Despite a widening current account deficit in the fourth quarter of 2018, Indonesia's central bank is unlikely to hike its policy rate further "as long as foreign exchange supply from capital inflows can cover (it)", said Citi economist Helmi Arman in a Feb 10 note. Bank Indonesia's next policy meeting is set for Feb 20 to 21.
Ahead of the Apr 17 elections, "policymakers are clearly focused on growth preservation and reversing any negative sentiment that may have emerged when IDR hit 15K/US$ late last year", said Mr Helmi. He expects this focus to continue being reflected in the central bank's foreign exchange policy, which apparently favours allowing or amplifying the appreciation of the rupiah on the back of capital inflows.
In the fourth quarter, Indonesia's current account deficit widened to 3.6 per cent of GDP annualized, up from 3.3 per cent in the preceding quarter. This took the full-year current account deficit to 3 per cent of GDP, almost twice 2017's figure of 1.6 per cent.
The deteriorating trade balance was "of no surprise" to Citi, and was in fact less severe than Citi's projection of 4 per cent of GDP. Citi attributed the difference to higher than expected year on year increases in tourism revenue, incoming worker remittances, and investment income of domestic companies.
Of these, the rise in worker remittances seems the most sustainable amid government efforts to boost the placement of Indonesian migrant workers, said Mr Helmi. Remittances helped improve the current account deficit by about 0.2 per cent of GDP in 2018, with further upside visible in 2019.
Citi sees the current account deficit's quarterly trajectory as determined largely by the trade balance, which in turn hinges on commodity exports and the peak of the infrastructure import cycle. Citi's base case is for exports to be "generally soft" in the first half of 2019, while imports "could stay elevated as consumption growth is propped up ahead of the elections". Infrastructure imports are also not expected to subside materially until the second half of the year.
Citi's projection is for the current account deficit to fluctuate towards 3 per cent of GDP in Q1 and 3.5 per cent in Q2, before falling towards 2 per cent in the second half as domestic demand softens. "Given a positive near-term outlook for capital inflows, the balance of payments may see surplus in Q1 but more caution is warranted in Q2," said Mr Helmi.
From a structural perspective, slowing tourism revenue growth in 2018 "highlights how recurring natural disasters could become a headwind to the government’s tourism drive", he noted. It therefore remains imperative for Indonesia to attract export-oriented FDI, he said, adding that progress on this remains lagging compared to other Asean countries, except in a few industries such as basic metals.