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ECONOMIC UPDATE – External trade review - A positive catalyst for CAD and rate cuts



An unexpected surplus in May

After posting a significant deficit of USD 2.5 bn in April, trade balance unexpectedly had significant surplus of USD208 mn in May. The figures came much better than our and consensus’ prediction at USD -1.5 bn and USD -1.3 bn deficit, respectively. Even only 1 out of 24 surveyed economists that predicted surplus. May trade figures slightly improve the year to date trade deficit at USD2.1 bn.   


Export performance remained sluggish but showed a litlle progress

Export was seen trending down by -8.99% YoY to USD14.7 bn but its monthly figure was positive with 12.42% MoM. Oil and gas sector became the main laggard as its export fell significantly by -31.77% YoY (50.19% MoM), mainly due to lower crude oil export (-69.63% YoY). Non oil and gas export fell by -6.44% YoY (10.16% MoM). If we break down the non oil and gas components, we will find lower mining product export which dragged the whole non oil and gas export growth down. Statistical office (BPS) noted mining product export fell 14.33% YoY (-1.76% MoM), mainly due to lower commodity prices. Ores, Slag, and Ash led the fall with 53.25% YoY decline. However, mineral fuel (including coal) export surprisingly had positive growth of 4.8% YoY, continuing its positive trend since April. Manufacture export declined by -4.99% YoY (12.4% MoM), led by falling animal or vegetable oils/fats (including CPO) export by -13.7% YoY. According to the release, the sluggish export remained driven by deteriorating aggregate price which BPS noted decreased by -17.94% YoY (3.10% MoM). Meanwhile, the export volume growth remained positive at 10.9% YoY (9.04% MoM). May trade figure brought 5M19 export figures at USD 68.5 bn, 8.61% lower than 5M18.


Import slumped to below our expectation

Import growth fell by -17.71% YoY (-5.62% MoM) to USD 14.5 bn in May, below our expectation and consensus. It seemed that the accumulation of import for Ramadhan and Lebaran festive only peaked in April. Oil and gas import fell by -26.89% YoY (-6.41% MoM) and non oil and gas import fell by -15.94% YoY (-5.48% MoM). Based on the usage, raw materials / intermediary goods became the main laggards as its import slumped by -19.12% YoY (-7.82% MoM). Consumption goods import also decreased by -10.8% YoY but its monthly figure was positive at 5.62% MoM. Falling raw materials / intermediary goods import denoted slowing down domestic consumption outlook in 2H19. Meanwhile, capital goods import also fell by -15.23% YoY (-1.76% MoM), indicating slowing down investment activity. Furthermore, the falling import is reflected not only on its aggregate price (-7.75% YoY) but also on its volume which slipped by -10.8% YoY. May import figures brought 5M19 import figures at USD 70.6 bn, 9.23% lower than same period in previous year.


Positive trade data is good for rate cut outlook

Trade surplus in May was mainly due to significant fall in import. On positive side, it gives a room of breath for CAD as it may fell below our expectation at 3.0% of GDP. We may revise our forecast for CAD if the trade data remain on surplus in June-July. On the negative side, the significant fall in import denoted slowing down domestic economic activity. As we have mentioned before, falling materials / intermediary goods import provided a negative outlook for consumption while falling capital import goods is a negative sign for investment. However, both positive and negative sides we’ve mentioned give a one clear conclusion that this trade data open opportunity for rate cut. BI may start its rate cut cycle in 3Q19. We expect rate cut of 50 bps in 2019 and 50-75 bps in 2020.