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ECONOMIC UPDATE – BoP review - CAD Broke The Safe Limit


CAD Broke The Safe Limit


BoP continued to post deficit

Bank Indonesia (BI) reported that Indonesia’s Balance of Payment (BoP) continued to be in deficit territory of USD -4.0 bn, making 1H18 BoP was on USD -7.4 bn deficit. However, thanks to financial account which came higher than estimate surplus, deficit in BOP  was lower than our previous estimate of more   than USD 5 bn.  We view that 100 bps rate hike in May-June helped to maintain the competitiveness of Indonesia’s financial market and prevent deficit higher in financial account.       


CAD broke the “safe limit” of 3% of GDP

Current account deficit (CAD) was reported at USD 8.0 bn or 3.04% of GDP. This level was the yellow sign for authority to fix fundamental problem in current account as the CAD broke the safe limit of 3%. Goods trade posted lower surplus of USD 289 (vs 1Q18 surplus at USD 2.3 bn), mainly due to lower non oil and gas surplus at USD 3.2 bn (vs 1Q18; USD 4.4 bn). According to BI data, export grew at 11.7% YoY and import grew at 26.6% YoY due to higher domestic demand as showed by higher GDP growth in 2Q18 at 5.27% YoY. 2Q18 usually become the seasonal peak of deficit in service trade and primary income. It was seen on 2Q18 primary income deficit at USD 8.2 bn, higher than 1Q18 deficit at USD 7.9 bn but lower than 2Q17 deficit at 8.3 bn. Higher primary income deficit peak usually happen in 2nd quarter and 3 rd quarter due to interest and dividend payment. However, we are quite surprise on service trade deficit at USD 1.8 bn. Although it is higher than 1Q18 deficit at USD 1.6 bn, the service trade posted lower deficit from 2Q17 position at USD 2.2 bn. This is the lowest service trade deficit since 2005, thanks to improvement in travelling (mainly driven by tourism) sector (see exhibit 2). Secondary income balance also posted higher surplus at USD 1.6 bn, helping to ease CAD. However, better performance from service trade and secondary income cannot compensate lower surplus from goods trade balance.


Financial account: positive impact from rate hike

Financial account posted surplus at USD 4.0 bn, higher than 1Q18 surplus at USD 2.4 bn amidst pressure from global, especially FFR hike expectation and US trade war. Portfolio account was back to surplus at USD 53 mn (USD 1Q18: USD – 1.1 bn) and other investment posted USD 1.5 bn surplus (1Q18: USD 0.6 bn). We see it as the result of 100 bps policy rate hike in May – June. Although BI noted USD 1.8 bn capital outflow from equity market, it was compensated by significant foreign inflow to corporate bonds at USD 2.3 bn. Furthermore the rate hike also increased the other investment account, especially to money and saving account as the interest rate became more competitive compared to regional. However, lower direct investment surplus at USD 2.5 bn (vs 1Q18 USD 2.9 bn), signaled a yellow light, which was mainly driven by lower foreign investment which posted lower surplus at USD 3.5 bn (vs 1Q18 USD 3.6 bn). This is in line with lower investment growth data in GDP which only 5.87% YoY, compared to above 7% growth in previous 3 quarters. 


CAD at 2.5% of GDP, expect another 50 bps rate hike due to Turkey Lira crisis

We believe CAD will stay at around 2.5% - 3.0% of GDP in 3Q18 before ease in 4Q18 due to seasonality. July trade balance data will be the preliminary sign of CAD condition in 3Q18, requiring our attention amidst Turkey potential crisis and trade war escalation condition. As of Aug 10, Lira has depreciated 64% YTD giving further pressure to emerging market currency as investor consider to pull back their money to safe haven. We predict another pressure wave for Rupiah in 2H18 beside the trade war escalation. Should the Lira depreciation not ease, we will move to our pessimistic case of Rupiah at Rp 14,750 in YE 2018. However, currently we are raising our policy rate forecast by 50 bps to 5.75% in YE 2018. If Turkey Lira crisis is worsen and trade war escalate even further, we expect central bank will not hesitate to increase policy rate by 100 bps given its hawkish stance to maintain stability.