Why Indonesia's current account deficits are bittersweet

Part 2
Why Indonesia's current account deficits are bittersweet (Part 2 of 5)

Why headline data paints a gloomy picture for Indonesia

Indonesia’s GDP forecasts have been slashed down

Bank Indonesia has already cut its 2013 and 2014 GDP growth forecasts by 0.3 and 0.2 percentage points, respectively. The updated expected GDP growth for 2013 is 5.5% to 5.9%—down from the 5.8% to 6.2% that is now the forecast range for 2014’s growth.

Why headline data paints a gloomy picture for IndonesiaEnlarge Graph

The cut in the forecast is once again the government acknowledging that lower growth is acceptable since the priority now is keeping inflation down and taking control of the foreign exchange rate.

Reduced household spending

The cut in forecast, however, was expected given recent macroeconomic date. Both retail sales and consumer confidence were down, implying a contraction in household spending in the second half of 2013.

Investment to contract

Plus, non-construction investment is also expected to contract, as hinted by several macro data points:

  • Capital goods imports slowed.
  • Heavy equipment sales contracted.
  • Manufacturing power consumption decreased.

Commodity prices are hurting trade

Indonesia’s commodities are a key component of its international trade. Given China’s slowdown, the prices of many key commodities for Indonesia’s economy have dropped. Mainly, coal, gold, and palm oil all edged lower over the past few weeks, resulting in lower exports.

However, recent government action may offer some hope of controlling the account deficit.

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