A Stronger Bottom Line
Executive Summary
A cascade of good news in February firmed recent optimism. The first report was about inflation, suggesting that price rises were moderating. This was especially happy news, given Indonesia’s sensitivity to weather-prone inflation, as the country’s geographic position and archipelagic character leave its infrastructure vulnerable to flooding. Next came the report of a stronger monthly trade performance in December 2013, which pushed the Q4 trade balance into surplus. Even though the trade trends were partly cyclical, as we continue to believe the deficit will resurface in May or June and also in September (in the run-up to two major festivals), for now the trend has been reversed.
As we predicted in our last report, Central Bank FX reserves have also increased, surpassing the psychological $100 billion mark. This was the fourth month of steady rises. The issuance of the global bond in the first week of January was, of course, the reason for the latest increase. But whatever the source, people tend to focus only on the nominal level.
Balance of payments data in Q4 was also good, delivering a small and manageable Q4 current account deficit of 1.98% of GDP. The capital account produced a big surplus, generating a Q4 BOP surplus of $4.412 billion. Nonetheless, the annual CAD came in at a $ 28.4 billion deficit. But the capital account surplus of $22.7 billion in 2013 produced a $7.3 billion balance of payments deficit.
All in all, the Central Bank was confident in the stability of the economy, and at its last meeting kept its benchmark policy rate unchanged, at 7.5%.
The situation was further enhanced by the release of national accounts data, which showed the continued bullishness of the economy. Although Q4 growth was just 5.72%, that was up a bit from Q3. Is this a sign of another turnaround for the growth cycle? Time will tell. But based on data from the ground, the possibility can’t be ignored. Q4 growth at that level put annual growth at 5.78% - respectable, given the global climate.
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