Good economic news in the midst of uncertainty
This publication reports on developments in September prior to the tragic earthquake over the past weekend. We will keep you apprised of that situation in coming reports.
The month of September 2018 brought several pieces of good economic news. The first was the report of the Minister of Finance on the Indonesian budget, which displayed encouraging developments. In the first eight months of the year, the Indonesian budget deficit was reported at 1.8% of GDP. But more interestingly, the primary balance recorded a surplus, the first after many years. Certainly things may change toward year-end. However, such developments indicated that the Indonesian government financial situation was firmly under control.
Secondly, the response of the Indonesian Central Bank to global financial developments was another piece of good news. After the erratic weakening of the rupiah, the Indonesian exchange rate started to stabilize over the past few weeks. Anticipating a rise in the Fed Funds rate, the Indonesian Central Bank made significant preparations, including by conducting a dialogue with market players. Therefore, when the US Federal Reserve increased the Fed Funds rate by 25 basis points, Indonesian Central Bank also raised its benchmark rate by 25 basis points.
Finally, we note the solidity of the Indonesian banking system. At a time of significant economic uncertainty, the banking system remained intact and strong. In fact, loan demand continued to increase, indicating that the business community remained optimistic during this uncertainty. The Indonesian banking system has not only enjoyed capital strength, but also high profitability in recent months. During the Asian Crisis in 1998, the Indonesian banking system was significantly weakened and later on needed a massive capital injection.
In the midst of that sanguine situation, the Indonesian trade balance reported another deficit in August 2018, albeit of a much lower size than the previous month. Exports in August declined marginally while imports dropped more sharply. August exports reached $15,818.1 million, marginally lower than the level in July, of $16,290.2 million, a decline of 2.9%. However, year over year, total exports increased by 4.15%. Meanwhile, imports in August also declined at a higher pace than in July, by 7.97%, to reach $16,139.5 million. Compared with the same period of 2017, imports grew by 24.65%. This resulted in a trade deficit of $1,021.4 million, significantly lower than the deficit of $2,006.9 million in July.
The Central Board of Statistics also released the Consumer Price Index report, which showed mild deflation of 0.05% in August. With that performance, year-over-year inflation stood at 3.2%, a level at the lower end of the target corridor of the Central Bank. However, in anticipation of the interest rate increase in the US, Bank Indonesia raised its interest rate further, by 25 basis points, to 5.75%, at its meeting in September 2018.
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