Indonesia challenged to pare current account deficit despite oil price 'windfall'

JANUARY 10, 2019 - 11:32 AM

FALLING oil prices could be “an unexpected windfall” for Indonesia, which is running a current account deficit - but the country still faces unique challenges in chipping away at that deficit.

That’s according to Sanjay Mathur, chief economist for South-east Asia and India at ANZ, who pointed the finger at structural weakness in the income and services component.

 “In Indonesia, not only are remittance flows small but dividend and interest payments on the stock of foreign direct investment (FDI) and portfolio liabilities are also substantial,” he said.

“From the international investment position of Indonesia, we observe that the stock of portfolio liabilities has rapidly grown and is now larger than the stock of FDI.

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“The problem is that, unlike dividend payments on direct investment, which tend to co-vary with the business cycle dynamics, interest payments on the stock of debt liabilities tend to occur at regular intervals. And, indeed, this problem is well reflected in the rise in the ratio of income outflows to the stock of direct and portfolio investment liabilities.”

Based on Indonesia’s reliance on oil imports and its sensitivity to crude prices, Mr Mathur’s team believes that stable oil prices of US$55 a barrel could cut the current account deficit by 0.44 per cent of the gross domestic product (GDP) in 2019.

But the question is whether any further reduction of the deficit is even possible, he added, especially without a sharp slowdown in domestic demand.

Mr Mathur said: “Assuming no change in the services and income balance, the trade surplus will need to rise to 3.2 per cent of GDP in 2019, from 0.5 per cent in Q3 2018, to balance the current account -  in turn warranting a substantial squeeze in imports.”