Robust domestic demand amidst global economic slowdown has affected Indonesia’s external performance. The Q2/2012 current account deficit widened to USD6.9 billion (3.1% of GDP) from the USD3.2 billion deficit (1.5% of GDP) in the previous quarter as the shrinking trade surplus was insufficient to compensate for the mounting deficits in the services and income accounts. On the non-oil and gas trade balance, the lower surplus was due to weakening export performance as demand subdued and global commodity prices drop while imports, especially raw material and capital goods, grew high in line with the strong domestic demand. The oil & gas sector also shared a negative contribution as the oil trade deficit still outweighed the gas trade surplus. On the services account, the rising deficit was mainly due to increases in freight payments on imports and numbers of Indonesian travelling abroad. Meanwhile, the augmenting income account deficit was due to increased profits and interest earned by foreign investors in keeping with steady expansion of their investments in Indonesia.

High investors’ confidence on the prospect of Indonesian economy boosted the capital and financial account to post significantly heftier surplus. In Q2/2012, the capital and financial account surplus went up to USD5.5 billion from USD2.5 billion in Q1/2012. Driving this increase were higher levels of direct investment, portfolio investment, and private foreign debt withdrawal. This condition had pointed towards a remained strong foreign investor’s confidence on Indonesia’s economic prospect and resilience amidst global economic uncertainty. Notwithstanding, the capital and financial account surplus was inadequate to compensate for the current account deficit. Consequently, the overall balance of payments experienced a deficit of US$2.8 billion. Meanwhile, the international reserves at the end of Q2/2012 was recorded at USD106.5 billion, equivalent to 5.7 months of imports and servicing of official external debt.¹

During the second half of 2012, the current account deficit is projected to subdue at around 2% of GDP and the overall balance of payments will return into surplus. The rate of decline in exports is expected to be smaller in the third quarter, followed by a positive growth in Q4/2012, while import growth is predicted to be lower in the second half of 2012. On the other side, the surplus of capital and financial account will be larger, both from FDI, portfolio investment, and draw down of foreign loans. As a result, the overall balance of payments will return into surplus. The projection is based on expectations of improvement in global economic conditions and higher export commodity prices in the second half of 2012. In addition, recent brisk expansion in investment activity and imports of capital goods is expected to boost the domestic economic activity and reduce dependence on imports.

The expected improvement in Indonesia’s balance of payments will also be supported by policy responses taken by Bank Indonesia and the Government. Bank Indonesia and the Government today had met and formulated policy measures to contain growing current account deficit. Bank Indonesia will take several measures to expedite adjustment to external balance through exchange rate policy, strengthening monetary operation, macroprudential policy to manage domestic demand, and policy to attract foreign capital inflows. On the Government front, various policies in fiscal, trade, industry, and energy, will be taken to promote exports and manage imports in order to to improve the health of Indonesia balance of payments. Detail explanation on those policy measures is accessible in the joint press release of the outcome of Coordination Meeting between Bank Indonesia and Government of Indonesia.

A complete report on the development of Indonesia’s balance of payments in Q2/2012 supplemented with statistical tables could be accessed in the Q2/2012 Balance of Payments Reports in the Bank Indonesia website.

Jakarta, 10 August 2012
Head of Office of the Governor

Dody Budi Waluyo
Executive Director

1). Total international reserves at the end of July 2012 were up slightly from to the end-Q2/2012 position, reaching USD106.6 billion.