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 The second-quarter deficit often widens from the first, but this
year there is extra concern about the gap as it keeps pressure on
the rupiah <IDR=ID> and reflects economic problems President-elect
Joko Widodo will face when his term begins in October.
Bank Indonesia (BI), which last year hiked rates to deal with a big
current account deficit, has a monthly policy meeting on Thursday.
All 14 economists in a Reuters poll expect the benchmark rate <BIPG>
to be kept at 7.50 percent, and most of them see the rate remaining
there at the end of the year.
Between June and November 2013 - when the benchmark rate was last
changed - BI raised it 175 basis points to bolster the rupiah,
battle inflation and contain the current account deficit, which hit
4.4 percent of gross domestic product in 2013's second quarter.
The deficit was only 2.06 percent of GDP in January-March this year,
and early in the year the central bank predicted that the 2014 level
could be below 3 percent, an improvement on last year's 3.3 percent.
Early this year, BI said this year's deficit would be 3.3 percent,
and on Wednesday, Governor Agus Martowardojo said it would be
"around 3 percent".
But in the second quarter, the deficit widened sharply, part due to
poor exports. Low commodity prices and a ban on mineral-ore exports
contributed to a trade deficit of $2.21 billion compared with a
$1.07 billion surplus in April-June 2013.
The median forecast in a Reuters poll was for a second quarter
deficit of 4.00 percent of GDP - the same level BI recently
projected.
Gundy Cahyadi, an economist with DBS in Singapore, said BI will
remain vigilant in making policy, as the current account deficit
remains large and "is still some distance away from being at a more
sustainable level."
One problem facing Widodo - and sustaining a trade deficit - is that
Indonesia needs costly imports of oil, and budget subsides that keep
down domestic fuel prices need to be cut again, as they were in June
2013.
ACTION ON SUBSIDIES?
If domestic fuel prices could be raised again, that would reduce the
government's budget deficit and should reduce oil demand and
imports.
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Mirza Adityaswara, BI's senior deputy governor, said recently it is
the job of the "non-monetary sector" to tackle the current account
because the oil sector accounts for two-thirds of the deficit.
Coordinating Economic Minister Chairul Tanjung said last week
options being considered include having the current government cut
fuel subsidies before its term ends in Ooctober.
But the subsidy problem could be left for Widodo's administration to
deal with. Cutting fuel subsidies is politically unpopular, hurting
poor Indonesians, and fuel hikes traditionally cause a spike in
inflation.
This year, inflation has slowed significantly and the annual pace
economic growth - at 5.12 percent in the second quarter - was the
lowest since late 2009.
However, consumption has remained strong, which is one reason
economists expect monetary policy to remain tight. Two analysts in
the latest poll saw BI raising the policy rate by 25 basis points by
year-end.
More than just monetary policy is needed to deal with Indonesia's
external imbalances, economists at Bank Danamon said in a recent
research note, adding that authorities need to deal with
infrastructure problems and productivity as well as build up
manufacturing to cut reliance on commodity exports.
"Fuel subsidies needs to be eliminated to provide fiscal space to
support these structural policies," they said.
(Editing by Richard Borsuk)
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