Indonesia's current account deficit narrowed to USD 5.3bn

Analyst predicts deficit is still going to be sizable.

According to DBS, the current account deficit narrowed to USD 5.3bn in 1Q13 from USD7.6bn in the preceding quarter. Two main factors(commodity prices and the strength of the domestic economy) are critical to watch to project the size of the current account deficit. 

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Firstly, commodity prices stayed depressed through 1Q as China’s growth surprised on the downside. As a result, exportsin level terms actually declined by 3.4% QoQ. However, imports fell by a larger 5.3% QoQ, resulting in an improvement in the trade balance.

This was possible asthe domestic economy has moderated on the back of weakerinvestment overthe last few months. As such,the urgency to tighten monetary policy from an external stability standpoint has eased somewhat.

Going forward, an improvement in external demand should translate into higher export values. However,the extent ofimprovement could be capped if commodity pricesstage only a modestrebound in the coming quarters.

We believe thatthe slowdown in investmentistemporary and is due to accelerate. As such, a concomitant increase in imports is also expected.

Overall, this implies that while the trade balance should improve, the size of the trade surplus is going to be small compared to 2010 and 2011. Accordingly, the current account deficit isstill going to be sizable at around 1.5-2.0% of GDP in 2013. For the medium term, concerns on external stability are likely to persist.