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ECONOMIC UPDATE - External trade review - Trade surplus widens on lower imports



Trade surplus for 41 months in a row

According to Statistics Indonesia (BPS), Indonesia's trade surplus increased by 9.38% MoM to USD3.42 bn in September, driven by lower imports. This figure is higher than our expected trade surplus of USD3.11 bn and the consensus estimate of USD2.35 bn. Nonetheless, on a yearly basis, the trade surplus demonstrated a weaker outcome, declining by -31.21% YoY from USD4.97 bn in the same month of the prior year. Regarding the cumulative performance during the first nine months of 2023, the trade surplus declined by -30.36% YoY, falling from USD39.85 bn in 9M22 to USD27.75 bn in 9M23. Meanwhile, Indonesia has sustained a positive trend in international trade since May 2020, resulting in 41 consecutive months of trade surplus. Looking ahead, it is expected that export performance will continue to deteriorate due to declining commodity prices, a result of reduced global demand. Additionally, the persistent application of higher interest rates by numerous central banks in response to ongoing inflationary pressures is projected to negatively impact the real sector's performance. Consequently, our forecast indicates a further narrowing of the trade surplus. Consequently, we maintain our projection that the current account could show a small deficit of -0.5% of GDP in 2023, in contrast to a surplus of 1.0% of GDP in 2022.


Exports dip driven by commodity performance

Total exports declined by -16.17% YoY to USD20.76 bn in September 2023. Nevertheless, this reduction showed an improved performance compared to the prior month's -21.21% YoY drop. Furthermore, this number slightly fell short of our projection of -14.12% YoY and the consensus estimate of -13.70% YoY. On a monthly basis, total exports recorded a -5.63% MoM drop. Specifically, oil and gas (OG) exports increased by 6.54% MoM to USD1.40 bn, however non-oil and gas (NOG) exports decreased by -6.41% MoM to USD19.35 bn. In September 2023, the primary destinations for non-oil and gas exports were China at USD5.17 bn (-3.69% MoM), followed by the United States at USD1.84 bn (-13.80% MoM), and India at USD1.50 bn (-18.55% MoM). We attribute the downward export trend to commodity performance. On a monthly basis, exports of CPO and coal fell by -23.35% MoM and -2.19% MoM, reaching USD1.84 bn and USD2.20 bn, respectively. On a yearly basis, exports of CPO and coal decreased by -23.54% YoY and -47.04% YoY, respectively. Indonesia's exports rely on commodities. CPO and coal exports constitute 20.89% of September’s total exports. Furthermore, we project that export growth will diminish to -0.1% YoY this year.


Imports decrease alongside PMI

Total imports shrunk by -12.45% YoY, amounting to USD17.34 bn, which was deeper than both our and consensus estimates of -8.37% YoY and -5.00% YoY, respectively. Additionally, from a monthly standpoint, total imports decreased by -8.15% MoM. To delve into the details, OG imports rose by 25.04% MoM to USD3.3 bn. Nevertheless, NOG imports saw declining growth, dropping by -13.60% MoM to USD14.01 bn. Raw/intermediary goods continued to dominate the import sector, constituting 73.19% of total imports, declining by -4.86% MoM and -14.83% YoY, respectively. Among the selected non-OG sector, the largest contributor (comprising 18.63% of total non-oil and gas imports) was machinery/mechanical appliances and part thereof (HS 84), which experienced a deceleration by -11.89% MoM and -6.11% YoY, totaling USD2.61 bn. Aligning with the import contraction, the manufacturing purchasing manager index (PMI) eased to 52.3 in September from 53.9 in August, marking the softest pace since May. Meanwhile, we project that the import growth will decelerate to -0.5% YoY this year.


Anticipating a strong USD

Despite Indonesia's trade surplus, the country's foreign exchange reserves faced a notable decline, with USD134.9 bn at the end of September 2023, marking a significant decrease of USD2.2 bn compared to the previous month. This substantial decline is consistent with the need for currency intervention, which has become necessary due to the strengthening of the USD exchange rate and the outflow of foreign capital from the Indonesian market. Bonds experienced a capital outflow of -USD1.1 bn, while equity saw an outflow of -USD0.26 bn. This trend was driven by the possibility that the Federal Reserve (the FED) might raise interest rates by another 25 basis points, resulting in a range of 5.50% - 5.75% by the end of this year, as indicated by the FOMC dot plot. Despite the implementation of the policy of Export Earnings on Natural Resources (DHE) and the issuance of Rupiah Securities (SRBI), the pressure on the dollar remains unabated. The Rupiah depreciated by -1.5% MoM to Rp15,455/USD in September, a decline worse compared to the Philippines and Malaysia, which recorded changes of +0.01% MoM and -1.2% MoM, respectively. Meanwhile, based on the latest meeting of the Board of Governors of Bank Indonesia, it appears that the interest rate will remain at 5.75% until the end of the year, in line with the goal of keeping inflation within the 2-4% target range. Given the uncertainty surrounding the Federal Reserve (the FED), we predict that the Rupiah will reach Rp15,310/USD at the end of 2023 and average Rp15,190/USD for the entire year of 2023.