Trade surplus may persist but don’t ignore weak export growth in Indonesia

On Monday, the October trade data may provide another reason for those calling for a rate cut by Bank Indonesia (BI). The trade balance is likely to have recorded another surplus in October, bringing the year-to-date total near USD 8bn. Current account (C/A) deficit is trending circa 2% of GDP, a sharp improvement from 4.4% in mid-2013. 

Yet, despite the trade balance consistently in the surplus since Dec14, note that export growth is still deeply in the negative. What contributes to the trade surplus is weak import demand. If one were to believe that a recovery in domestic demand will be seen in 2016, the C/A deficit is likely to widen again. 

Until there is a significant, and sustained, recovery in export growth, external balances may remain weak. Not that the C/A deficit will widen back to 4% levels but it is likely to remain higher than net foreign direct investments, trending at around 1.5-2% of GDP currently. This may continue to put some external financing risks on the table, at a time when the US Fed seems committed to raise its interest rates. A rate cut by BI may be premature at this juncture, given the need to sustain stability in the financial system.