JAKARTA (TheInsiderStories) – After recording a trade deficit of US$2.05 billion in November 2018, Bank Indonesia (BI) is still optimistic the current account deficit (CAD) will wane to 2.5 percent of gross domestic products (GDP) in 2019, through improving exports and growing tourism to enhance the trade balance.
Deputy Senior Governor of Indonesia’s Central Bank Mirza Adityaswara said on Monday (12/17), the deficit in November 2018 was a sign that the export and import of services was still a concern, so it is necessary to bring the trade balance back to positive.
He thinks, the government must immediately issue incentives related to exports to encourage business people and cooperate with industry players and the community to promote exports.
Adityaswara also appreciated the efforts made by the government to strengthen exports, such as through the Comprehensive Economic Partnership Agreement (CEPA) with the European Union and hoped there would be more agreements like this in the future.
“Hopefully we can push partnerships, investments and exports deeper,” said the senior deputy governor.
Meanwhile, Finance Minister Sri Mulyani Indrawati said that the export sector was still affected by external pressure, one of which was the reduction in demand from major export destinations such as China.
“This must be seen carefully the factors of China’s economic growth is it internal adjustment or because trade war with the US,” she said at the same day.
She added that the weakening of export performance also occurred due to sluggish trade with non-traditional markets, such as in Latin America and Africa, which were also affected by global conditions.
“New markets, perhaps in current economic conditions, tend to be weak. So the ability to absorb exports is limited,” the minister stated.
In addition, according to her, there are also export commodities that are sensitive to non-economic issues, such as crude palm oil, thus contributing to reducing demand in European countries.
Seeing this uncertain global condition, the government continues to strengthen export competitiveness by providing incentives to exporters so the trade sector’s passion does not weaken.
“Exports are driven by the power of our competition, through various policies to support, such as incentives. However we need to understand, the dynamics of the global market are very high and uncertain,” Indrawati revealed.
On the import side, the government will conduct a more in-depth study of the import reduction policies that have been issued, such as increasing import income tax rates.
“For other sectors, oil and gas and non-oil and gas must continue to pay attention to the ability of domestic industries to produce substitutions, so we remain focused on that portion,” she added.
The minister ensured that the effort to manage the trade sector must be sought to restrain the widening of the CAD which has now approached three percent of GDP.
Futhermore, Chief Economist PT CIMB Niaga Tbk Bank Adrian Panggabean said, Indonesia’s economy is predicted to be faced with many challenges next year. Indonesia’s economic growth is projected to be 4.9 percent, which is slightly lower than the 2018 average at 5 percent.
Volatility in the financial markets, as a consequence of lack of liquidity due to rising interest rates, is set to continue. This condition arose due to pressure from external factors and domestic market conditions which then affected national economic growth.
“From the global side, the challenges that will reduce Indonesia’s economic growth come from the prospect of continuing to normalize the Fed Fund Rate two to three times next year, the economic slowdown in China, the prospect of monetary normalization in the European zone, geopolitical friction is affecting oil prices, as well as the prospect of a continuing trade war between the US and China,” he said.
Another factor that helped influence Indonesia’s economic growth next year, he continued, was a non-expansionary government fiscal policy. This is also a consequence of the low tax ratio or our tax ratio, which is then accentuated by the effect of interest rate policy in maintaining the value of the rupiah but has an impact on weakening the dynamics of the real sector.
On the other hand, the inflation rate throughout 2019 is expected to remain low. “I see both headline inflation and core inflation next year will be below the median BI target,” he said.
Panggabean explained, in line with the increase in the benchmark interest rate by 175 bps since May 2018, coupled with the hope that the government will conduct temporary rescheduling of a number of infrastructure projects to keep the current account deficit very wide, import pressure is expected to begin to decline in 2019.
He revealed, the CAD in 2019 is likely to be lower than 2018. CAD is expected to be in the range of 2.5 percent of GDP. By referring to the CAD prospects, and a list of global factors including stability in the US dollar index and the prospect of depreciation of the Yuan, Rupiah trading in 2019 will be at the level of 14,400-15,200 per US dollar.
Meanwhile, Mirae Sekuritas believes that the implementation will not be reflected in the numbers anytime soon, as it will take time to see the impact to the trade balance. As Indonesia recorded higher-than the November account for 4Q 2018, which expect to be higher than the 3.37 percent of GDP in 3Q18.
Also, the November trade deficit will add more pressure to the depreciation of the Rupiah. Indonesia’s export performance in November 2018 was recorded at $14.83 billion. That number dropped 6.69 percent compared to October. The decline in exports was 3.28 percent compared to last year.
Meanwhile, November 2018 imports were recorded at $16.88 billion, down 4.47 percent compared to the previous month. When compared with November 2017 there was still an increase of 11.68 percent.
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