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ECONOMIC UPDATE - Bop review - Signal of recovery



Surplus in BoP, eventually

After being hit with negative Balance of Payment (BoP) in two consecutive quarters and a deficit at USD7.1 bn in overall 2018, Bank Indonesia (BI) recorded surplus at USD4.3 bn in 4Q19 (vs. USD46 mn deficit in 3Q19). In 4Q19, current account deficit (CAD) stood at USD8.1 bn (2.8% of GDP), worse than the consensus expectation at USD8.0 bn deficit. Thus, the result in 4Q19 brings a better outcome in overall 2019 compared to 2018, amounting USD4.7 bn of BoP, USD30,4 bn of CAD (2.7% of GDP) and USD36.4 bn of financial and capital account. This better outcome brings a better prospect for the Indonesia fundamental, supported with the highest foreign exchange (forex) reserves since Jan-18.


Better performance from trade sector

We initially expect 4Q19 CAD will be very near with 3.0% to GDP but after we saw some improvement in trade performance in 4Q19, we expect it will be narrower than our estimate. However, the upside actually did not come from trade account but from financial account. In overall merchandise trade, it showed a significant turnaround from USD2.5 of deficit bn to USD0.3 bn of surplus in 4Q19. The export on goods showed a -3.4% YoY of growth and -9.2% YoY of goods import growth, resulting on trade surplus of USD311 mn (vs. -USD2.5 bn in 4Q18). Non-oil and gas (non-OG) trade surplus increased by 26.4% YoY to USD3.2 bn although the export growth was -0.9% YoY with the deeper fall of import growth at -8.7% YoY. The sluggish were due to the lower price of our exported commodities (-4.2% YoY in average) and the global economic downturn itself. Meanwhile, OG sector trade balance remained deficit at USD3.2 bn. On service side, the deficit widened by 20% YoY to USD2.1 bn (vs USD1.6 bn of deficit in 4Q18). 


Consistently negative primary income

Primary income deficit also widened to USD8.3 bn (vs USD7.4 bn in 4Q18) due to the increase of interest and dividend payment in line with the increase of the direct and portfolio investment from last year. Meanwhile, secondary income posted USD1.97 bn surplus in 4Q19, slightly lower than 4Q18 figure at USD2.04 bn due to the little drop from government income and other transfers. Nevertheless, the remittances made by Indonesian migrant workers were still solid where the personal transfer grew by 2.05% from USD1.76 bn to USD1.79 bn in 4Q19, supported by 3.7 mn migrant workers abroad in the same period. The better social protection agreement in Hongkong and Taiwan with Indonesian government creates a better labor market there even though in next period we may see the number falls due to the political turmoil in Hongkong and coronavirus outbreak. This is important since Indonesian migrant workers share in both countries were 15.5% of total Indonesian migrant workers worldwide.


Financial account surplus remained significant

Financial account maintained significant surplus at USD12.4 bn with a jump from 2Q19 figure at USD7.4 bn. The other significant jump came from direct investment from USD0.85 bn to USD3,3 bn in 4Q19. Meanwhile, portfolio account decrease by 33.5% YoY from USD10.5 bn tp USD6.9 bn. Lower long term government bond issuance (4Q19: USD4.03 bn vs 4Q18: USD4.84 bn) became the main laggard in portfolio account surplus. However, the overall 2019 displayed a significant hike of capital inflow where portfolio investment increased by 131.4% YoY from USD9.3 bn to USD21.5 bn in 2019. Thanks to the better domestic investment climate in 2019.


Signal of recovery

The global economic slowdown due to trade war and softening China’s expansion made the CAD was at 2.7% of GDP in 2019. With a better condition from the implementation of B-30, higher CPO prices, the decrease in oil prices and the higher value added commodities export, the trade account should be better in 2020. However, the challenge will come from the coronavirus outbreak that may hit Indonesia trade performance in first semester of 2020. Overall, the external sustainability indicators (CAD and foreign debt) indicate a better condition of the economy. We see rupiah will streghten to Rp13,842/USD on average and Rp13,710/USD on YE 2020 but the numbers are still under our review due to the hard-to-predict coronavirus outbreak. With existing CAD, BI still has a reason to have another rate cut by 25bps in 1Q20 to reassure the growth for next period.