ECONOMIC UPDATE - External trade review
Slower Import Growth Took June Trade Balance to Surplus
End 2Q18 with significant surplus
After experiencing significant deficit in April and May totaling USD -3.1 bn, Indonesia trade balance finally was back to surplus in June by USD 1.7 bn. This figure brought YTD trade deficit lower to USD -1.0 bn. However, we still see that 2Q18 trade performance may bring the current account deficit for more than 2.5% of GDP due to peaking dividend payment (seasonal) in this quarter.
Commodities reliance export and its risk to trade war
Good performance of commodity sectors brought export to grow 11.5% YoY (-19.8% MoM) to USD 13.0 bn in June. The decline in monthly basis was due to Lebaran festive but it still grew in positive trend annually. Commodities sector lifted up the export by 58.5% YoY (1.08% MoM), mainly supported by mineral fuel (mostly coal) sector growth at 46.8% YoY. Manufacture sector, which had the highest proportion of export at 73.0%, faced stagnation as it only grew 0.3% YoY. Agriculture sector even had worse performance as it declined by 25.3% YoY in June. We see that Indonesia needs to stimulate its manufacture sector to be more export driven. Higher commodities export this year got much help from higher commodities price, especially coal. In 2H18 onwards, we see that commodities price has peaked and leave manufacture sector to lead the growth. Moreover, Indonesia export will face some challenges in escalating trade war tension between US and China. We see that trade war will give modest effect to China’s economic. Current China’s export to US ratio to GDP only 3.9%, lower than its peak during the beginning of commodities boom (2005) when it contribute around 10.5% to China’s GDP. We see Indonesia can aim for palm oil market to China or EU as trade war between US and those countries forced them putting tariff to US soybean export.
Strong import growth may continue in 3Q18
Imports significant growth did not continue in June where it only posted 12.7% YoY (-36.3% MoM). We do not see it as the weakening sign of domestic demand but it was only seasonal performance due to Lebaran festive in June. Capital goods still led the growth by 19.9% YoY growth and raw/intermediary goods with 14.6% YoY growth. On the other hand, consumption goods declined by 9.5% YoY as the stock for lebaran festive has been imported in April – May. However, we see that the declining growth of import only temporary and import may experience strong growth again in 3Q18. According to IHS Markit report regarding Indonesia’s manufacturing PMI, the increase of input purchasing by manufacturers was still not sufficient preventing reduction in stocks of input as the result of strong demand during Lebaran festive. It made stock of finished goods also decreased. We believe this is a sign that manufacturers will start restocking in 3Q18. Furthermore, Indonesia will face Asian Games season during August – September which will require additional stock, especially after the high demand in Lebaran. We see that import growth will hike up in 3Q18 and brought trade balance to deficit territory again.
CAD 2018 at 2.5% of GDP, policy rate on hold in July
Current YTD trade deficit ease to USD -1.0 bn while 2Q18 trade deficit was at USD -1.3 bn. We see that 2Q18 current account deficit may still widen beyond 2.5% of GDP due to the peak of dividend payment. The similar condition is predicted to continue in 3Q18 as we believe import will have another rounds of strong growth due to manufacturers restocking. We view that CAD will ease in 4Q18 and bringing overall CAD in 2018 at 2.5% of GDP, widen than 2017 position at 1.7% of GDP. With current circumstances, we believe policy rate hike of 100 bps in May-June should be enough to support Rupiah further. We have a call of policy rate hold at 5.25% in July. Bank Indonesia is seen to have another 50 bps rate hike in 2H18 if trade war escalation worsens and bringing Rupiah above Rp 14,500 level.