Linda Yulisman and Hans David Tampubolon, Jakarta – Indonesia's biggest trade deficit, recorded in October, is likely to cause jitters in the currency market, with economists warning of the impact it poses to the already weak rupiah.
After recovering over the last two months, the trade balance in October flipped back into the red, driven by a sharp rise in imports against the backdrop of a continued weak export performance, the Central Statistics Agency (BPS) revealed on Monday.
The trade deficit topped US$1.55 billion in October as international commodity prices declined while imports soared given the stable pace of purchases of capital goods, raw materials and intermediary goods.
Exports plunged by 7.61 percent to $15.67 billion in October from a year earlier, higher than the market forecast of 4 percent. The decline, according to the BPS, was mostly attributable to a palm oil price drop.
Imports grew steadily by 10.82 percent to $17.21 billion from the past year, particularly due to the purchase of a fleet of commercial aircraft and spare parts for local airlines worth $418 million, according to the BPS.
Finance Minister Agus Martowardojo said the government would remain cautious over the impact of the trade deficit. "The deficit needs to be handled as soon as possible. Normally, imports should not have stood that high amid our weak current exchange rate. So, we need to study this further," Agus said.
Barclays Capital regional economist Prakriti Sofat said the worsening trade balance would likely weigh on the rupiah in the short term.
"Our one-month forecast remains at Rp 9,650 [against the US dollar]. We maintain our six-month forecast of Rp 9,800 given the structural current account deficit, continuing unfavorable terms of trade and the rising political risk premium," said Sofat in a research note.
The rupiah closed weaker at Rp 9,598 per dollar compared with Rp 9,594 on Nov. 30, prices from local banks compiled by Bloomberg show. The one-month implied volatility, a measure of expected moves in exchange rates used to price options, climbed five basis points to 4.65 percent, according to Bloomberg.
The record high trade deficit is likely to impact the country's balance of payments, which flipped back into positive territory in the third quarter of the year from two consecutive deficits in the first and second quarters.
If left unchecked for long, a deficit in the balance of payments would reduce the country's ability to service foreign-denominated debts and finance imports.
According to the central bank, Indonesia's balance of payments recorded a surplus of $800 million in the third quarter of the year, mostly derived from proceeds funneled by foreign direct investment. A "surplus" in the balance of payments generally means an inflow of income into the country.
Bank Danamon economist Anton Hendranata said in a research note on Monday that heightened concern might reemerge given the balance of payments performance, particularly on the current account deficit, as the trade data showed strong and resilient imports weighing down the trade balance.
"Monthly trade data tends to be volatile, but it's still too early to estimate the impact on the current account deficit or on the rupiah, which is currently hovering at Rp 9,600," said the research note.
"However, if the condition persists, the current-account deficit may be bigger than our estimate of 2.1 percent of gross domestic product this year. This could put more pressure on the weak rupiah."
The note also explained that although Bank Indonesia might still be tolerating the weak rupiah, the resurgence of concern over the current account deficit might compel the central bank to raise the overnight deposit facility (FASBI) rate to help reduce pressure in the foreign exchange market.