ECONOMIC UPDATE - BoP review - Narrowing CAD, reassuring growth


BoP remained deficit but with lower magnitude

Bank Indonesia (BI) recorded an improvement on Balance of Payment (BoP) to USD46 mn in 3Q19 (vs USD1.9 bn deficit in 2Q19). Digging into details, current account deficit (CAD) stood at USD7.7 bn (2.7% of GDP), worse than the consensus expectation USD7.1 bn deficit. Compared to 2Q19, the deficit narrowed from USD8.1 bn (2.9% of GDP, revised number). To be noted, there were some adjustments on numbers of the accounts on 2Q19, such as the USD8.1bn CAD, USD7.6 bn on financial account and 2.9% of CAD to GDP (from previous release they were recorded on USD8.4 bn, USD7.0 bn and 3.0%, respectively).


CAD was lower than our expectation at 2.9% of GDP

The USD7.7 bn of CAD, which is equivalent to 2.7% of GDP, was lower than our expectation at 2.9% of GDP since we saw that the increase of the export way lower than recorded and the payments side in primary income should be higher than BI recorded as it showed higher trend from last year. Based on the revised numbers, the current CAD was lower compared to the CAD on 2Q19 that reached USD8.1 bn (2.9% of GDP) and still lower compared to 3Q18 figures at USD8.5 bn (3.2% of GDP). Deeper, export on goods showed negative growth of -8.5% YoY and goods import at -12.0% YoY, resulting on trade surplus of USD1.25 bn. On general merchandise, non-oil and gas (non-OG) trade surplus declined from USD3.1 bn in 2Q19 to USD2.7 bn mainly due to sluggish commodities price. Meanwhile, OG sector trade balance remained deficit at USD2.2 bn despite it was better than 2Q19 figures deficit at USD3.0 bn. On service side, the deficit widened to USD2.8 bn (vs 2Q19 at USD1.9 bn deficit). Lower surplus on travel segment at USD1.4 bn (vs 3Q18 at USD1.6 bn) brought the service deficit higher though the government has promoted tourism utmostly over years. However, compared with the previous quarter, the travel segment showed an improvement as it recorded surplus of USD1.1 bn on 2Q19. Primary income deficit also widened to USD8.4 bn (vs 3Q18 at USD7.9 bn) due to the increase of interest and dividend payment in line with the increase of the increase of direct and portfolio investment from last year. However, from previous quarter, primary income showed an improvement as it recorded deficit of USD8.7 bn on 2Q19. Meanwhile, secondary income posted USD1.78 bn surplus in 3Q19, slightly higher than 3Q18 figure at USD1.77 bn but still lower than 2Q19 figure at USD1.99 bn.


Financial account surplus remained significant

Financial account maintained significant surplus at USD7.6 bn and showed slight increase from 2Q19 figure at USD6.5 bn. Seemed slowing down, direct investment declined to USD4.8 bn from USD5.4 bn on 2Q19. Meanwhile, portfolio account posted higher surplus at USD4.8 bn (vs 2Q19: USD4.6 bn). Lower foreign investment to public sector (3Q19: USD2.5 bn vs 2Q19: USD4.2 bn) became the main laggard in portfolio account surplus. In line, the capital inflow to government bonds showed a decline (3Q19: USD2.6 bn vs 2Q19: USD4.1 bn).


CAD at 3.0% of GDP in FY 2019

The global slow down due to trade war and softening China’s expansion made us maintain our CAD target of 3.0% of GDP. However, we see the probability of the CAD posted on lower level is likely to happen since 3Q19 CAD was way lower than we expected. Especially, the first phase of trade deal between US and China is no longer up in the air. We see a better outcome on next year trade performance if the trade war gets cool down. As the consequences, CAD will be same or even slightly under the permissible deficit limit on YE 2019 and Rupiah will streghten to Rp14,250/USD on average and Rp14,190/USD on YE 2019. Thus, BI can keep its chin up due to a stable Rupiah as it has a reason to hold the rate cut though we see BI will have another one more cut by 25bps to reassure the growth for next period above 5.0% so the BI-7DRRR may reach 4.75% on YE 2019.