Pressure eases on Indonesia’s trade balance
- Tight monetary policy and several governments measures to tame imports had impacted imports
- Weak export performance, in line with peers in the region, was mainly external factors
- Risks to our growth, policy rate, and rupiah forecasts are even
- We remain favourably predisposed toward Indonesian rates, FX, and equities
We think trade balance could improve in 2019 compare to 2018 for three reasons:
• The impact of Rupiah depreciation will finally pass through to prices and will lower imports demand further.
• We expect oil price to average between USD65-70/bbl (Brent) this year vs USD 72 in 2018. This should translate into a lower oil import bill.
• China’s likely economic stabilisation could provide support for trade demand in the region, including Indonesia.
Exports deceleration could last this year
Weak exports performance was in line with regional peers as exports deceleration was mainly due to slower global trade demand coupled with tighter liquidity which impact trade via weaker purchasing power. In addition, Indonesia’s major commodities’ price such as CPO, coal and rubber are expected to remain flat this year.
In terms of major exports destination, major destination, China, Japan and ASEAN which accounted for 34% of Indonesia’s exports eased significantly. On this regard, China’s economic rebound or at least a softer landing could support intra-Asia trade this year and supports Indonesia’s exports.
Dissecting imports slowdown
Fortunately, imports have slowed down more deeply than exports, improving Indonesia’s overall trade balance. Combination of lower oil price and weaker Rupiah compare to 2017 level had contributed to imports contraction. Moreover, as imports content of exports product is still quite significant, slower exports also contribute to imports contraction. Domestically, softer investment growth which seemed to have peaked in 3Q18 might had lower capital goods imports.
Besides external and domestic factors, other important determinant come from the policy space. Tightening monetary policy stance and several measures to curb imports have also contributed to improvement in the trade balance. These measures include higher import tax (PPH 22) on near 1,000 consumption goods, the requirement to use biodiesel blended fuel (B20) and plan to postpone capital goods imports of several infrastructure projects.
Imports contraction was broad-based (consumer, raw material and capital). Consumption goods imports fell by 13.9%YoY (3mma), while capital imports were down 4.5%YoY. The biggest proportion come from raw material which account for 75% of total imports, decelerated by 7.4%YoY.
Implication for rates
In the last policy meeting, Bank Indonesia (BI) reiterated its focus on keeping Rupiah around its fundamental level, making sure inflation is within BI target ranges, reducing current account deficit and maintaining attractiveness of domestic financial assets. As the Fed changed gear toward supporting growth more and inflation and Rupiah are within BI’s comfortable level, the only factors that need to be watched further is development in trade balance and current account.
For now, we still think that BI is likely to stand pat this year, as global uncertainties remain present on both trade and capital flows front. More trade balance data points are needed to conclude otherwise.
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