. The decline in the performance of the goods trade balance was mainly influenced by the increase in the oil and gas trade balance deficit.

While the increase in the non-oil and gas trade balance surplus was relatively limited due to high imports due to strong domestic demand.

The increase in the oil and gas trade balance deficit occurred in line with rising oil imports amid rising world oil prices. The increasing current account deficit also contributes from increase in the service account deficit, especially transportation services.

However, the larger CAD was restrained by the increase in manufacturing product exports and increase in surplus travel services as the number of foreign tourist arrivals rose, including the implementation of the Asian Games in Jakarta and Palembang.

On the other hand, the capital and financial transactions in the third quarter of 2018 recorded a substantial surplus as a reflection of continued high investor confidence in the outlook for the domestic economy. The capital and financial account recorded a surplus of $4.2 billion in the reporting period, supported by increased direct investment inflows.

In addition, the flow of foreign funds in instruments of Government Securities and corporate foreign loans also increased. Nevertheless, the capital and financial account surplus was not enough to finance the CAD, so that the Indonesian Balance of Payments (BoP) in the 3Q of 2018 had a deficit of $4.4 billion.

With these developments, the position of foreign exchange reserves at the end of September 2018 was $114.8 billion. The amount of foreign exchange reserves is equivalent to financing 6.3 months of imports and government foreign debt and is above the international adequacy standard of 3 months of imports.

Looking ahead, the BoP performance is expected to improve and can continue to sustain the resilience of the external sector. Strong coordination and concrete steps taken by the Government together with Bank Indonesia to encourage exports and reduce imports are believed to have a positive impact in controlling the current account deficit, which remains below 3%.

At the same time, BI will keep a close watch on global developments that can affect the outlook for the balance of payments, such as the still high uncertainty on global financial markets, the volume of world trade which tends to decline, and the increase in world oil prices.

The central bank also will continue to strengthen the policy mix to maintain economic stability, and strengthen policy coordination with the government in encouraging the continuation of structural reforms.

The Governor Perry Warjiyo said, the flow of foreign capital was gradually improving the current account. The update of data on foreign capital flows to the country for this month is around $4.4 trillion in Government bond.

Thus, the Government bond ata year to date (YTD) is around $42 trillion. In addition, the good thing is that the flow of foreign capital to shares this month was US$ 5.5 trillion. Meanwhile, the data on foreign capital flows to the shares of YTD is still negative.

“The flow of foreign capital into SBN is getting bigger, this means that investors are confident in the Indonesian economy,” he said after Friday prayers at the Bank Indonesia Mosque on Nov. 9.

For inflation data, Warjiyo elaborated, in terms of monitoring prices for the first week of November, inflation was recorded at 0.16 percent, with data YTD 2.3 percent and year on year at 3.12 percent. The data is based on a BI’ price monitoring survey until Nov. 1, 2018.

Commenting the CAD, Coordinating Minister for Economic Affairs Darmin Nasution said the decline in the CAD deficit would only be felt in the fourth quarter of 2018. According to him, it took time before government policies such as the mandatory 20 percent Biodiesel could have an impact on the CAD level.

Written by Staff Editor, Email: theinsiderstories@gmail.com

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