Indonesia: Exports and imports contract again in August

Indonesian imports contracted yet again by 2.41% this time, as almost all sub-components were in the red barring iron and steel which grew by 14.77%.

The government had made a concerted effort to limit the current account deficit as it was one of the main reasons for the Indonesian rupiah's weakness in 2018. Meanwhile, exports also showed weakness with the August reading posting a contraction of 5.75%, albeit slightly better than the market consensus of a 6.5% drop off with the ill effects of the trade war and lower commodity prices hitting mineral fuel and rubber exports.

Despite the government's best efforts to mitigate the widening trade gap, the current account deficit as of 2Q hit $8.4 bn - wider than last year and roughly 3.04% of GDP.

With eight out of the last nine months showing import compression, we can expect gains in capital formation to be limited, putting a temporary dampener on overall economic growth. Meanwhile, the export sector may continue to struggle on weak demand owing to the trade war while depressed commodity prices may likewise hurt exports of mineral products.

Overall, despite the improvement in the trade balance to help shore up the external sector, Indonesia is still expected to post a current account deficit, although the central bank Governor Perry Warjiyo remains confident that financial account flows, both foreign direct and portfolio flows will help offset the struggles of the current account.