Indonesia Credit Rating Update 31 May 19

01 Agustus 2019

Indonesia Monetary Update

by: Myrdal Gunarto (mgunarto@maybank.co.id)

3Q18 CAD Results: Peak Dividend Payments & Trade Deficit Widen Indonesia’s CAD

Indonesia’s current account deficit (CAD) ratio continues to reach above 3% of Gross Domestic Product (GDP) in 3Q18. The CAD deficit at 3.37% of GDP in 3Q18 is higher than the previous quarter result at 3.02% of GDP. The current account deficit increased from US$7.98 billion in 2Q18 to US$8.85 billion in 3Q18. It’s the highest deficit in Indonesia’s current account since 3Q14. Furthermore, Indonesia’s balance of payments (BOP) also sustains its deficit in 3Q18. We concluded that it’s the consequences of higher deficit in the primary incomes and negative trade balances due to stronger domestic demand on imported goods for infrastructure, foods demand, and fuel transport demand. That condition can’t be offset by a surplus in the capital & financial account. Indonesia’s BOP positions remains deficit in 3Q18. Total BOP’s deficit widens from US$4.31 billion of deficit in 2Q18 to US$4.39 billion in 3Q18. Hence, Indonesia’s total foreign reserves decreased from US$119.84 billion in 2Q18 to US$114.85 billion in 3Q18.

The deficit in the primary incomes widen during peak season for paying dividend & government bonds coupon. It’s the consequence of strong foreign investment flow both in the direct investment and the government bonds market to Indonesia in last previous years. Indonesia is the investment grade country that offering attractive yields with strong potential for direct investment due to its bonus demographic profile. Meanwhile, Indonesia’s trade balance positions worsen from US$297 million of surplus in 2Q18 to US$398 million of deficit in 3Q18. Moreover, the global oil prices becomes higher after the Organization of the Petroleum Exporting Countries makes a strategic decision on its supply capacity to send global oil prices to be higher. As the net oil importer country, the fuel subsidized prices remain stable although the oil prices become more expensive due to increasing oil prices and strengthening US$. It’s in line with the country’s achievement to book robust economic growth above
5% with low inflation level. Total oil imports increased from US$6.53 billion in 2Q18 to US$7.32 billion in 3Q18. The average prices of Indonesia crude oil increased from US$70.71/barrel in 2Q18 to US$72.51/barrel in 3Q18. On the other side, the deficit in the current account’s service account still widens from US$1.86 billion in 2Q18 to US$2.22 billion in 3Q18 although the country is visited by more foreigners during Asian Games. Total inbound travelers increased from 3.17 million in 2Q18 to 3.70 million in 3Q18, according to Bank Indonesia. It was due to the side effects of high payments services for supporting strong imports’ activities during 3Q18. The country only recorded US$1.30 billion of surplus from travel services activities. It still can’t offset total deficit in the current account’s services for international trade transports that reached by US$2.22 billion in 3Q18.

On the capital & financial account, total surplus slightly decreased from US$4.53 billion in 2Q18 to US$4.17 billion in 3Q18. It’s not enough to offset total deficit in the current account side. Total surplus in the capital & financial account declines after total surplus in both portfolio investment account and other investment account in 3Q18 shrank than prior quarter. Moreover, total surplus in the direct investment account in 3Q18 is also lower than total surplus in the same period in previous year. Loosening surplus in the direct investment (3Q18 vs 3Q17) is in line with foreign investors’ behavior before big political events occur in 2Q19. Meanwhile, the portfolio account position have changed from surplus by US$104 million in 2Q18 to be deficit by US$104 million in 3Q18. It’s due to strong effects of investors’ carry trade actions in local financial markets during Federal Reserve’s policy rate hike decisions by three times in the first nine months of 2018. Hot money flows flew from the emerging countries to the developed country, such as the United States, after strengthening in the positions of global interest rates & US$. The yield rate in the US10Y government bonds becomes more attractive from 2.86% on 29 Jun-18 to 3.06% on 28 Sep-18. We saw foreign investors realized their profits in both local equity & bond markets. Foreign investors recorded US$117.34
million of net selling position in Indonesia’s equity market during 3Q18. The foreign investors also cut their ownership in the government bonds from 37.79% of total in 29 Jun-18 to 36.89% of total in 28 Sep-18.

Going forward, we thought that Indonesia’s balance of payment position to improve in 4Q18. The main reasons are 1.) positive expectation in further country’s trade balance position after  government’s intention to manage total imports for infrastructure needs, 2.) fewer realization on the fuel imports following recent global oil prices’ drop, 3.) improving money inflow in the domestic financial markets after investors have anticipated further pressures due to certainty in the Fed’s policy rate decision. Hence, the current account deficit ratio is expected to reach 2.90% of GDP in 2018. Nevertheless, we remain monitoring recent global economic prospect development after seeing persisting trade war and China’s economic growth slowdown. The trade war will keep evolving if the United States continues to make further adjustment on the international trade’s rationalization. It will give impacts to every part in the balance of payment. It can be seen by recent strengthening US$ against Rupiah. Against those conditions, the Monetary Authority is expected to adjust again its policy rate on its next monetary meeting for keeping macroeconomic stability, especially on the currency’s side.