A surplus in the current account
Indonesia has already seen the painful impact of the pandemic on its economic growth. For the first time since the Asian Crisis in 1998, when the economy declined by 14%, the Indonesian economy declined, by 5.32% in Q2 2020 after positive growth of 2.97% in Q1 2020. In Q3 2020, the Indonesian economy saw a rise in economic activity: measured by Q/Q economic growth, Indonesian economy grew 5.05% in the third quarter of 2020. However, compared with the same period of the previous year, economic growth remained negative, although not as severely as in Q2, with the Indonesian economy declining by 3.49%.
The decline of the economy helped the Indonesian current account for that quarter. While in Q2 2020, the Indonesian current account suffered a deficit of $2,944 million or 1.20% of GDP, it turned into a small surplus in Q3, at $964 million or 0.36% of GDP. This was the first current account surplus since Q3 2011. Since the financial and capital account in the balance of payments also recorded a small surplus, the overall balance of payments registered a surplus of approximately $2,053 million, leading the foreign exchange reserves of the Central Bank to increase to $135,153 million in September 2020. However, reserves declined somewhat, to $133,633 million, in October 2020.
In the period after the Asian Crisis of 1998, the Indonesian current account was mostly in surplus for over ten years. It almost turned to a deficit in 2004 and 2005 and rebounded again in 2006 and 2007. Similarly, the yearly current account balance almost fell into deficit in 2008 but rebounded the following year, until it really started to turn into a deficit in the last quarter of 2011. However, during the time of President Soeharto, from 1965 to 1998, the Indonesian balance of payments suffered chronic deficits in its current account, and only once registered a surplus, in 1974 after the spike in oil prices due to Arab-Israeli conflict.
The balance of trade data for the month of October 2020 was released by Central Board of Statistics. Exports increased by 3.09% M/M, reaching $14,391.8 million, while imports declined by 6.79% to reach $10,785 million, resulting in a large trade surplus of $3,606.8 million. If the trade surplus continues in the coming months, there is a chance that the current account surplus in Q3 2020 will be repeated in the last quarter of the year.
The Central Board of Statistics also released the inflation report, which showed mild inflation for the month of October 2020, at 0.07%. With that performance, Y/Y inflation stood at 1.44%, a level below the target corridor of the Central Bank. The Central Bank is also charged with stimulating the economy to reverse the negative momentum from the effects of the coronavirus on the economy. Therefore, with inflation subdued and the exchange rate at a manageable level, Bank Indonesia decided to slash the benchmark rate by 25 basis points to reach 3.75%.
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