Indonesia Trade Picture Signals Worsening Economy
Rieka Rahadiana and Neil Chatterjee
Indonesian exports and imports fell the most in three years in August, suggesting weakening third quarter growth for Southeast Asia’s biggest economy that is likely to lead the central bank to keep benchmark interest rates at a record low all year.
Trade imbalances in recent months have been a concern for investors and although the unexpected drop in imports produced a slight trade surplus, economists now worry that Indonesia could finally be showing cracks from the global downturn, joining other major emerging markets.
The country’s exports, 70 percent of which are commodities, tumbled 24 percent in August from a year earlier, twice as much as forecast and the worst drop since June 2009. Export orders for September also fell, according to the HSBC purchasing managers’ index (PMI), showing the weakness is likely to be sustained.
Imports fell 8 percent, the first year-on-year drop for a month since November 2009.
“The trade figures clearly mean that we should expect a marked slowdown in growth during the second half of the year,” said Gundy Cahyadi, an economist at OCBC Bank in Singapore. “Of particular concern would be the import growth figure, as it indicates that domestic demand may be moderating further into the year-end.”
Until now, buoyant domestic demand from emerging middle-class consumers and rising foreign investment have kept Indonesia’s economy motoring along at more than 6 percent growth this year. However, surging imports led to a record trade deficit in June that hurt the rupiah.
“Today’s data releases should partly assuage over-heating and current account shortfall concerns,” said Radhika Rao, economist at Forecast, though she added that the rupiah “will remain on the backfoot.”
The currency, emerging Asia’s worst performer in 2012, eased 0.2 percent on Monday. For the year, it has lost more than 5 percent against the dollar.
The export weakness in August was led by oil products, which fell 38 percent month-on-month, the statistics bureau said.
For four consecutive months through July, Indonesia reported trade deficits. In August, there was a surplus of $250 million, as trade with European Union nations improved, though Indonesia continued to have a deficit with its largest trade partner China, the bureau said.
“The surplus is not yet stable,” said Satwiko Darmesto, a director at the statistics bureau, adding that the trend on imports was not yet clear.
Ramadan festivities, when consumption usually rises, in July and August this year may have affected the data. In July, there was a trade deficit of $180 million.
Manufacturing activity in Indonesia slowed in September from a month earlier to record only a slight expansion, the HSBC PMI showed. Asia’s manufacturers are continuing to struggle in the face of tepid demand from the United States and Europe.
A Reuters poll before the fresh Indonesian data saw August exports falling 12.3 percent from a year ago, due to weak demand from China. The poll had expected imports to rise 7.8 percent from a year earlier.
The weak trade picture, plus milder-than-expected inflation figures that were also released on Monday, mean Bank Indonesia (BI) will try to prop up domestic credit growth by keeping its benchmark rate steady at a record low 5.75 percent, and may use other tools to support the rupiah.
The central bank has lessened its intervention in recent weeks to allow the rupiah to slip below 9,500 per US dollar, market players say. It has also moved to pop potential bubbles in vehicle loan financing by increasing mandatory downpayments.
This has led motorbike sales to fall for months, though the central bank’s consumer confidence index picked up in August and other economic data does not confirm a drop in demand just yet.
Economists still expect BI to effectively tighten policy by the year-end by lifting the deposit facility rate — the bottom range for its monetary operations — to absorb liquidity.
“We think BI will likely continue tightening by lifting the deposit facility rate gradually over the next few months to 4.75 percent [from the current 4 percent] by the middle of next year, but may choose not to move this month given the improvement in the trade balance,” said Chua Hak Bin, economist at Bank of America Merrill Lynch.