Indonesia trade deficit raises risks ahead of elections, hits rupiah

Jakarta: Sliding exports pushed Indonesia's trade balance into its second biggest monthly deficit in five years in April, a surprise that renewed pressure on the fragile rupiah.

A shrinking current-account gap and moderating inflation had only recently boosted investor confidence in south-east Asia's largest economy ahead of presidential polls in July, making the rupiah Asia's best performing currency earlier this year.

But with data on Monday showing exports slipping due to softness in commodity prices, and further aggravated by the raw mineral export ban that went into effect in January, analysts say the possibility of any policy easing has diminished.

"We had expected a sharp deterioration in Indonesia's trade balance over April but the actual deterioration was truly shocking," said ANZ's Asia chief economist, Glenn Maguire.

He said export growth remained weak due to softer prices for key commodity and manufactured exports. And firm imports may be due to a combination of lagged foreign exchange effects and foreign direct investment inflows from a build-up in capacity.

"The external position is likely to remain negatively pressured in coming months if our assessment of these dynamics proves true," Maguire said.

The G20 economy has kept policy tight and taken steps to dampen imports to shrink the current-account deficit, which had ballooned last year and sparked capital outflows.

Inflation picked up in May but largely met forecasts, underlining expectations that Bank Indonesia will likely leave interest rates unchanged at its meeting on June 12 to continue bolstering the economy as growth slows.

Indonesia's trade balance slipped to a $1.97 billion (Dh7.23 billion) deficit in April, after two straight months of surpluses, confounding analysts' expectations for a $220 million surplus. The trade deficit was larger in July last year when it was $2.3 billion.

Exports in April dropped 3.16 per cent against expectations in a Reuters poll of 3.5 per cent growth. Imports slipped 1.26 per cent versus expectations for a bigger 7.7 per cent fall.

Analysts attributed import strength to an increase in shopping and purchases, as Indonesians prepare for celebrations after the Ramadan fasting month.

Wellian Wiranto, economist at OCBC Bank, said it underlines how import-intensive the Indonesian consumption story remains.

"Against a backdrop whereby political uncertainties build up ahead of the July 9th presidential election especially with the narrowing lead of Jokowi over Prabowo, today's trade data is not helpful to market sentiment towards Indonesia."

Next month, Indonesians will choose between Jakarta governor Joko "Jokowi" Widodo and former army general Prabowo Subianto to be president for five years, starting in July. Earlier, Jokowi was viewed as highly likely to win, but the contest has tightened and become heated.

The rupiah hit its weakest in more than three months on Monday, falling as much as 1 percent to 11,785 per dollar.

Deficit nerves

Gundy Cahyadi, an economist with DBS, said import growth was stronger than expected, suggesting the current account may continue to remain under pressure, although it still looked like the gap could still come in below 3 per cent of GDP this year.

Annual inflation in May picked up to 7.32 per cent from 7.25 per cent in April due to higher food costs, the data showed, but was near forecasts for 7.3 per cent. On a month-on-month basis, CPI was up 0.16 per cent.

Analysts mostly expect Bank Indonesia to keep rates on hold but maintain a hawkish bias as it stays watchful of inflation.

Bank Indonesia has indicated that it will continue to adopt a tight monetary policy this year to help stabilise the rupiah and to lower the current-account deficit to under 3 per cent of gross domestic product from 3.3 per cent in 2013.

It has maintained its policy rate at 7.5 per cent since December after increasing it by 175 basis points between June to November to support the rupiah.

Meanwhile, there is a chance the export outlook will brighten in the coming months as manufacturing activity surged to a record high in May, an HSBC Markit purchasing managers' index survey showed on Monday.


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