Trade surplus narrows to the lowest level since May-23
According to Statistics Indonesia (BPS), Indonesia's trade surplus fell by -80.25% MoM and -64.02% YoY to USD0.47 bn in Jul-24. Moreover, this figure was below both our forecast of USD2.41 bn and the consensus estimate of USD2.47 bn. This is the smallest trade surplus since May-23. Nonetheless, Indonesia's foreign trade has been on the trade surplus trend since May-20, posting a trade surplus for 51 consecutive months. The trade surplus was mainly driven by a USD2.60 bn surplus in non-oil and gas (NOG) exports, which offset a USD2.13 bn deficit in oil and gas (OG) exports. Furthermore, the small trade surplus is largely attributed to the high total imports of USD21.74 bn, the highest level since Aug-22. Cumulatively, the trade surplus fell to USD15.91 bn in 7M24 from USD21.20 bn in 7M23. Looking ahead, the trade performance remains challenging. China, Indonesia's largest trading partner, still faces weakening domestic consumption and slowing growth, which could reduce demand for Indonesia's exports. However, India's strong economy could provide some buffer. Moreover, we expect the current account deficit to widen from 0.1% of GDP in 2023 to 0.4% of GDP in 2024.
Mining and Japanese demand drive export growth
Total exports increased by +6.55% MoM and +6.46% YoY to USD22.21 bn in Jul-24, slightly exceeding both our projected estimate of +6.30% YoY and the consensus estimate of +3.84% YoY. However, cumulatively, total exports decreased by -1.47% YoY to USD147.30 bn in 7M24. Breaking down the numbers, OG exports rose by +15.57% MoM and +15.99% YoY to USD1.42 bn in Jul-24, while non-oil and gas NOG exports increased by +5.98% MoM and +5.87% YoY to USD20.79 bn in the same period. We attribute the higher total exports to the strong performance of the mining sector and its derivatives, which grew by +19.51% MoM to USD3.77 bn, driven primarily by HS 26 products (ores, slag, and ash) and HS 71 products (natural and cultured pearls, precious/semi-precious stones, and precious metals). Furthermore, Japan recorded the highest monthly growth among export destination countries, with a +43.46% MoM increase to USD 1.78bn in Jul-24, making it the third-largest export destination. This strong growth is attributed to the appreciation of the Japanese yen, which strengthened by +4.99% to JPY152.67/USD in Jul-24. Looking ahead, exports to Japan could potentially increase further this month, driven by the strong yen following a 0.15 bps interest rate hike to 0.25%. As of now, the yen has appreciated by +3.73% MtD to JPY146.97/USD.
China's product leads import to record high since Aug-22
Total imports surged by +17.82% MoM and +11.07% YoY to USD21.74 bn in Jul-24, reaching its highest level since Aug-22 and significantly surpassing both our forecast of +1.10% YoY and the consensus estimate of -1.13% YoY. OG imports amounted to USD3.56 bn (+8.78% MoM and +13.59% YoY), while NOG imports reached USD18.18bn (+19.76% MoM and +10.60% YoY). Consumer goods imports increased by +16.79% MoM to USD2.07bn, while intermediate and capital goods imports rising by +17.21% MoM and +21.21% MoM to USD2.35bn and USD0.29bn, respectively. China remained the largest source of imports at USD6.53bn, accounting for 35.91% of total imports, and recorded the highest monthly increase with an additional USD1.19 bn (+22.17% MoM). We attribute the high imports from China to weak domestic demand there, leading to overcapacity. The government should be vigilant in anticipating a potential influx of Chinese goods, especially as Indonesia's Manufacturing PMI fell to 49.3 in Jul-24, marking the first contraction in factory activity since Aug-21, driven by local businesses' concerns about competing with imported goods.
Interest rate cuts are coming
The annual inflation rate in the US slowed for the fourth consecutive month to 2.9% in Jul-24, the lowest level since Mar-21, down from 3% in Jun-24 and below the consensus forecast of 3%. Similarly, annual core inflation also slowed for the fourth consecutive month, reaching 3.2%, the lowest reading since Apr-21, compared to 3.3% in Jun-24, in line with consensus estimates. Following the release of this inflation data, the US Dollar Index (DXY) decreased by -1.56% MoM to 102.56. Meanwhile, the Rupiah appreciated by 3.04% MoM to Rp15,678/USD, reaching its strongest level since Mar-24. Traders now see a 100% probability that the Fed will lower rates in Sep-24, with 64.5% expecting a 25 bps cut and 35.5% anticipating a 50 bps cut, according to the CME FedWatch Tool. Given the recent US inflation data, we believe this could reinforce the Fed's confidence in cutting the federal funds rate (FFR) by 25 bps to 5.25% in Sep-24 and maintaining it at that level for the rest of the year. We expect this rate cut to be sufficient to spur economic growth while keeping inflation in check. We think a more aggressive 50 bps cut this year could lead to a resurgence in inflation next year, particularly in the context of a potential trade war with China. On the domestic front, we anticipate that Bank Indonesia (BI) may cut its benchmark rate by 25 bps to 6.00% in 4Q24, driven by controlled inflation and the stability of the Rupiah. We currently expect the Rupiah to be Rp15,850/USD by the end of 2024 and average Rupiah to be Rp15,900/USD this year.
