ECONOMIC UPDATE - External trade review
Yellow Light for 3Q18 CAD
Higher than expected deficit, bad signal for 3Q18 CAD
Indonesia’s trade balance continued its deficit trend in August at USD -1.02 bn. This came higher than both our estimates and Bloomberg consensus as denoted by table in the left. The figure give a yellow sign for 3Q18 CAD as it may end with another 3% of GDP or even higher. August trade deficit brought YTD trade balance figure to USD -4.1 bn.
Export growth weaken, must seek other opportunities
August export grew only 4.15% YoY (-2.90% MoM) or the weakest annual growth in 2018 to USD 15.8 bn. Oil and gas sector export grew 12.24% YoY (-3.27% MoM) while non oil and gas sector grew 3.43% YoY (-2.86% MoM). August export data was worrying as its volume only grew 0.97% YoY, compared to 7M18 which grew 15.88% YoY. If the figure continues in following months, it should be the sign of lower export demand which we believe was mainly due to trade war development. Indonesia’s export value growth driver was still led by mining sector at 17.85% YoY (-13.58% MoM). However, this was much lower than July’s growth at 44.6% YoY, due to lower mineral fuel (mostly coal) export growth at 14.4% YoY (vs Jul 2018 at 40.0% YoY). In our previous trade report (published 15 August 2018), we’ve stated our concern of lower coal export value growth due to limited upside from its price. Meanwhile, the biggest proportion sector to export, manufacture, had stagnant growth of 1.75% YoY (-0.45% MoM) and agriculture sector even experienced significant negative growth of -20.98% YoY even though its proportion to total export is less significant (1.8% proportion in 8M18). We see the importance for Indonesia to boost export growth through manufacture products to lower CAD in future. Indonesia can seek for export opportunity to US in the middle of its trade war with China, especially for products which Indonesia can gain advantage with less US tariff (or even free) than China did like steel. August export figure brought YTD export figure to USD 120.1 bn or 10.4% higher than same period previous year.
Import growth remain high, import reduction policy impact still need time to be seen
BPS reported import growth remained high in August at 24.65% YoY (-7.97% MoM) to USD 16.8 bn. Oil and gas import jumped 51.43% YoY (14.5% MoM) to USD 16.8 bn, mostly due to higher aggregate price which is noted by BPS grew 41.77% YoY. Jump in oil and gas import showed the necessity to reduce this sector import, especially with B20 policy to replace some of oil import with domestically CPO production. However, the impact of this policy, which started in September, should be more significant in 2019. Moreover, energy ministry admitted that B20 policy is not yet fully implemented due mainly to distribution problems. Meanwhile, non oil and gas import grew19.9 % YoY to USD 13.8 bn, normalize from July 2018 growth at 25.67% YoY which we see at restocking effort from firms after Lebaran season. Based on economic groups, consumption growth experienced significant growth at 30.2% YoY and raw/intermediary goods had 24.57% growth in August 2018. Government import reduction policies like B20, import tax and delaying some of infrastructure projects needing imported materials will had more significant effect in 2019. August import figure brought YTD import figure to USD 124.2 bn or 24.52% higher than same period in 2017.
Expecting rate hike of 25-50 bps this month, depending on US-China trade war progress
Higher-than-expected trade deficit should bring higher pressure to Rupiah. Furthermore, the peak of global volatility may come in near term as US is said to give its biggest tariff sanction to China with minimum value of USD 200 bn. As Rupiah had depreciated to near Rp 15,000, we believe further action from central bank by raising rate is needed in current circumstances. If Trump signs the new tariff before board of governor meeting in September 26-27, USD/Rupiah may weaken to above 15,000 level and would force Bank Indonesia to raise rate by 50 bps. However, if there is no new tariff from US to China, 25 bps rate hike should be enough for this month. Furthermore, we also expect another rate hike after this month (most probably in November after 3Q18 CAD data release) with 25 bps magnitude.