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ECONOMIC UPDATE - External trade review - Continuing deficit may push up CAD

ECONOMIC UPDATE - External trade review

Continuing deficit may push up CAD

 

Trade deficit remains above  USD1 bn in May

Indonesia trade balance continued to post significant deficit of USD -1.5 bn even though it was slightly lower than April figure of USD 1.6 bn. The deficit is much higher than both our estimate and Bloomberg consensus (see table at left). Although exports improved by posting 12.5% YoY growth, it was outpaced by imports growth of 28.1% YoY ,  bringing another pressure to current account deficit (CAD) and Rupiah in 2018.

 

Better export growth from higher commodities price

Statistics office (BPS) reported May exports grew 12.5% YoY (10.9% MoM) to USD16.1 bn in May, better than previous month’s growth at 9.01% YoY. Oil and gas sector grew at 21.5% YoY (28.8% YoY) and non oil and gas sectors also had positive growth at 11.6% YoY (9.2% MoM). May exports tend to be driven by the volume as it grew 16.04% YoY while the aggregate price declined by -3.08% YoY. Indonesia exports structure still heavily rely on commodities (27.99% YoY) to boost growth, especially coal (15.9% YoY) and tins (88.5% YoY) for May. On the other side, manufacture exports remained stagnant at 8.98% YoY and agriculture sector even had negative growth of -1.78% YoY.  Most Indonesia’s non – oil and gas exports still went to China (14.4% proportion), US (10.8% proportion) and Japan (9.6% proportion). May exports performance brought 5M18 exports figure to USD 74.9 bn or 9.6% higher than the same period in 2017.

 

Import strong growth showed domestic demand strengthen

Imports recorded a significant growth in May of 28.1% YoY (9.17% MoM). Based on usage, capital goods imports became the main driver of growth by 43.4% YoY growth in May, a strong indication of higher investment growth in 2Q18. Ramadhan and Lebaran festive seasonality drove the consumption goods imports growth (34.0% YoY) and raw/intermediary goods imports growth (24.5% YoY). Continuing significant growth of consumption goods and raw/intermediary goods import growth denoted strong domestic demand during Ramadhan month and Lebaran festive in this year. Furthermore, Indonesia’s retail association (Aprindo) sees that retail sales grew 15%-20% YoY during the Lebaran season in this year. We see consumption growing at 5.0% in 2Q18 due to well performance in Lebaran season. However, Aprindo also noted that retailers’ stock is getting thin after Lebaran season, an indication of continuing strong import growth in following months, especially in approaching Asian Games season.  May oil and gas imports grew 57.2% YoY (20.9% MoM) due to peaking oil price while non oil and gas imports increased 23.9% YoY (7.2% MoM). Import volume grew by 9.3% YoY while the aggregate price grew 7.21% YoY.  May performance brought 5M18 import figure at USD 77.8 bn or 24.75% higher than the same period in previous year.

 

CAD target under review, BI to increase rate in June meeting

YTD trade deficit has reached USD -2.8 bn from surplus USD 0.3 bn in 1Q18. We see that high growth of import trends will sustain at least until 3Q18 as investment growth trend elevated and better demand of Lebaran. We will review our CAD forecast soon after June’s trade data releases as we see that CAD may widen from our current forecast at 2.1% of GDP. Widen CAD may give more pressure for Rupiah but we see central bank tightening path will help to prevent Rupiah to depreciate further. However, we expect low possibility for Rupiah appreciating to Rp13,500/USD territory due to higher CAD and global volatility. We maintain our view of average Rupiah at Rp 13,975 for 2018. Higher CAD and new threat of global volatility from trade war will force central bank to raise rate to in June meeting and once more in 2H18 to 5.25% in order to prevent further depreciation of Rupiah.