Here's how Indonesia will fight current account deficit woes

These measures aren't new, but the country will still give them a shot.

According to OSK DMG, after all the talk about coordinating efforts to curb the rising current account deficit, the BI and the government finally issued a statement late Friday evening on how they were going to deal with the issue. However, most of these measures are not new and have been previously announced by either BI or the government.

BI measures:

1. Exchange rate stability – BI will stabilize the rupiah in line with fundamentals to support the adjustment of external balances.
2. Monetary operations strengthening – This is to support rupiah stability and to control liquidity, and BI raised the deposit facility rate by 25 bps to 4.00% (175 bps below the BI rate).
3. Relaxation on rules regarding short term capital inflows – The minimum tenor for forward hedging by non-resident lowered to 1 month from 3 months previously.
4. Macroprudential policies on loan-to-value (LTV) tightened – New regulations will cover sharia-compliant finance industry and ban the use of unsecured personal loans for credit advances.

Government policies:

1. A tax holiday to encourage capital goods production.
2. An import duty exemption to reduce dependence on imported finished goods.
3. Mining regulations to increase the value-add of mining exports.
4. Anti-dumping and customs precaution regulations to protect the domestic industry.

It is a relief to see BI finally taking steps to tackle the bubbling economy. We have been worried that monetary policy could be held too loose for too long, thus making any adjustments more painful. A point to note is that the central bank is not intending to use the policy rate to curb excessive consumption. Instead, it is tightening policy via the deposit facility (to reduce liquidity) and macroprudential measures (to curb excessive borrowing). We are not convinced that these policies alone will be sufficient to curb excessive spending and reduce the current account deficit. Eventually, BI will have to take the plunge and further signal its intention to tighten policy by raising its key policy rate. We expect such a move to come only in 2013.

As for the government’s policies, measures to protect domestic industries and to promote more value-added exports will likely have a long gestation period. The results are unlikely to be seen in the near- to medium-terms. Instead, some of these policies like mining regulations could worsen the trade deficit in the near term as exports of minerals would be curbed and could widen the current account deficit even more.