2 biggest factors to Indonesia's USD 5.3b current account deficit

From USD7.6b in the last quarter.

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.

Here's more from DBS:

Firstly, commodity prices stayed depressed through 1Q as China’s growth surprised on the downside. As a result, exports in 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 as the domestic economy has moderated on the back of weaker investment over the 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 of improvement could be capped if commodity prices stage only a modest rebound in the coming quarters.

We believe that the slowdown in investment is temporary 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 is still 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.

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