0 Indonesia’s Trade Deficit, Inflation Nag While Economy Team in Flux

Indonesia’s trade balance stayed in deficit in January and inflation last month hit a 20-month-high, underlining the top challenges for the government after the president abruptly announced plans to change its finance minister and central bank chief. Investors, rattled by record trade deficits in the past year and now facing uncertainty over monetary and fiscal policy in Southeast Asia’s top economy, pushed the rupiah down 0.2 percent after the higher-than-expected inflation data on Friday. 

Despite the nagging worries, particularly over the external deficits, foreign investors have bought into Indonesia’s strong growth story and have shown little reaction to President Susilo Bambang Yudhoyono’s sudden announcement that he wants to move Finance Minister Agus Martowardojo to run the central bank. Despite the lack of clear explanation for the changes or who might be the new finance minister, market sentiment has been little affected. The Jakarta stock exchange’s main index rose 7.7 percent in February, its biggest gain since September 2010. 

And net inflows into the bond market since the beginning of the year rose 7.3 percent by Feb. 26. Bank Indonesia’s current governor Darmin Nasution will step down in May. It is unclear who will replace Martowardojo, if his appointment is approved by a parliamentary commission expected to meet in the second half of March.   Martowardojo has denied he was being pushed out of his job, after speculation he was being shifted to the central bank because he had crossed swords with politically powerful businessmen.   

Should Martowardojo move to the central bank, one of his priorities will be keeping a lid on inflation, as rising food prices pushed the annual rate to 5.31 percent in February, versus a forecast 4.81 percent. But core consumer prices, showing a rise of 4.29 percent, were contained and should give the central bank leeway to keep its benchmark policy rate steady at a record low of 5.75 percent when its policymakers next meet on March 7. “We believe that Bank Indonesia will not change the BI rate because of manageable inflation looking ahead,” said Andry Asmoro, economist at Bank Mandiri in Jakarta. 

“The exports contraction was lower due to better demand from developed countries...We expect exports will remain under pressure on global uncertainty,” said Asmoro.   The trade gap narrowed slightly in January as exports posted their smallest fall in nearly a year, reflecting recovering global demand and providing some hope that the nation’s external balances may improve in 2013. The G20 economy had a sizable current account deficit and its first-ever annual trade deficit in 2012, as exports fell due to weak overseas markets and as the higher price of crude oil bumped up the import bill.

The twin deficits have put downward pressure on the rupiah, making it the worst-performing emerging Asian currency in 2012, when it fell about 6 percent against the dollar.      According to the statistics bureau, the country had a trade gap of $170 million in January, compared to a revised $190 million deficit a month earlier and a Reuters’ poll median projection for a $210 million deficit. In January, exports fell 1.24 percent from a year earlier, the smallest drop since last March, as non oil and gas exports picked up to both China and India. Imports increased 6.82 percent, driven by a 29 percent jump in fuel imports and a nearly 15 percent rise in raw material imports. However, imports of capital goods, a leading indicator for investment, fell 12 percent, while imports of consumer goods dropped 16 percent.     

Core Inflation Contained
Separate data issued by HSBC showed manufacturing activity rose slightly in February, although new export orders fell. Other indicators for consumer demand, the main driver of the G20 economy, remain buoyant. The government has been trying to cool imports and has imposed quotas or taxes on imported foodstuffs such as beef and wheat flour. The statistics bureau said crop import restrictions were behind the pick up in February inflation. 

The biggest rise was for garlic prices, which surged 30 percent from January, while state-controlled power tariffs rose nearly 4 percent. However, analysts said they expected inflationary pressures to ease in coming months with the harvest season. “We expect inflation will drop in March and April, along with the rice crop season,” said Purbaya Yudhi Sadewa, economist at Danareksa in Jakarta.

Reuters
source : the jakarta globe