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
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.
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.
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.
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% five-years earlier. With a current account deficit of $20bn, financing needs for full-year 2013 amount to $140bn, 1.6 times its foreign reserves.
BY Johanna MELKA
To Read the Entire Report Please Click on the pdf File Below.
External accounts deteriorate
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.
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.
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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.
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% five-years earlier. With a current account deficit of $20bn, financing needs for full-year 2013 amount to $140bn, 1.6 times its foreign reserves.
BY Johanna MELKA
To Read the Entire Report Please Click on the pdf File Below.
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