Here's the biggest worry in Indonesia's October trade

There's been a gradual decline in this component.

According to DBS, October trade data provided a pleasant surprise and boosted sentiment in the markets. The trade account registered a small surplus of USD 40mn, against our and market expectations of a USD 0.8bn deficit. 

Export growth came in at 2.6% YoY, close to our forecast of 3.0%. Import growth disappointed at -8.9% YoY, with import of capital goods falling 19.5% YoY in the month.

However, the main concern for the trade account still lies with the oil & gas component. Production of crude oil has been on a gradual decline in the past decade and net imports of refined oil have continued to grow as the consumer base expands.

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Some adjustments are necessary to correct these structural problems. One solution would be to further reduce fuel subsidies, but this is unlikely to happen in the near-term.

As such, despite export growth looking better, the trade account may not post significant surplus on a regular basis. In fact, we will be less than ecstatic if the trade surplus is caused by a sharp fall in import of capital goods. As it is, import of capital goods has fallen more than 17% in the year-to-date.

This is a sign that investment growth has also fallen quite significantly this year. Little wonder that GDP growth is currently below its potential. Look for the BI to take these points into consideration in the upcoming policy meeting. Coupled with the fairly stable CPI inflation (albeit still high at 8.4%

YoY in November), the October trade surplus should ease some pressures on the central bank to tighten further.