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ECONOMIC UPDATE - BoP review - The pandemic drives capital flight



Lower current account deficit

Bank Indonesia (BI) reported Indonesia’s balance of payments (BoP) deficit of USD8.55 bn in 1Q20 (vs. USD4.28 bn surplus in 4Q19). In contrary, current account deficit (CAD) declined to USD3.92 bn (1.42% of GDP), worse than the consensus expectation at USD3.85 bn deficit. The lower CAD is due to the declining of import weighed on by global pandemic, followed by narrowed service account as well. Trade surplus played significant role as it built up around 28% of the current account. The biggest laggard came from primary income where it built up around 51% of the current account as Indonesia still depends on foreign investment. As Covid-19 pandemic hits on every sector, it brought significant impact to financial account it swung to a deficit of USD2.93 bn due to the capital flight amid pandemic compared to surplus of USD9.86 bn in 1Q19.


Better performance from trade sector

In overall goods trade, it showed a significant jump from USD0.3 bn to USD4.39. The export of goods increased slightly by 1.29% YoY where the import decreased by 6.49% YoY. Non-oil and gas (non-OG) trade surplus almost doubled in yearly basis to USD5.8 bn where the export growth was 0.95% YoY supported by the deeper fall of import at -7.39% YoY. The higher export value was due to the higher price of Indonesia exported commodities around 9.97% YoY in average of the price increase 1Q20. Meanwhile, OG sector trade balance remained deficit at USD2.74 bn or declined by 27.8% YoY due to the average price fall around 26.9% YoY in1Q20 and the weakening global demand. Therefore, the narrowed CAD was mainly led by trade surplus. 


Serious hit on financial account

This is the first time since 3Q11 financial account posted deficit. It dropped to deficit of USD2.93 bn where previously it was a USD12.6 bn surplus in 4Q19. The significant plunge is understandable since Covid-19 pandemic hit surged in 1Q20. The source of the deficit came from portfolio investment that posted deficit of USD5.81 bn where it contributed to almost the half of the financial account. Historically, it seldom stayed at deficit. Thus, Indonesia still seems dependent on its portfolio investment in building up its financial account. Meanwhile, direct investment stayed on positive territory but it decreased by 39.1% YoY to USD3.54 bn. From Exhibit 4, we see that there was a big capital outflow from public securities as much as -USD8.13 bn as the main laggard in portfolio account. In 2019, we experienced a relatively better domestic investment climate where portfolio investment increased by 131.4% YoY but it faded along the way with Covid-19 appearance. Thus, large capital outflows happened as foreign portfolio investors seek safe havens in the face of the deepening global pandemic


Expect more in 3Q20

As the current condition related to Covid-19 pandemic is getting manageable, we see Indonesia may attract once more capital inflow in the rest of 2020 if the government contains Covid-19 well. On positive notes, BI recorded a net inflow of USD4.1 bn in portfolio investment from Apr-20 to the mid of May-20 after recording a net outflow of USD5.7 bn in 1Q20. Related to trade, we see Indonesia may not depend as much on OG trade due to the relatively low price and the low global demand of oil. Indonesia may boost its export as China, Indonesia’s top trading partner, is recovering from Covid-19, alongside with another peer countries recovery. Consequently, Indonesia’s import will be increasing as domestic industries can operate again due to the relaxation of large-scale social restriction (PSBB) in Jun-20. With policy mix from the government and BI, we are sure that 3Q20 will be better than 1H20. When things get better, to boost the economic growth, BI will have another 50bps rate cut in 2H20.