Ending the Year Safely
Executive Summary
The countdown toward 2014 has started to accelerate. It seems so far that we will leave 2013 on a satisfactory note. While at the macro level imbalances remain, at the micro level the Indonesian corporate sector continues to move briskly, albeit at a slower pace. Overall, while there are several shortcomings, in general we may leave the year 2013 safely.
As was elaborated in our previous report, the main imbalance has been external. The current account deficit remained the main concern of the policy makers at the government and the Central Bank. The concern was triggered by the existence of the deficit in the balance of trade. Before the crisis in 1998, Indonesia also suffered current account deficits for more than 30 years, during the government of President Suharto, yet at that time the balance of trade remained positive. Therefore the appearance of a trade deficit has basically become a new phenomenon for the Indonesian economy.
In the third quarter of 2013, the current account deficit remained at over $8 billion. From the trade data, it appeared that oil and gas suffered a deficit of around $3 billion in that quarter. At the same time Foreign Direct Investment amounted over $5 billion. The deficit from the oil and gas reflects the flaw in the energy subsidy policy. The government addressed that issue by raising the domestic fuel price in June 2013, yet the increase was relatively timid. Therefore, a more ambitious policy is needed in order to prevent the oil and gas deficit from ballooning. Instead, the Central Bank tried to address that issue by raising the BI benchmark rate in order to dampen overall demand.
Against that backdrop, the trade balance in October 2013 posted a small surplus. Increasing exports, together with declining imports growth produced the long-awaited outcome. The question is whether the surplus was only accidental or will prove longer lasting. If the surplus continues until the end of 2013, the news may lift confidence on the economy. However, if the surplus is accidental, the government must work harder to address the imbalance with a much bolder policy.
The good news on the trade balance was also accompanied by a mild inflation figure for November 2013. With only one month remaining, it is highly likely that yearly inflation in 2013 will be slightly below 9%, on the optimistic side of the previous government’s prediction. The slowing of inflationary pressures left the Central Bank an opportunity to stand pat, and it kept the benchmark rate intact at 7.50%. While the market reacted by weakening the Rupiah after the announcement, with the US Dollar crossing a threshold level of Rp. 12,000, the Central Bank remained firm in its decision, but with the promise of optimizing the other instruments in its monetary policy mix.
Now read on...
Register to sample a report