INDONESIA BALANCE OF PAYMENT RELEASE: Q2 20191  Indonesia posted a current account deficit (CAD) of USD 8.4 billion in Q2 2019, up from USD 7.0 billion in Q1. On a four-quarter rolling sum basis, the CAD remained unchanged from Q1 at 3.1 percent of GDP.2  The goods trade account posted a smaller surplus of USD 0.2 billion compared to USD 1.2 billion in Q1. Although imports contracted, exports contracted more partly because of lower prices of key commodities. Meanwhile, both services and income account deficits widened in Q2.  The financial account surplus narrowed to USD 7.1 billion in Q2 from USD 9.9 billion in Q1, on the back of lower foreign capital inflows in the form of lower portfolio inflows and larger outflows of other investments. The latter was due to large external debt repayments of both private and government debt.  Indonesia’s overall Balance of Payments (BoP) returned to a deficit of USD 2.0 billion in Q2 from a surplus in the previous two quarters, which led foreign reserves to decline to USD 123.8 billion in Q2 from USD 124.5 billion in Q1. The CAD widened to USD 8.4 billion in Q2 2019 from the USD 7.0 billion deficit posted in the previous quarter (Table 1 and Figure 1). The wider deficit was mainly driven by the seasonal increase in primary income payments from repatriated dividends, larger service interest payments on external debt of USD 11.0 billion, as well as a marginally wider deficit in trade services of USD 2.0 billion. A significantly smaller surplus in the goods trade account also contributed to the larger deficit (Figure 2). On a four-quarter rolling sum basis, the CAD was flat at 3.1 percent of GDP in Q2, halting the sequential worsening of the CAD since Q4 2017. The weak surplus in the goods trade balance was driven by slowing in both goods exports and imports due to unfavorable global economic conditions and lower commodity prices. Goods exports continued to shrink to 8.4 percent yoy in Q2 after declining by 7.1 percent in Q1. The slowing of goods exports was broad-based, partly due to Indonesia’s subdued price of the key export commodities3 and weakening demand from Indonesia’s major trading partners4 (Figure 3). The contraction of exports was driven by lower export values of oil and gas, coal, processed commodities (palm oil, rubber, and wood) and textile, clothing, and footwear, which was partially offset by larger exports of paper products, motor vehicles, and gold articles. With regards to Indonesia’s main commodity exports,5 the slowing in coal exports was partly due to lower demand from India and Japan for Indonesian coal. Similarly, palm oil export values dropped by 17.9 percent yoy in Q2, to the lowest since Q2 2016, due to lower exports to several Asian countries such as India;6 and the EU imposition of the crude palm oil export ban since May 2019.7 Goods imports value contracted again in Q2 by 8.4 percent yoy, nearly double the rate of the 4.8 percent decline in Q1. The contraction in goods imports was broad-based within economic categories, as consumption, raw materials, and capital goods decelerated to 10.8 percent, 7.1, and 8.7 percent, respectively (Figure 4). The decline in the import of raw materials was partly driven by a drop in crude oil and oil product imports of 30.9 percent and 12.3 percent, respectively, partly due to the B20 policy.8 Declining consumption good imports was broadly in line with higher tax rates for selected imported consumer goods.9 Capital and intermediate goods imports also contracted, consistent with slower investment growth, particularly investment in transport equipment. 1 Prepared by Magda Adriani, reviewed by Derek Chen and cleared by Frederico Gil Sander. 2 Computed as the sum of the CAD over the past four quarters, divided by GDP over the past four quarters. As a share of Q2 GDP, the Q2 current account stood at 3.0 percent. 3 Prices of Indonesia’s main commodity exports, which include coal, crude oil, palm oil, rubber, and base metals, contracted on average 8.2 percent yoy in Q2 2019. 4 World Bank projections of average growth of MTP nations moderated in 2019 to 3.1 percent from 3.2 percent in 2018. Major trading partner economies consist of China, Japan, United States, India, Singapore, Korea, Malaysia, Philippines, Thailand, Vietnam, Netherland, Australia, and Germany. 5 Indonesia’s coal, palm oil, and textile products exports contribute to nearly 15, 12 and 8.1 percent of total non-oil and gas. 6 CPO exports to India weakened due to the 40 percent import tariff implemented since March 2019. 7 The European Commission set a rule to prohibit the import of CPO to EU countries in response to Indonesia’s policies for the use of CPO as a raw material for biofuel. 8 Government mandated the use of B20 in September 2018, the government has initiated policies of encouraging the use of B30, conversion of diesel power plants to palm oil powered generations, as well as feeding refineries with palm oil to produce diesel fuel. 9 https://finance.detik.com/berita-ekonomi-bisnis/d-4197331/sri-mulyani-pengendalian-900-komoditas-impor-tekan-daya-beli Both the services trade deficit and income accounts deficit widened in Q2 to USD 2.0 billion and USD 6.7 billion, respectively. The services trade deficit was slightly larger was partly driven by smaller travel service surplus10, on the account of the greater number of Indonesian traveling abroad and less spending by foreign tourists in Indonesia. The latter was in turn partly due to the weaker Rupiah, despite a larger number of foreign tourists in Q21112. The wider deficit in the income account was driven by the seasonal repatriation of dividends and larger service interest payments on external debt13. Foreign direct investment (FDI) moderated to USD 5.8 billion in Q2 from USD 6.2 billion in Q1, (Q2 2018: USD 6.1 billion) (Figure 5)14. Manufacturing remained the main destination for FDI flows, followed by the financial intermediation and mining and quarrying sectors, which altogether accounted for almost 90 percent of total FDI in Q2. The large FDI inflow in the manufacturing and financial sectors was driven, respectively, by capital acquisition of domestic paper companies and commercial bank by non-residents. Indonesia’s net direct investment (direct investment in Indonesia less Indonesia’s direct investment abroad) edged up to USD 5.4 billion in Q2 from USD 5.3 billion in Q1. Over the first half of the year, net direct investment covered less than 70 percent of Indonesia’s CAD resulting in a continued deficit in the ‘basic balance’ (Figure 1). The financial account surplus declined to USD 7.1 billion in Q2 from USD 9.9 billion in Q1, on the back of lower portfolio inflows and larger outflows of other investment. Portfolio inflows moderated to USD 4.5 billion from USD 5.4 billion in Q1. Portfolio flows were supported by the issuance of government global bonds in the form of Samurai bonds in May 2019 and Dual Currency bonds in June 2019, the foreign purchase of government bonds (Surat Utang Negara, SUN), as well as strong equity inflows (Figure 6). Other investments outflows rose to USD 2.8 billion in Q2 from USD 0.8 billion in Q1 (Q4 2018: surplus of USD 3.6 billion), driven by external debt payments by both governmental and private sectors. Due to a widening in the current account deficit and narrowing financial account surplus, Indonesia’s Balance of Payments (BOP) posted a deficit of USD 2.0 billion in Q2 2019 (0.7 percent GDP). Therefore, Indonesia’s international reserves declined at the end of June 2019 to USD 123.8 billion from USD 124.5 billion as of March 2019, sufficient to finance Government external debt repayments and imports for 6.8 months. Table A.1 Indonesia’s Balance of Payments (BOP), in USD billion, unless otherwise indicated 2018 Q2 2018 Q3 2018 Q4 2018 Q1 2019 Q2 2019 Nominal GDP 1,042 263.8 262.9 256.8 267.7 278.1 Overall Balance of Payments (7.1) (4.3) (4.4) 5.4 2.4 (2.0) As percent of GDP (0.7) (1.6) (1.7) 2.1 0.9 (0.7) As percent of GDP, four-quarter rolling sum (0.7) (0.2) (1.1) (0.7) (0.1) 0.1 Current Account (31.0) (7.9) (8.7) (9.2) (7.0) (8.4) As percent of GDP (3.0) (3.0) (3.3) (3.6) (2.6) (3.0) As percent of GDP, four-quarter rolling sum (3.0) (2.2) (2.6) (3.0) (3.1) (3.1) Goods Trade Balance (0.4) 0.3 (0.5) (2.6) 1.2 0.2 Services Trade Balance (7.1) (1.8) (2.0) (1.6) (1.9) (2.0) Income (23.5) (6.4) (6.2) (5.0) (6.3) (6.7) Capital and Financial Accounts 25.0 3.1 3.9 15.8 9.9 7.1 As percent of GDP 2.4 1.2 1.5 6.1 3.7 2.5 As percent of GDP, four-quarter rolling sum 2.4 2.1 1.6 2.4 3.1 3.4 Direct Investment 13.4 2.4 4.5 1.8 5.3 5.4 Portfolio Investments 9.3 0.1 (0.1) 10.5 5.4 4.5 Other Investments 2.1 0.6 (0.6) 3.6 (0.8) (2.8) Source: Bank Indonesia, World Bank staff calculations 10 The export and import travel service balance was based on foreigners visiting Indonesia’s tourist destinations and Indonesians going abroad, whereas the travel service mainly comprised passenger and freight cost. 11 Indonesia Rupiah to USD in average Q2 2019 was 14,254 and Q1 2019 was 14,136. 12 Foreign tourists into Indonesia increased to 3.1 million in Q2 2019 from 2.9 million in Q1 2019. 13 The service trade deficit was wider in Q2 2019 than in Q2 2018 partly because of the greater number of Indonesians traveling abroad this year. The deficit in primary income was wider in Q2 2019 than in Q2 2018 partly due to less dividend received and higher interest payments on equity and investment fund shares to non-residence. 14 Laporan Neraca Pembayaran Indonesia Q2 2019. Figure 1: Overall balance of payments posted a deficit as Figure 2: Current account deficit widened in Q2 in line with deficit in current accounts offset by surplus in direct and slower global trade, lower commodity prices, and structural portfolio investment constraints in Indonesia’s exports. (USD billion) (USD billion) Current account Direct investment Goods Trade Services Trade 20 Portfolio investment Other investment 8 Income Current account balance Overall balance Basic balance 15 6 4 10 2 5 0 0 -2 -4 -5 -6 -10 -8 -15 -10 Jun-16 Jun-17 Jun-18 Jun-19 Jun-16 Jun-17 Jun-18 Jun-19 Source: Bank Indonesia; World Bank staff calculations Source: Bank Indonesia; World Bank staff calculations Note: Basic balance is the sum of the current account and direct investment Figure 3: Exports continued to deteriorate… Figure 4: … while imports contracted in all categories. (contributions to growth, yoy) (contributions to growth, yoy) Others Automotive & computers Other Fuel Textile, clothing & footwear Processed commodities Capital Raw materials net of fuel Other mining Coal Consumer goods net of fuel Imports 30 Oil and gas Total exports 25 20 20 15 10 10 5 0 0 -5 -10 -10 Jun-17 Jun-18 Jun-19 Jun-17 Jun-18 Jun-19 Source: Bank Indonesia; World Bank staff calculations Source: Bank Indonesia; World Bank staff calculations Figure 5: FDI moderated slightly in Q2 2019 while the Figure 6: … with strong inflows from government bonds manufacturing sector remained its main destination… and equity (USD billion) (USD billion) Other Financial Intermediation Equities SBI Wholesale and retail trade Manufacturing SUN Gov. global bonds Mining and Quarrying Agricultre and forestry Main net portfolio inflows 9 Total 5 7 3 5 1 3 1 -1 -1 -3 -3 -5 -5 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Source: Bank Indonesia; World Bank staff calculations. Source: Bank Indonesia; World Bank staff calculations Note: Sertifikat Bank Indonesia (SBI) and Surat Utang Negara (SUN) are local currency bonds