Tuesday, January 15, 2013

Balance of Payments and current Economic, financial conditions in Indonesia in the beginning of 2013:


The balance of payments in Indonesia like in any other country in the world records all the transactions between the country and the rest of the world over a period of time. The Bank of Indonesia is issuing a report quarterly showing the evolution of the balance of payments with details regarding the current and capital accounts and its implications.

In the analysis of the balance of payments in Indonesia, I will focus on the last 4 quarters (from Q3 2011 to Q2 2012) and analyze the effects of global and domestic Economic and financial conditions related to the change in the balance of payments in details. 
Click To enlarge the Graphs and tables

1)      Current Acccount:

The current account deficit in Indonesia has increased throughout the past 4 quarters, indeed for the Q2/2012 it has reached about $6.9 billion (-3.1% of GDP), the main cause of this increased deficit is the consequence of a deteriorating non-oil and gas trade balance, with a significant stagnation in exports from global uncertain perspective regarding the euro-crisis, and increasing imports.

1.1)            Goods and Services Balance:

·         The non oil and gas trade surplus have narrowed to $2.2 billion, from the reduction in exports and increase in imports due to the unsolved Euro crisis and the slow economic recovery in the United states which has affected Indonesia both directly and indirectly as it has also reached Indonesia major trading partners such as China or India,  resulting in a lower demand for Indonesian export products.

·         On the other hand the oil exports have also contracted throughout the past quarters and continue to have a negative contribution to the current account. Moreover the price per barrel has decreased since the beginning of 2012 from the weakening global outlook and decrease in manufacturing activities in China.The gas exports have recorded the slowest growth for years for the same reasons as the reduction in exports, but Indonesia’s gas production is expected to rise for the next few years as several large-scale projects will begin operations.

·         The service trade balance is still in deficit moving in a range from -$2 billion to -$3.2 billion for the last 4 quarters, the deficit comes mainly from an increasing deficit in transportation due to expenditures from the Indonesian government on transportation facilities as the country is not considered as the same level as other ASEAN countries in this area, while the surplus from travel is diminishing especially from the seasonal trend.

1.2)            Income Account:

The income account is still in deficit but it has reduced since the beginning of Q3 2011, from the steady expansion in foreign direct investment (FDI) , and the strong performance of domestic companies in which foreign investors hold shares.

1.3)            Transfer Payments:

The current transfers have been stable other the past few years but slightly decreasing, due to a reduction in the deployment of Indonesian migrant workers abroad while the number of expatriates in Indonesia has been increasing especially for highly paid executives.
The amount of migrant workers is on average 95,000 per quarter, with a majority of them heading to the neighboring Malaysia while the rest stays in south-east asia mostly Hong Kong or Singapore and middle eastern region.

1)      Capital and Financial Accounts:

The capital and financial accounts have been increasing over the last 4 quarters to reach a $5.5 billion surplus in Q2 2012, this development reflects the confidence from foreign investors in Indonesia economy’s outlook despite the worsening economic conditions in the world, indeed we can see  on the table that the increase in direct investment accounts for a major part of the surplus.

2.1) Direct Foreign Investment:

Foreign direct investment have kept pouring into the Indonesian market throughout the year, registering a $3.7 billion surplus for Q2 2012, the fact that FDI surplus is lower this quarter is explained by the higher dividend payouts especially in the oil and natural gas production sharing contractors with offshore parents companies.

On the other hand Indonesia’s direct investment abroad has recorded a “disinvestment” due to the fact that a lot of holding companies have been created in Indonesia to offshore subsidiaries.

2.2) Portfolio Investment:

Inflows of foreign portfolios started pouring into Indonesia since Q3 2011, this increase is mainly due to the massive buying of foreign currency global bonds issued by the government and private sector, despite the fact that foreigner  holdings of rupiah-denominated securities, were concerned by the expectations of rupiah depreciation.

Moreover the deteriorating global conditions have lead to a lack of interest from foreign investors on the domestic stock market, recording a net sales of $875 million during the last quarters.

2.3) Other Investment:
Other investments were on deficit  for the past 4 quarters, this increased deficit can be explained bu the higher private sector deposit offshore explained by the rise in portfolio inflows.

Regarding the asset side, other investment of private sector recorded a deficit for the last 4 quarters, while the liabilities side shows a strong surplus



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