JAKARTA (TheInsiderStories) – Good morning. Bank Indonesia (BI) contributed to the government’s effort to contain Indonesia’s widening current account deficit (CAD) by delivering its fourth rate hike since May.
BI raised the benchmark seven-day reverse repo rate by 25 bps to 5.50 percent in order “to maintain the attractiveness of domestic financial market as well as keeping the current account deficit at a safe level”.
The rate hike may instill some sense of stability to the domestic financial market, which has been affected by risk-off behavior due to the ongoing financial crisis in Turkey. The Jakarta Composite Index was up 0.81 per cent at 5,817 while the rupiah strengthened to 14,621 per US$ from 14,625 per US$.
Indonesia CAD widened to 3.0 per cent of GDP in second quarter from 2.2 per cent in the previous quarter. In addition, the deficit in balance of payment rose to $4.3 billion from $3.9 billion, which means capital is exiting Indonesia.
And, given the latest trade data, the problem may continue. The Statistics Indonesia announced today that Indonesia recorded a trade deficit of $2.03 billion in July, the largest since July 2013 and a swing from a surplus of $1.71 billion in June. The trade balance was in a deficit as imports surged more than exports, which was due to the accelerating pace in economic activities.
Rising import is a cause for concern for the government. Finance Minister Sri Mulyani Indrawati said the trade deficit in July was an anomaly, while Coordinating Minister for Economic Affairs Darmin Nasution the result was above expectations.
One of the government’s measure is to curb imports by imposing 7.5 per cent import tax for consumer goods and capital goods that can be produced domestically.
The government will also stop imports over than 500 items as part of the effort to curb the rising current account deficit. Another step is to stop exports of oil and diverted all production share of contracts to be purchased by state-owned energy producer PT Pertamina. This will reduce the imports of oil in order to meet domestic consumption.
Fortunately, the government has secured a commitment from business community grouped within Indonesian Chamber of Commerce to bring all export proceeds back to Indonesia, which could help to stabilize the rupiah. In what could be a good news for Indonesia, a build-up in United State oil inventories and rising OPEC output pushed oil prices lower.
Moving to politics, Vice President Jusuf Kalla today met with the opposition presidential candidate Prabowo Subianto and his running mate Sandiaga Uno. While Kalla insisted the meeting was between two friends, it could fuel speculations on what the businessman-turn-politician is up to in the 2019 Presidential Election, which he will not be competing.
Hope you have a profitable day.