Morning Briefing: Indonesian Govt Takes Bold Steps to Address CAD

CMEA Darmin Nasution, Finance Minister Sri Mulyani Indrawati and BI's Governor Perry Warjiyo delivered the Limited Meeting on Government Policy at the President Office on Tuesday (14/08)

JAKARTA (TheInsiderStories) – Good morning. The government had taken bold steps to address Indonesia’s persistent current account deficit (CAD), which continues to underwhelm the economy and a source of weakness and volatility for the rupiah.

Of all the four measures announced by Finance Minister Sri Mulyani Indrawati on Tuesday (14/08), the plan to halt imports for over than 500 items is a minefield. Such policy might be unpopular, with the obvious target is consumer goods and capital goods that can be produced domestically.

While details of the policy to be disclosed later, Indrawati hinted that the flow of goods through e-commerce industry will be one of its purviews. Another important measure is the expansion of 20 percent biodiesel mix policy or B20 to non subsidized fuel starting in September.

The expanded B20 policy is estimated to cut imports by US$2.3 billion until the end of the year. In addition, given Indonesia’s position as the world’s largest CPO exporter, the policy will boost the price of the commodity.

Curbing import is the easiest route in the attempt to curb the widening CAD, which reached 3 percent of GDP in the second quarter. Indonesia recorded a trade deficit $1.02 billion in the first six months this year, with imports rising faster in the past two months as economic activities gain momentum.

Today, the Statistics Indonesia will announced Indonesia’s July trade data at 1100 local time. The trade data may offer a glimpse on the impact of accelerating economy, depreciated rupiah, the trade war and, more importantly, whether the plan to halt imports is justified.

In addition, Indonesia’s balance of payment also saw its deficit widened to $4.3 billion in second quarter (2Q) of 2018 from $3.9 billion in 1Q 2018. That shows money are leaving Indonesia not only through trade in services but also from the financial and capital market. Typically, Indonesia records a current account deficit but still maintains a surplus in balance of payment.

No good news from the government fiscal policy either. Spending on energy subsidy already reached 75 percent of the allocation in the first seven months, while capital spending was only 27 percent.

Overall, the government budget deficit was Rp151.3 trillion ($10.58 billion) or 1.02 percent of GDP by end of July. The government pegged 2018 budget deficit at Rp325.9 trillion or 2.19 per cent of GDP.

Another important event on this day is the announcement by Bank Indonesia (BI) of the result of its monetary meeting. The recent fall of the rupiah may weigh on the mind of BI which has aggressively raised its benchmark rates due to external pressures.

Yesterday, the Jakarta Composite Index was down 1.56 percent at 5,769.9 as negative sentiment from the ongoing crisis in Turkey continues to spread to the emerging market. The rupiah weakened to 14,625 per US$ from 14,583.

On the politic side, Asman Abnur, the administrative and bureaucratic reform minister, could be the first victim of the 2019 Presidential Election. As his party, the Amanat Nasional Party  joined the opposition camp, the President has no option but to remove Abnur from the ministerial post.

His likely successor is the national police deputy chief Syafruddin. The appointment will certainly fuel more speculation on the ruling party PDIP’s closeness with the national police.

Hope you have a profitable day.

TIS Intelligence Team, Email: theinsiderstories@gmail.com