Indonesia’s trade surplus widens sharply in June on contracting imports

Indonesia’s trade surplus widened sharply to USD 900 million in June, as compared with USD 374 million recorded in May. It was more than the market projections of a trade surplus of USD 212 million.

The sharp increase in trade surplus is mostly due to import compression, which is because of imports contracting at a rapid pace.

Imports dropped 7.41 percent year-on-year to USD 12.02 billion, as compared with consensus forecast of 10.10 percent. Meanwhile, exports dropped 4.42 percent to USD 12.92 billion, as compared with consensus projection of 12.4 percent drop.

June’s data implies that domestic demand continues to be sluggish. May’s print was already worrisome as it recorded weak import growth that should have rebounded ahead of the Ramadan, said ANZ in a research report.  Capital expenditure continued to be weak, as it was clear in the growth in capital goods imports. However, it is expected to start rebound later in 2016, according to ANZ.

The implementation and timing of infrastructure programs and public works is expected to be an important determinant of import growth. Recent signs of higher coordination between important government policy agencies and departments imply that the value-added component of the imports basket is expected to rise as significant infrastructure programs and public works are accelerated, said ANZ.

It is evident that the easing of monetary policy requires doing the heavy lifting, especially with the restricted fiscal space given for the revised budget. Domestic demand in Indonesia continues to be subdued, while an external-led demand is absent. There is sufficient space of the central bank to ease policy that is provided by the dovish tone of the US Fed and persistent benign inflation outlook.

According to ANZ, the upward revised loan growth target of 12 percent to 14 percent is not expected to be met, with year to date lending growth still declining below the earlier lending target of 10 percent to 12 percent. This requires additional reductions in the central bank’s rate path and also the lending rates in order to attain the new targets.

“For the upcoming Bank Indonesia (BI) meeting on July 21, we are pencilling a 25bps cut with the BI rate to reach 6.25 percent from 6.5 percent. This is in addition to another 25bps cut in lending rate. Furthermore, given liquidity constraints, we are also pencilling a 50bps cut in reserve requirement ratio to boost the available liquidity in the system”, added ANZ.