Why Indonesia's current account deficits are bittersweet (Part 4 of 5)
Foreign exchange rate stabilization
In the minutes of its latest meeting, Bank Indonesia outlined several reasons why the account deficit is likely to narrow in the coming months.
The 1.25% rates hike will certainly help support the rupiah and offset the potential effects of a beginning of tapering.
Recently, the government changed the holding period of government bonds from six months to just one month. The action aims at strengthening liquidity management and boosting the efficacy of monetary operations as well as increasing the liquidity of the financial markets.
The latter especially should help in supporting the exchange rate. In general, the liquidity of Indonesia’s rupiah has been relatively low, which contributes to the account deficit widening.
Oil imports reduction
July’s account deficit amounted to $2.3 billion, yet a large part of the deficit was caused by the oil buffer built ahead of the Eid Muslim holiday. Going forward, oil imports will be lower.
Plus, as we saw in the first part of this series, the soft patch ahead for domestic consumption will lower oil demand.
Also, given the reduction of tensions between the United States, Russia (RSX), and Syria, oil prices have moved back down. But this effect may not last.
As imports decrease, the account deficit should narrow. Moreover, foreign direct investment as well as portfolio investments increased, which will also support a reduced current account deficit.
Browse this series on Market Realist:
- Part 1 - Foreign exchange weakness: The Achilles’ heel of emerging markets
- Part 2 - Why headline data paints a gloomy picture for Indonesia
- Part 3 - Hawkish rates action in Indonesia aims to shield the economy
- Bank Indonesia
- current account deficit