Indonesia: A pause with a constructive outlook
We take stock of external balances, which show that vulnerabilities are low.
Group Research - Econs, Radhika Rao25 May 2023
  • BI’s rate pause helps to balance easing domestic inflation and external uncertainty
  • We maintain our call for a rate pivot in 2H23
  • A stronger fiscal position lends resilience to domestic bonds
  • Current account strength moderated in 1Q, but we expect a narrow surplus to sustain
  • Foreign reserve coverage ratios are supportive
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BI extends pause

  • Decision and economic assessment

Bank Indonesia extended the rate pause, leaving the 7-day reverse repo rate unchanged at 5.75% and the policy corridor intact. 

Alongside a more positive view on global growth (BI’s 2.7% yoy vs IMF’s 2.8%), authorities are confident that domestic growth will average between 4.5-5.3%. This is backed by a strong start to the year at 5% yoy in 1Q and a firm 2Q (DBSf: 5.1-5.2% yoy) owing to seasonal festive strength, strong domestic demand, and a supportive trade sector.

Policymakers are betting on domestic banks’ efforts to boost lending activity, just as total credit growth eased to 8.1% yoy in April, on base effects and moderating working capital requirements by firms (see chart).

While the rupiah has come under pressure in the past fortnight, along with the regional currencies, from a bid dollar, BI expects to stabilise the currency through intervention, also helped by firm external balances. Despite the recent correction, the IDR is holding up as the best performer amongst the Asia10 FX this year (see chart).

The current account is expected to fall within a narrow band of -0.4% to +0.4% of GDP this year vs +1% of GDP in 2022 (see our views in the next section). BI also plans to pursue with Op-Twist, through the sale of short-term securities, which will help restore rate differentials and support the currency.

  • Policy outlook

The decision to hold rates was along market expectations, with much attention on the accompanying policy commentary.

In our view, the pause is aligned with an easing inflation trajectory but a softer currency as the latter faces renewed pressure from uncertainty over the US debt ceiling negotiations. Looking ahead, BI’s constructive view on the currency and expectations that the inflation will be back within target by mid-year still suggests policy will be in neutral gear in the near term but pivot towards easing in 3Q, with an eye on exogenous developments (see our view).

Fiscal position a key strength 

Jan-Apr fiscal math continues to maintain a strong beat, with a cumulative total surplus of IDR 234.7trn (1.12% of GDP) and a positive primary balance of IDR 374.3trn. Revenues reached 40.6% (17.3% yoy) of the annual budgeted target, whilst spending trailed at 25% (2% yoy). Subsidy payments were up 10% on the year, mainly due to higher non-energy payouts, including interest support for the KUR program, railways, housing, etc.

Under revenues, tax collections reached 40.1% of the target (up 21.3% yoy) on the lagged impact of commodity prices and tax measures announced last year, just as takeaways from customs and excise slowed (-12.8% yoy). Non-tax revenues continued to rise at a steady clip, touching 49.3% of the full-year target (22.8% yoy). This reflects positive collections from non-O&G resources (88.8% of target) owing to coal royalty production fee, separated state assets income (83.2%) backed by SOE bank dividends. On the other hand, O&G receipts slowed on lower Indonesian crude prices and oil and gas lifting.

Past trends suggest that expenditure routinely picks up in the second part of the year, which along with the impact of the correction in key natural resources and normalisation in demand, stands to narrow the extent of fiscal buffer in 2H23. Nonetheless, the Jan-Apr run-rate will leave the full-year deficit in better health than the budgeted -2.84% of GDP. We expect the deficit to narrow to -1.8 to -2%.

Our Rates Strategists have noted that IndoGBs have been resilient this year, more so in the past fortnight as IDR yields stay capped even as UST yields have risen, likely a reflection of strong domestic fiscal dynamics, as discussed above. A narrower fiscal deficit will help keep a lid on this year’s IndoGB issuance (net financing stands at IDR 243.9trn, i.e., 35% of target by Apr23). Recent auctions have also seen the issuance sizes being smaller than the indicative targets, boding well for the local debt markets.

Tracking external balances

We take stock of external balances, which show that vulnerabilities are low.

Current account strength moderated in 1Q, but we expect a narrow surplus to sustain. 1Q23 current account narrowed to $2.9bn (0.9% of GDP) in 1Q23, down from $4.2bn (1.3%) in 4Q22. Goods trade surplus narrowed marginally to $14.7bn (vs ~$17bn in 4Q), with a slight narrowing in the services deficit owing to better travel-related and business service inflows, whilst transportation remained in the red. Primary income gap was marginally smaller on lower investment income payments.

The financial account side of the equation witnessed a sharp rebound to $3.4bn vs -$0.12bn the quarter before, helped by a reversal in portfolio investment inflows and steady FDI performance. This reflects a pick-up in flows into the local Indonesia bonds (SBN) and equities, helping to negate a wider deficit in ‘other investments’ segment on account of the public sector’s external debt repayments and private players’ offshore investments (trade, financial instruments, etc.). 1Q23 balance of payments led to a net accretion of $6.5bn vs $4.7bn in 4Q22.

Taking a pulse of the April trade numbers, exports contracted 29.4% y/y accompanied by a 22.3% fall in imports, leaving the trade surplus up US$3.9bn vs $2.9bn the month before. This takes Jan-Apr trade surplus to only a marginal 5% lower than the comparable period year ago. While base effects and softening commodity prices weigh on exports, slowing import demand lends some concern over trend production (and consumption). Even if we assume that the trade surplus halves vs 2022 on falling commodity prices and moderate import growth, we expect the surplus to support the current account, besides stronger transportation, and travel-related earnings. This combination backs our forecast for a smaller current account surplus of 0.2% of GDP this year along with a narrow BOP surplus, vs current account balance of +1% in 2022 and +0.3% in 2021.


Secondly, foreign reserves stock continues to hover around one and a half year high at $144.2bn, leaving the coverage ratios in good health –

a) 6.4 months of imports or 6.3 months of imports and servicing the government's external debt;

b) Short-term external adds up to 34% of reserves by original maturity and 45% by residual maturity (see chart)

c) DBS proprietary gauge GEFR (global external financing ratio) for Indonesia, which compares the reserve stock with the current external liabilities, puts the ratio at a healthier 1.8x vs 2013 at 1.2x, helped by relatively stronger current account balances.

Authorities have also been active in maintaining bilateral currency swap agreements with other regional partners, including Singapore’s MAS, Malaysia’s BNM, and South Korea’s BOK, amongst others, reinforcing defences in the event of unexpected global uncertainties.

In all, the economy’s external vulnerabilities are manageable at this juncture. Authorities will nonetheless be keen to maintain buffers in light of lingering uncertainty over the US debt ceiling negotiations, tight global monetary policy, and pockets of stress (for instance, US regional banks).

To read the full report, click here to Download the PDF


Radhika Rao

Senior Economist – Eurozone, India, Indonesia
[email protected]


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