Indonesia’s trade deficit hit an all-time high in June as exports from Southeast Asia’s largest economy fell sharply, a sign that weaker demand from China and the West is affecting some of the few countries still growing at a considerable clip.
A third straight month of trade deficits in one of the world’s biggest commodity producers bodes ill for Indonesia, which had become a darling of foreign investors looking for fresh opportunities, but has struggled to contain the damage from a sharp fall in its currency in recent months that has rattled investors.
It also is further evidence of the slowdown in China and India, whose strong demand helped some emerging markets, including Indonesia, come through the 2008 global financial crisis relatively unscathed. Until now, countries like Indonesia had argued China’s purchase of consumer goods and other products would offset weakness in Western demand.
“We’ve never recorded a deficit this huge, even during crises,” Satwiko Darmesto, director of Indonesia’s Central Statistics Agency, told reporters following the release of June data showing a $1.3 billion trade deficit, nearly three times as large as expected.
He warned that Indonesia may post a trade deficit for all of 2012, after earlier assurances from Indonesian leaders that the country – long known as a big exporter of natural resources – would post another trade surplus for the year.
Indonesia’s statistics agency also said Wednesday that inflation accelerated slightly in July, as the start of the Ramadan fasting month pushed up basic food prices, while Thailand also saw accelerating price gains. Indonesia’s consumer price index rose 4.56 percent in July from a year earlier, up from June’s 4.53%, while Thailand’s inflation rate rose 2.73 percent from the same month a year earlier, faster than June’s 2.56 percent gain.
Although the latest inflation figures are still relatively low for the countries, economists are worried it could pick up more noticeably in Asia as drought in the US pushes global food prices higher. Any sustained pickup in inflation would complicate central banks’ responses to weak global growth, making it harder for them to keep interest rates low.
Economists are still trying to sort out the meaning of the unexpectedly large trade deficit in Indonesia, and whether it will continue. Some of the recent export declines may have been exacerbated by globally falling commodity prices, and recent changes in tax and regulatory policy in Indonesia that encouraged some buyers of Indonesian commodities to front-load purchases earlier this year.
Overall, Indonesia is still running a trade surplus of $459 million through the first half of the year. But that is a far cry from the giant surpluses of recent years, which ranged from nearly $8 billion to more than $26 billion.
Longer term, the concern among some economists is that Indonesia could face more protracted periods of deficits, as rising incomes and robust domestic demand keeps imports high. That, in turn, raises the specter of the country consuming more than it can afford – a situation that has tripped up other emerging Asian economies, such as India and Vietnam.
“In our view, the rapidly rising trade deficit is symptomatic of an economy growing beyond its productive potential,” Robert Prior-Wandesforde, an economist at Credit Suisse in Singapore, wrote in a research note.
Indonesia’s current account showed a record deficit of $2.9 billion in the first quarter.
Countries with current-account deficits must make up for the money they send abroad to pay for imports by attracting foreign investment capital to keep their financial systems afloat. But if a currency is a weakening, foreign investors are less likely to invest.
That is not fully the case with Indonesia, although the rupiah is Southeast Asia’s worst performer so far this year, down 4 percent since January 1 and more than 10 percent in the past 12 months. Foreigners fled Jakarta’s overbought market earlier this year, but in recent sessions have been returning, pushing their net investments in Indonesian stocks and bonds into positive territory.
In addition, foreign direct investment into Indonesia reached a record $5.9 billion in the second quarter, up 30.2 percent from a year earlier.
Another bright spot was Wednesday’s HSBC Purchasing manager’s Index, which showed Indonesian manufacturing activity expanding in July, one of the few countries in Asia to show growth.
Indonesia is still expected to grow in excess of 6 percent this year, after posting 6.5 percent growth last year, the country’s fastest expansion in 15 years.
If China regains its momentum later this year, as some economists expect, that could give Indonesia and other similar nations a boost.
Shipments of Indonesian coal have fallen as China’s own exports suffer in the global slowdown, but Supriatna Suhala, executive director of the Indonesian Coal Mining Association, said, “I’m very convinced coal demand from China will start to recover.”
Trade deficits aren’t always a big problem for countries, especially if they are driven by investments in imported equipment that lead to efficiencies later. Indonesian Trade minister Gita Wirjawan recently told reporters the country would be in a better fiscal position next year, as today’s imports drive more manufacturing activity – and more exports – in the future.
Still, Wednesday’s trade data are an ominous sign, not least because of the big drop in exports. The statistics agency said exports fell 16.4 percent on year to $15.36 billion, down 8.7 percent on the month. Imports rose 10.7 percent from a year earlier to $16.69 billion, but slid 2.1 percent from May.
Given the trend, Credit Suisse’s Prior-Wandesforde said the current-account deficit is likely to double in the second quarter, which could add to pressures on the country.
“Indonesia’s rapidly deteriorating external account doesn’t bode well for the rupiah, and [we] expect it to continue underperforming other Asian currencies in the months ahead,” he said.
Economists believe Indonesia may be adding to its problems by imposing new regulations aimed at ensuring more commodity revenue stays in the country, despite opposition to the moves from foreign investors.
In mid-May, Jakarta introduced a 20 percent tax on the export of 65 unrefined mineral types, ahead of a full ban expected in 2014.
The government aims to boost domestic value by pushing miners to process minerals before they export them.
Chinese imports of nickel ore and bauxite reached record levels in May, as importers sought to beat the Indonesian trade policy. Indonesia exported two million tonnes of nickel ore to China in June, down 7 percent from a year earlier, and down sharply from four million tonnes in May.
Indonesia exported 187,355 tonnes of bauxite to China in June, down 93 percent from a year earlier and down sharply from 5.6 million tonnes imported in May.