Indonesia
October 2013
Indonesia Growing external vulnerability Indonesia has been particularly hard hit by the wave of mistrust concerning the emerging countries. Yet unlike India, its macroeconomic fundamentals are solid. Growth is robust, even though it is expected to slow slightly to 5.5% in 2013, and medium-term growth prospects are upbeat. Public finances are healthy, with public debt of 23% of GDP and a budget deficit of almost 2% of GDP, despite the weight of oil subsidies. The only source of vulnerability is a swelling current account deficit, but the authorities have taken appropriate measures to remedy this situation.
■ External accounts deteriorate
1- Repayment of external debt
Foreign investors have sanctioned Indonesia for the sharp deterioration in its external accounts. From a current account surplus of 0.2% in 2011, Indonesia swung into a current account deficit of 2.8% of GDP in 2012, its first since the crisis of 1997. In Q2 2013, the current account deficit swelled to an annualised rate of 4.4% of GDP. The current account deficit can be attributed to two factors: the dynamic growth of domestic demand and the decline in international iron ore prices, in addition to a strong seasonal effect in Q2.
▬ External debt repayment (annualised, USD mn) — Repayment, as % FX reserves (RHS) 175 000
250
150 000
225 200
125 000
175
100 000
150
75 000
In full-year 2013, Indonesia is expected to report another current account deficit, while capital inflows will not be big enough to ensure a balance of payments equilibrium. Foreign direct investment (FDI) is the main source of financing for the country’s current account deficit. In full-year 2012, net FDI covered 77% of the deficit. Structurally, Indonesia is not as fragile as India, and less exposed to capital flight. Since Q1 2013, however, FDI has slowed and portfolio investment has plummeted. Whenever international financial pressures have hit the emerging markets, Indonesia has always reported massive capital flight, which has been the case since mid May. The share of Indonesian bonds owned by non-residents dropped to 30% in September from 33% six months earlier. In H1 2013, the balance of payments deficit amounted to more than $9bn, the equivalent of 2% of GDP at an annualised rate.
125
50 000
100
25 000
75
0 09 Source: Central bank
50 10
11
12
13
The structure of external debt has also become more risky. At the end of Q2, short-term debt accounted for nearly 18% of total debt (vs. only 12% five years earlier). In contrast, borrowers as a whole are a little less exposed to currency risk than they were five years ago. The share of rupeedenominated debt was 13% at the end of Q2, compared to less than 10% five years earlier. Even so, the private sector is still highly exposed to depreciation of the rupee, notably against the dollar: 89.2% of its external debt is denominated in dollars.
H2 prospects are hardly encouraging. The current account deficit should narrow with the slowdown in domestic demand, but capital inflows are expected to decline sharply, too, notably portfolio investment.
Clearly, Indonesia’s external vulnerability has increased significantly in recent years and has accentuated with the decline in foreign reserves since the beginning of the year. Foreign reserves were down to $86bn at the end of August, from $101bn at the beginning of the year.
Moreover, although external debt is mild at 28% of GDP, it must be watched closely. The debt of non-financial companies accounts for 56% of exports of goods and services, up from 40% at year-end 2008. Debt repayment charges are higher because they should reach more than $120bn over the full year (short-term debt + repayment of the principle on medium and long-term debt), compared to only $31.5bn five years earlier. As a result, debt servicing (excluding interest) amounted to 140% of foreign reserves, compared to 57% fiveyears earlier. With a current account deficit of $20bn, financing needs for full-year 2013 amount to $140bn, 1.6 times its foreign reserves.
The monetary authorities have taken appropriate measures to contain the current account deficit while supporting the currency, which has been undermined by massive capital outflows since mid May. Since July, it has raised its key policy rate by 150bp to 7.25%. Yet investors’ mistrust is not justified by the country’s macroeconomic fundamentals.
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Indonesia
■ Public finances are relatively solid
October 2013
■ Dynamic growth
Indonesia’s public finances are among the most solid of the Asian countries. Public debt accounts for 23% of GDP and the budget deficit is less than 2% of GDP.
Despite the world economic slowdown, real GDP growth remained robust at 6.2% in 2012, although it began to slow in Q3 2012. By Q2 2013, growth had slowed to 5.8% year-onyear (1.3% q/q), compared to 6.2% in Q2 2012, mainly due to the slowdown in investment (to 4.7% y/y in Q2 2013 vs. 12.5% in Q2 2012). Although housing investment continued going strong, productive investment declined sharply, notably investment by foreign companies.
Yet the tax base is still small at 16.2% of GDP, limiting the possibility of infrastructure programmes which the country badly needs to face up to major bottlenecks, notably for power distribution and transportation. The government managed to respect its targets to contain budget spending in the first seven months of the year, with spending accounting for 49.8% of the official target. Inversely, revenues fell slightly short of the government’s forecasts due to the sharper-than-expected economic slowdown (48.5% of the target).
In the light of the most recent leading indicators, growth should continue to slow in H2 2013. The industrial PMI index contracted again in August, to 48.5 vs. 50.6 the previous month. Moreover, retail sales and industrial production both continued to slow through August. Consumer prices increased 8.8% y/y in August, with core inflation of 4.5% (excluding energy and food prices). High inflation and tighter monetary conditions should strain domestic demand. Consequently, we do not expect growth to exceed 5.5% in 2013.
Public spending is sharply restricted by the high cost of fuel price subsidies. The decision last June to raise subsidised fuel prices (by 44% and 22%, respectively, for heating fuel and diesel) should help contain the budget deficit, as well as the current account deficit, without adjusting other expenditures. In full-year 2013, the cost of fuel price subsidies will have been trimmed to 2.3% of GDP from 2.7% in the initial budget. At the same time, the government said it would pay financial compensation to the lowest income households. The net gain for the budget will be only 0.1 points of GDP, but that is enough to maintain the deficit below the 2% threshold.
Johanna Melka
[email protected]
Yet as long as the government fails to implement veritable indepth reforms of the subsidy system it will have only limited fiscal manoeuvring room to respond to the shortcomings of the country’s infrastructure, which in turn is straining its longterm growth potential.
Forecasts
2- Industrial production and PMI surveys ▬ Manufacturing PMI index (LHS) 55
— industrial output (yoy, mm3m, RHS)
15
2011 2012 2013f 2014f
54 53
10
52 51 50
5
0
47 46 45 12
13
6.2
5.5
5.4
4.3
7.1
5.5
Gen. Gov . balance / GDP (%)
-1.2
-1.8
-2.3
-2.1
Gen. Gov . debt / GDP (%)
24.4
23.3
23.1
23.0
0.2
-2.8
-2.4
-1.9
Ex ternal debt / GDP (%)
26.6
27.9
28.1
27.5
Forex reserv es (USD bn)
107
105
85
90
Forex reserv es, in months of imports
5.6
5.3
4.8
4.5
Ex change rate USD/IDR (y ear end)
-5 12
6.5
Inflation (CPI, y ear av erage, %)
Current account balance / GDP (%)
49
48
Real GDP grow th (%)
f : BNP Paribas forecasts
13
Source: CEIC
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5.7
9 068 9 638 10 200 9 600
