Petar VujanovicHead of Indonesia DeskOECD, Economic Department

Part 2 – Is there a current account problem?

INDONESIA’S CURRENT ACCOUNT CHALLENGE

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Current Account

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Current account in OECD and selected emerging economiesA big deterioration in Indonesia’s current account (% of GDP)

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Current account in selected emerging economies

Rapid deterioration in current account began in mid-2011

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Exchange rate

Depreciation of over 35% since beginning of 2012.

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Current account components (USD)

Higher oil deficit and lower non-oil & gas goods surplus

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Current account components (USD)

Goods imports stalled and big fall in goods exports (USD) since beginning of 2012.

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Trade

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Oil and gas – USD and Rupiah

Denomination of trade (USD or rupiah) makes a difference.

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Oil – net exports and price

Oil price explains a big part of the growing oil deficit

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Gas – net exports and price

Gas price explains little of the (relatively modest) decline in gas exports (large trade surplus)

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Trade – Non oil and gas goods exports

Both manufactures and mineral commodity exports have declined

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Trade – Manufactured exports

Manufactured exports are quite diversified

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Trade – Exports - Manufactures

Palm oils Base metal products

Processed rubber products

-40% (18%)

-46%(10%)

-43%(12%)

Percent reduction in value from Q2 2011 peak

(% share)

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Palm oil prices

Palm oil prices have fallen over 30% since Q1 2011

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Trade – Exports – Mining and other

~30% of all goods exports

Coal Crude oil Natural gas

-29%(39%)

-10%(24%)

-28%(26%)

Percent reduction in value from ~Q4 2011

peak (% share)

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Trade – metal prices (IMF)

Metal prices have fallen over 30% since Q1 2011

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Trade – thermal coal prices (IMF)

Coal prices have fallen by around 30% since Q1 2011

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Terms of trade…. In short – Indonesia has suffered a large decline in its terms of trade – and accelerated since beginning of 2011. Similar to other commodity-based economies, like Chile and Australia.

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Trade – Goods and Service Imports (USD and local currency)Value of imports in local currency has been driven by depreciation. Volumes have been flat in recent quarters.

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Trade – Goods and Service Imports (USD)Raw materials are the largest component

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Trade – Raw material imports (USD)

Processed industrial supplies are the largest component

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Trade – Monthly trade balance

The turn around in the trade balance continued in November.

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Capital and Financial Account

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National savings and investment

Gross national savings and investment are now close to being equal

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Capital account components

Portfolio flows have been volatile; reserves accumulation has been important.

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Reserves assets and the exchange rate

Policy of rapid reserve accumulation fro 2008 while the rupiah strengthened helped to hold down the current account deficit.

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Conclusion

• There has been a big deterioration in the current account since the end of 2011.

• This has contributed, at least in part, to a large depreciation in the Rupiah.

• Decline in goods balance (non-oil and gas, and oil).

• Commodity prices account for a large part of this – including crude oil, palm oil, coal, and many metals – end of the “super-cycle”.

• A terms of trade shock – like other commodity exporters.

• Imports of processed industrial supplies are a large component but flat (USD and volume) growth.

• Savings excess over investment has disappeared.

• Reserve asset transactions important in explaining capital account.

• FDI flows have increased. Portfolio flows have been volatile.