"Bank Indonesia’s policy mix, supported by the Government’s fiscal financing policy, mitigated the negative impact of worsening global economic and financial conditions on Indonesia's balance of payments (BOP)," said the Governor of Bank Indonesia, Agus D.W.Martowardojo, in response to the publication of the latest balance of payments statistics which showed reduced BOP deficit from U.S.$6.6 billion in the previous quarter to U.S.$2.5 billion in Q2/2013. This improvement was supported by the capital and financial account that had returned to surplus after recording a substantial deficit in the previous quarter. On the other hand, following its seasonal pattern, the current account deficit widened compared to the previous quarter. In line with the balance of payments deficit, international reserves at the end of June 2013 fell to U.S.$98.1 billion. Nevertheless, this level of international reserves was sufficient to finance import payments and servicing of government external debt for 5.4 months,hence remain above the international standards of adequacy.
Seasonal factors and declining export commodity prices led to larger current account deficit. Current account deficit increased from U.S.$5.8 billion (2.6% of GDP) in the previous quarter to U.S.$9.8 billion (4.4% of GDP) in Q2/2013 due to shrinking non-oil & gas trade surplus and widening services and income deficits. Non-oil & gas trade surplus narrowed as imports, especially imports of raw materials and consumption goods, increased in relation to Q2 domestic consumption that historically was always higher than Q1. On the contrary, improvement in non-oil & gas export performance was hampered by declining commodity prices in the international market due to China economic slow down. The services account deficit widened due to increased payments for transportation of goods in line with imports and more residents traveling abroad during the school holidays. In the same period, the income account deficit also widened as foreign debt interest payments and profit transfers to foreign investors increased in accordance with schedules. Meanwhile, oil and gas trade deficit eased compared to the previous quarter.
In the midst of global financial market turmoil, Bank Indonesia’s policy responses and Government’s fiscal financing strategy helped restore the capital and financial account surplus. After a deficit of U.S.$0.3 billion in the previous quarter, capital and financial account turned into surplus of U.S.$8.2 billion in Q2/2013. This improvement was contributed by, among other, increased foreign direct investment (FDI) inflows which indicate the continued strength of investor confidence in the fundamentals and prospects of the Indonesian economy. In addition, foreign portfolio investment still recorded a significant surplus amid a substantial outflow in June 2013 triggered by the US Fed’s plan to end its loose monetary policy. This improvement was supported by pre-emptive measures taken by Bank Indonesia against rising inflation expectations through increased FASBI and BI rate, the Government’s decision to issue foreign currency bonds as a source of fiscal deficit financing, and increased corporate global bond emissions. Another contributor came from other investments, primarily in the form of withdrawal of domestic bank's deposits held abroad. Banks withdrew part of their deposits abroad to meet their customers' needs and also to benefit from Bank Indonesia’s deposit facility in the form of foreign exchange term deposit instruments and hedging facility in the form of foreign currency swap instruments.
Agus D.W. Martowardojo added, "In Q3/2013 improvement in the global economic and financial conditions and domestic economic slowdown are expected to support our efforts to improve Indonesia’s external balance." Following its seasonal pattern, current account deficit in Q3/2013 will be much lower than that in Q2/2013. In addition, global economy and commodity prices recuperation will have a positive impact on the non-oil & gas export performance. Slowing domestic economic growth and the exchange rate that has been depreciated to its economic fundamentals will withstand acceleration of imports and reducing the services account deficit. On the capital and financial account, Q3/2013 surplus is predicted to remain copious. Although the growth of FDI tends to slow down, its value is expected to be higher than Q2/2013 following its historical trend. The turmoil in global financial markets that has begun to subside will reduce the outflow of foreign portfolio investment as occurred substantially in June. In fact, foreign investmentsto Government debt securities and domestic stocks havebeen returning since July to mid-August 2013.
More complete information and data are presented in the Q2/2013 Balance of Payments Report (Indonesian version) on the Bank Indonesia website.
Jakarta, 16 August 2013
Note: The Q3/2013 Indonesia balance of payments statistics will be published on 13 November 2013.